AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
REGISTRATION NO. 333-17627
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SPECIALTY CARE NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8011 62-1623449
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
44 UNION BOULEVARD, STE. 600
LAKEWOOD, COLORADO 80228
(303) 716-0041
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
KERRY R. HICKS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SPECIALTY CARE NETWORK, INC.
44 UNION BOULEVARD, STE. 600
LAKEWOOD, COLORADO 80228
(303) 716-0041
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
ALAN SINGER, ESQUIRE MICHAEL D. NATHAN, ESQUIRE
MORGAN, LEWIS & BOCKIUS LLP SIMPSON THACHER & BARTLETT
2000 ONE LOGAN SQUARE 425 LEXINGTON AVENUE
PHILADELPHIA, PA 19103 NEW YORK, NY 10017
(215) 963-5000 (212) 455-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number ofthe
earlier effective registration statement for the same offering. / / ___________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1997
3,198,062 Shares
Specialty Care Network, Inc.
Common Stock
($.001 par value)
------------------
Of the shares of Common Stock (the 'Common Stock') of Specialty Care Network,
Inc. (the 'Company') offered hereby, 3,000,000 shares are being sold by the
Company and 198,062 shares are being sold by the Selling Stockholders named
under 'Principal and Selling Stockholders.' The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders. Prior to this
offering, there has been no public market for the Common Stock. It is
anticipated that the initial public offering price will be between $7.50 and $9
per share. For information relating to the factors considered in determining the
initial public offering price, see 'Underwriting.' The Common Stock has been
approved for listing on The Nasdaq Stock Market's National Market ('NNM') under
the symbol 'SCNI.'
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE 'RISK FACTORS'
COMMENCING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
Total(2)............................ $ $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $1,110,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 450,000
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ and Proceeds to
Company will be $ .
The Shares are offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that the shares will be ready
for delivery on or about , 1997, against payment in immediately available funds.
Credit Suisse First Boston
Equitable Securities Corporation
Lehman Brothers
Prospectus dated , 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM 10b-6 AND
10b-7 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, all information in this
Prospectus assumes: (i) no exercise of the Underwriters' over-allotment option
and (ii) no exercise of outstanding options to purchase Common Stock. Unless the
context otherwise requires, all references to the 'Company,' 'Specialty Care
Network' or 'SCN' refer to Specialty Care Network, Inc., a Delaware corporation,
and its subsidiaries. See 'Risk Factors' for a discussion of certain factors
that should be considered in connection with an investment in the Common Stock
offered hereby. This Prospectus contains forward-looking statements that
address, among other things, acquisition and expansion strategy, use of
proceeds, projected capital expenditures, liquidity, proposed specialties of
physicians with whom the Company intends to affiliate, possible third party
payor arrangements, cost reduction strategies, possible effects of changes in
government regulation and availability of insurance. These statements may be
found under 'Prospectus Summary,' 'Risk Factors,' 'Use of Proceeds,'
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Business' as well as in the Prospectus generally. Actual events
or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation those
discussed in 'Risk Factors' and matters set forth in the Prospectus generally.
THE COMPANY
Specialty Care Network is a physician practice management company that
focuses exclusively on musculoskeletal disease-state management. SCN's goal is
to build the leading musculoskeletal physician practice management company in
the United States. The Company's strategy consists of three components: (i)
affiliating with leading musculoskeletal practices in targeted markets
throughout the United States; (ii) assisting each of its affiliated practices in
managing and expanding its business by providing comprehensive operational
support, including proprietary clinical and financial information systems; and
(iii) developing integrated regional musculoskeletal networks around its
affiliated practices. As a first step in implementing this strategy, on November
12, 1996, the Company, through the entry into service agreements and the
acquisition of practice assets, affiliated with a select group of five practices
encompassing 49 physicians located in Pennsylvania, New Jersey, Georgia,
Maryland and Florida. These practices were selected based on a variety of
factors, including, but not limited to, physician credentials and reputation;
competitive market position; specialty and subspecialty mix of physicians;
historical financial performance and growth potential; and willingness to
embrace SCN's corporate philosophy. The Company also manages one outpatient
surgery center and one outpatient magnetic resonance imaging ('MRI') center
owned by two of its affiliated practices.
The practices with which the Company has affiliated offer a broad spectrum
of musculoskeletal care, which is the treatment of conditions relating to bones,
joints, muscles and related connective tissues. The Company's affiliated
physicians are trained in a variety of musculoskeletal disciplines, including
general orthopaedics, joint replacement surgery, sports medicine, spinal care,
hand and upper extremity care, foot and ankle care, pediatric orthopaedics,
physiatry, trauma and adult neurology. In order to build networks of providers
that offer access to a full range of musculoskeletal care, the Company intends
to affiliate with physicians through the entry into service agreements and,
where appropriate, acquisition of practice assets, and otherwise contract with
physicians trained in other musculoskeletal subspecialties, including
occupational medicine, neurosurgery, plastic surgery, rehabilitation therapy and
rheumatology.
Expenditures for musculoskeletal care in the United States are significant,
with total direct costs associated with the delivery of musculoskeletal care
exceeding $60 billion in 1988, according to the American Academy of Orthopaedic
Surgeons ('AAOS'). Of this amount, approximately $7 billion represents fees paid
for physician services. In light of the cumulative effects of increased health
care costs, as well as inflation generally, the Company believes that direct
costs associated with the delivery of musculoskeletal care have increased since
1988.
The Company was incorporated in the State of Delaware in December 1995. The
Company's principal executive offices are located at 44 Union Boulevard,
Lakewood, Colorado 80228, and the Company's telephone number is (303) 716-0041.
3
<PAGE>
INITIAL AFFILIATED PRACTICES
On November 12, 1996, the Company, through a series of transactions (the
'Initial Affiliation Transactions'), including an asset purchase, a share
exchange and three mergers, acquired substantially all of the assets and certain
liabilities of the predecessors of the practices (the 'Predecessor Practices')
with which the Company has affiliated. In connection with the Initial
Affiliation Transactions, the Company issued an aggregate of 7,659,115 shares of
Common Stock and paid $1,537,872 in cash to physician owners of the Predecessor
Practices. Following the Initial Affiliation Transactions, the physician owners
of the Predecessor Practices, other than Greater Chesapeake Orthopaedic
Associates, LLC ('GCOA') in Baltimore, Maryland, which survived the Initial
Affiliation Transactions, formed new entities through which to practice
medicine. The new entities (together with GCOA, the 'Initial Affiliated
Practices') are Reconstructive Orthopaedic Associates II, P.C. ('ROA') in
Philadelphia, Pennsylvania; Princeton Orthopaedic Associates II, P.A. ('POA') in
Princeton, New Jersey; TOC Specialists, P.L. ('TOC') in Tallahassee, Florida and
Bainbridge, Georgia; and Vero Orthopaedics II, P.A. ('VO') in Vero Beach,
Florida.
Under the service agreements between the Company and each of the Initial
Affiliated Practices (the 'Initial Service Agreements') the Company provides
management, administrative and development services to the Initial Affiliated
Practices. The Initial Affiliated Practices will retain, among other things,
sole responsibility for all aspects of the practice of medicine. Under the
Initial Service Agreements, the Company receives service fees equal to (i) a
percentage ranging from 20% to 33% of pre-tax earnings of the Initial Affiliated
Practices before physician compensation and most fringe benefits and excluding
certain expenses of the Initial Affiliated Practices and (ii) reimbursement for
operating expenses of the Initial Affiliated Practices to be paid by the
Company. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview,' 'Business -- Contractual Agreements with
Affiliated Practices' and 'Certain Transactions.' As used in this Prospectus,
the term 'Affiliated Practices' includes the Initial Affiliated Practices and
other practices with which the Company may affiliate in the future.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company.......................................................... 3,000,000 shares
Selling Stockholders................................................. 198,062 shares
Total.......................................................... 3,198,062 shares
Common Stock to be outstanding after the offering......................... 14,045,015 shares(1)
Proposed Nasdaq National Market symbol.................................... SCNI
Use of proceeds........................................................... Repayment of certain indebtedness,
funding for possible future
affiliations and general corporate
and working capital purposes. See
'Use of Proceeds.'
</TABLE>
- ------------------
(1) Excludes 1,918,748 shares of Common Stock issuable upon exercise of
outstanding options to purchase Common Stock, with a weighted average
exercise price of $5.74 per share (assuming an initial public offering
price of $8.25 per share with respect to options granted with an exercise
price per share equal to the price per share of the shares offered hereby),
and 450,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
At the request of the Company, the Underwriters are reserving up to 150,000
shares of Common Stock (approximately 4.7% of the shares to be offered) for sale
to employees, directors and friends of the Company. The number of shares
available for sale to the general public in this offering will be reduced to the
extent such persons purchase such reserved shares. Shares purchased by
employees, directors and friends of the Company will be at the public offering
price as set forth on the cover page of this Prospectus. Any reserved shares not
so purchased will be offered by the Underwriters to the general public in this
offering.
4
<PAGE>
RISK FACTORS
An investment in the shares offered hereby involves a high degree of risk,
including, among others, risks related to lack of operating history, integration
of assets and personnel, affiliation and expansion strategy, dependence on
affiliated practices and physicians, termination of service agreements, changes
in payment for medical services, government regulation and dependence on
information systems. See 'Risk Factors.'
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following table sets forth certain unaudited pro forma financial data
for the Company giving effect to the Initial Affiliation Transactions, which
were accounted for using historical cost in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 48 ('SAB 48'), and the Initial
Service Agreements. The pro forma statement of income data for the year ended
December 31, 1995 and the nine months ended September 30, 1996 assume that the
Company was incorporated, the Initial Affiliation Transactions had occurred and
the Initial Service Agreements were entered into on January 1, 1995.
The unaudited pro forma as adjusted financial data further include the sale
by the Company of 3,000,000 shares of Common Stock offered hereby with estimated
net proceeds of $21,908,000 and the repayment of certain indebtedness as
described under 'Use of Proceeds.' The pro forma as adjusted balance sheet data
give effect to the transactions described above as if they occurred on September
30, 1996.
The unaudited pro forma financial data may not be indicative of the results
that actually would have occurred if the Initial Affiliation Transactions had
been effected, and the Initial Service Agreements had been entered into, on the
dates indicated or the results that may be obtained in the future. This data is
qualified in its entirety by, and should be read in conjunction with, the
Unaudited Pro Forma Financial Statements and Notes thereto, the financial
statements for the Company and each of the Predecessor Practices and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA (1)(2)
<TABLE>
<CAPTION>
<S> <C> <C>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
STATEMENT OF INCOME DATA
- ------------------------
Revenue (3) ....................................... $31,493,723 $25,132,937
Operating expenses:
Salaries and benefits ........................... 14,214,984 10,599,417
Supplies, general and administrative expenses ... 10,930,793 9,579,454
Depreciation and amortization ................... 713,481 602,396
Costs to evaluate and acquire physician practices -- 71,177
----------- -----------
Income from continuing operations ................. 5,634,465 4,280,493
Interest expense and other, net ................... (74,306) (22,648)
----------- -----------
Income from continuing operations before income tax 5,560,159 4,257,845
Income tax expense ................................ (2,112,860) (1,617,981)
----------- -----------
Net income ........................................ $ 3,447,299 $ 2,639,864
----------- -----------
----------- -----------
Total weighted average number of common shares
outstanding (4) ................................. 12,101,264 12,101,264
----------- -----------
----------- -----------
Income per share amount (5) ....................... $ 0.28 $ 0.22
----------- -----------
----------- -----------
SEPTEMBER 30, 1996
------------------
BALANCE SHEET DATA (6)
Total assets............................................................... $14,744,983
Total debt................................................................. 2,836,012
AS ADJUSTED BALANCE SHEET DATA (7)
- ---------------------------------------------------------------------------
Total assets............................................................... $35,224,875
Total debt................................................................. 1,158,262
</TABLE>
- ------------------
(1) The Initial Affiliation Transactions were accounted for using historical
cost in accordance with SAB 48. Accordingly, the Company will record the net
assets acquired at the Predecessor Practices' historical cost basis.
(2) Excluded from the summary financial data above are the discontinued
operations of Vero Orthopaedics, P.A. for the year ended December 31, 1995.
(3) Revenue generally consists of service fees equal to (i) a percentage of
pre-tax earnings of the Initial Affiliated Practices before physician
compensation and most fringe benefits and excluding certain expenses of the
Initial Affiliated Practices and (ii) reimbursement for operating expenses
of the Initial Affiliated Practices to be paid by the Company. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview.'
(4) The computation of income per share based upon 12,101,264 weighted average
common shares outstanding and common stock equivalents. See Note 15 to the
Unaudited Pro Forma Financial Statements included elsewhere in this
Prospectus for further discussion of the weighted average number of shares.
(5) See Note 2 to the financial statements of the Company for a description of
the computation of income (loss) per share amount.
(6) See Selected Unaudited Pro Forma Financial Data included elsewhere in this
Prospectus for the pro forma balance sheet data as of September 30, 1996.
(7) As Adjusted Balance Sheet Data reflects the sale by the Company of 3,000,000
shares of Common Stock offered hereby (assuming an initial public offering
price of $8.25 per share) and the application of the net proceeds
therefrom.
6
<PAGE>
RISK FACTORS
The following risk factors, as well as the other information contained in
this Prospectus, should be considered carefully before purchasing the Common
Stock offered hereby. This Prospectus contains forward-looking statements that
involve risks and uncertainties. See 'Prospectus Summary.' Actual events or
results may differ materially from those discussed in forward-looking statements
as a result of various factors, including, but not limited to, those discussed
below.
LACK OF OPERATING HISTORY; RISKS RELATED TO INTEGRATION OF ASSETS AND PERSONNEL
The Company was incorporated in December 1995 and, prior to its affiliation
with the Initial Affiliated Practices in November 1996, had no history of
operations or earnings. As a result of acquiring certain assets of the
Predecessor Practices, and entering into the Initial Service Agreements with the
Initial Affiliated Practices, the Company is now responsible for most
non-medical aspects of the operations, and manages most non-physician employees,
of the Initial Affiliated Practices. Prior to their affiliation with the
Company, the Predecessor Practices operated as separate independent entities,
and there can be no assurance that the Company will be able to integrate and
manage successfully the assets and personnel of, or provide services profitably
to, the Initial Affiliated Practices or other Affiliated Practices in the
future. In addition, there can be no assurance that the Company's affiliation
with the Initial Affiliated Practices or other Affiliated Practices will not
result in a loss of patients by any of the Affiliated Practices or other
unanticipated adverse consequences. Any of these events could have a material
adverse effect on the Company. There can be no assurance that the Company's
personnel, systems and infrastructure will be sufficient to permit effective and
profitable management of the Initial Affiliated Practices under the Initial
Service Agreements or to implement effectively the Company's strategies. See
'Business -- Strategy' and 'Management.'
RISKS ASSOCIATED WITH AFFILIATION AND EXPANSION STRATEGY
A primary element of the Company's strategy is to acquire certain assets
of, and affiliate through service agreements with, selected musculoskeletal
practices in targeted markets. The Company's strategy also involves assisting
Affiliated Practices in recruiting physicians and, to the extent permitted by
applicable law, contracting with ancillary musculoskeletal facilities, such as
outpatient occupational medicine, physical therapy and surgery centers and MRI
centers, and with associated providers. Identifying appropriate physician group
practices, individual physicians and ancillary providers and facilities and
proposing, negotiating and implementing economically attractive affiliations
with such practices, physicians and providers can be a lengthy, complex and
costly process. In addition, the Company is a party to a credit facility that
places certain limitations upon the number of affiliations the Company can enter
into in any quarter or year and the terms of any future affiliations. The
failure of the Company to identify and effect additional affiliations would have
a material adverse effect on the Company. Moreover, there can be no assurance
that future affiliations, if any, will contribute to the Company's profitability
or otherwise facilitate the successful implementation of the Company's overall
strategy. See 'Business -- Strategy.'
The Company's ability to expand is also dependent upon factors such as its
and the Affiliated Practices' ability to (i) adapt the Company's arrangements
with Affiliated Practices to comply with current or future legal requirements,
including state prohibitions on fee-splitting, corporate practice of medicine
and referrals to facilities in which physicians have a financial interest and
state anti-kickback provisions, (ii) obtain regulatory approval and certificates
of need, where necessary, and (iii) comply with licensing requirements
applicable to physicians and to facilities operated, and services offered, by
physicians. There can be no assurance that application of current laws or
changes in legal requirements will not adversely affect the Company or that the
Company and the Affiliated Practices will be able to obtain and maintain all
necessary regulatory approvals and comply with applicable laws, regulations and
licensing requirements. See '-- Government Regulation' and 'Business --
Government Regulation and Supervision.'
7
<PAGE>
DEPENDENCE ON AFFILIATED PRACTICES AND PHYSICIANS; RISK OF TERMINATION OF
SERVICE AGREEMENTS
The Company's operations are entirely dependent on its continued
affiliation through service agreements with the Initial Affiliated Practices and
on the success of the Initial Affiliated Practices. There can be no assurance
that the Initial Affiliated Practices will maintain successful practices, that
service agreements will not be terminated or that any of the key physicians in a
particular Initial Affiliated Practice will continue affiliation with such
practice. Two of the Initial Affiliated Practices, ROA and POA, are expected to
contribute approximately 30% each of the fees to be paid to the Company by all
of the Initial Affiliated Practices, based on their historical net patient
revenue and expenses. The termination of any of the Initial Service Agreements
would, and termination of service agreements with any additional Affiliated
Practices could, have a material adverse effect on the Company. For a
description of the Initial Service Agreements, including a description of their
termination provisions and non-competition arrangements with affiliated
physicians, and an agreement regarding a contemplated division of ROA into two
Affiliated Practices, see 'Business -- Contractual Agreements with Affiliated
Practices.' For a discussion of circumstances under which a service agreement
may be rendered unenforceable, see '-- Government Regulation.'
Some of the Initial Affiliated Practices derive, and other Affiliated
Practices may derive, a significant portion of their revenue from a limited
number of physicians. Particularly because none of the physicians at the Initial
Affiliated Practices has previously entered into service arrangements similar to
those embodied in the Initial Service Agreements, there can be no assurance that
the Company or the Affiliated Practices will maintain cooperative relationships
with key members of a particular Affiliated Practice. In addition, there can be
no assurance that key members of an Affiliated Practice will not retire, become
disabled or otherwise become unable or unwilling to continue practicing their
profession with an Affiliated Practice. The loss by an Affiliated Practice of
one or more key members would have a material adverse effect on the revenue of
such Affiliated Practice and on the Company. Neither the Company nor the Initial
Affiliated Practices maintains insurance on the lives of any affiliated
physicians for the benefit of the Company. The loss of revenue by any Affiliated
Practice would have a material adverse effect on the Company.
RISK OF CHANGES IN PAYMENT FOR MEDICAL SERVICES
The health care industry is experiencing a trend toward cost containment as
government and private third party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced capitated payment schedules with service
providers. Further reductions in payments to health care providers or other
changes in reimbursement for health care services could have a material adverse
effect on the Affiliated Practices and, as a result, on the Company. These
reductions could result from changes in current reimbursement rates or from a
shift in clinical protocols to non-surgical solutions to orthopaedic conditions.
There can be no assurance that the Company will be able to offset successfully
any or all of the payment reductions that may occur.
The federal government has implemented, in annual increments through
December 31, 1996, through the Medicare program, a resource-based relative value
scale ('RBRVS') payment methodology for health care provider services. RBRVS is
a fee schedule that, except for certain geographical and other adjustments, pays
similarly situated health care providers the same amount for the same services.
The RBRVS is adjusted each year and is subject to increases or decreases at the
discretion of Congress. To date, the implementation of RBRVS has reduced payment
rates for certain of the procedures historically provided by the Initial
Affiliated Practices. Further reductions could significantly affect the Initial
Affiliated Practices, each of which derives a significant portion of its revenue
from Medicare. For the nine months ended September 30, 1996, the net practice
revenue from Medicare constituted 22.3% of the aggregate net practice revenue of
the Predecessor Practices. RBRVS types of payment systems have also been adopted
by certain private third party payors and may become a predominant payment
methodology. Wider-spread implementation of such programs would reduce payments
from private third party payors, and could indirectly reduce revenue to the
Company.
8
<PAGE>
Rates paid by private third party payors, including those that provide
Medicare supplemental insurance, are based on established health care provider
and hospital charges and are generally higher than Medicare payment rates. A
change in the patient mix of any of the Affiliated Practices that results in a
decrease in patients covered by private insurance could have a material adverse
effect on the Affiliated Practices and, as a result, on the Company.
GOVERNMENT REGULATION
The delivery of health care, including the relationships among health care
providers such as physicians and other clinicians, is subject to extensive
federal and state regulation. The Company believes that its operations are
conducted in material compliance with applicable laws; however, the Company has
not received or applied for a legal opinion from counsel or from any federal or
state judicial or regulatory authority to this effect, and many aspects of the
Company's business operations have not been the subject of state or federal
regulatory interpretation. There can be no assurance that a review of the
Company's operations by federal or state judicial or regulatory authorities will
not result in a determination that the Company or one of its Affiliated
Practices has violated one or more provisions of federal or state law. Any such
determination could have a material adverse effect on the Company.
The fraud and abuse provisions of the Social Security Act and anti-kickback
laws and regulations adopted by many states, including Florida, a state in which
two of the Initial Affiliated Practices are located, prohibit the solicitation,
payment, receipt or offering of any direct or indirect remuneration in return
for, or as an inducement to, certain referrals of patients, items or services.
Provisions of the Social Security Act also impose significant penalties for
false or improper billings. In addition, the Stark Self-Referral Law imposes
restrictions on physicians' referrals for designated health services
reimbursable by Medicare or Medicaid to entities with which the physicians have
financial relationships. Many states, including the states in which the Initial
Affiliated Practices are located, have adopted similar self-referral laws which
are not limited to Medicare or Medicaid reimbursed services. Accordingly, the
Company is prohibited from owning facilities for the provision of, or otherwise
providing, certain ancillary services for patients of its Affiliated Practices.
Violations of any of these laws may result in substantial civil or criminal
penalties, including large civil monetary penalties, and, in the case of
violations of federal laws, exclusion from participation in the Medicare and
Medicaid programs. Such exclusion and penalties, if applied to the Company or
its Affiliated Practices, would have a material adverse effect on the Company.
The laws of many states, including the states in which the Initial
Affiliated Practices are located, prohibit business corporations such as the
Company from practicing medicine or exercising control over the medical
judgments or decisions of physicians and from engaging in certain financial
arrangements, such as splitting fees with physicians. These laws and their
interpretations vary from state to state and are enforced by both the courts and
regulatory authorities, each with broad discretion. Violations of these laws
could result in censure or delicensing of affiliated physicians, civil or
criminal penalties, including large civil monetary penalties, or other
sanctions. In addition, a determination in any state that the Company is engaged
in the corporate practice of medicine or any unlawful fee-splitting arrangement
could render any service agreement between the Company and an Affiliated
Practice located in such state unenforceable or subject to modification, which
could have a material adverse effect on the Company.
Expansion of the operations of the Company to certain jurisdictions may
require modification of the Company's form of relationship with its Affiliated
Practices, which could have a material adverse effect on the Company.
Furthermore, the Company's ability to expand into, or to continue to operate
within certain jurisdictions may depend on the Company's ability to modify its
operational structure to conform to such jurisdictions' regulatory framework or
to obtain necessary approvals, licenses and permits. Any limitation on the
Company's ability to expand could have a material adverse effect on the Company.
See 'Business -- Government Regulation and Supervision.'
In addition to extensive existing government health care regulation, there
are numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of
9
<PAGE>
health care services. These initiatives include reductions in Medicare and
Medicaid payments, trends in adopting managed care for Medicare and Medicaid
patients and regulation of entities that provide managed care and additional
prohibitions on ownership by health care providers, directly or indirectly, of
facilities to which they refer patients. Aspects of certain of these health care
proposals, if adopted, could have a material adverse effect on the Company. See
'-- Risks Associated with Affiliation and Expansion Strategy,' '-- Risk of
Changes in Payment for Medical Services' and 'Business -- Government Regulation
and Supervision.'
DEPENDENCE ON INFORMATION SYSTEMS
The Company's success is largely dependent on its ability to implement new
information systems and to integrate these systems into the Initial Affiliated
Practices' existing, operational, financial and clinical information systems. In
addition to their integral role in helping the Affiliated Practices realize
operating efficiencies, such systems are critical to negotiating, pricing and
managing capitated managed care contracts. See '-- Risks Associated with Managed
Care Contracts.' The Company will need to continue to invest in, and administer,
sophisticated management information systems to support these activities. The
Company may experience unanticipated delays, complications and expenses in
implementing, integrating and operating such systems. Furthermore, such systems
may require modifications, improvements or replacements as the Company expands
or if new technologies become available. Such modifications, improvements or
replacements may require substantial expenditures and may require interruptions
in operations during periods of implementation. The failure to implement
successfully and maintain operational, financial and clinical information
systems would have a material adverse effect on the Company. See 'Business --
SCN Operations.'
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS
As an increasing percentage of patients enter into health care coverage
arrangements with managed care payors, the Company believes that its success
will be, in part, dependent upon the Company's ability to negotiate contracts on
behalf of its Affiliated Practices with HMOs, employer groups and other private
third party payors. The inability of the Company to enter into such arrangements
in the future on behalf of its Affiliated Practices could have a material
adverse effect on the Company.
In certain instances, the Company may seek to negotiate on behalf of
regional musculoskeletal care networks consisting of the Company's Affiliated
Practices and other physicians or group practices willing to permit the Company
to negotiate on their behalf with respect to a particular third party payor. The
Company anticipates that, in the future, the payor contracts that may be entered
into on behalf of its Affiliated Practices and any related network physicians
will include contracts based on capitated fee arrangements. Under some of these
types of contracts, a health care provider agrees either to accept a
predetermined dollar amount per member per month in exchange for undertaking to
provide all covered services to patients or to provide treatment on an episode
of care basis. Such health care providers bear the risk, generally subject to
certain loss limits, that the aggregate costs of providing medical services will
exceed the premiums received. Some agreements may also contain 'shared risk'
provisions under which affiliated physicians may earn additional compensation
based on utilization control of institutional, ancillary and other services by
patients, and the Affiliated Practices may be required to bear a portion of any
loss in connection with such 'shared risk' provisions. To the extent that
patients or enrollees covered by such contracts require more frequent or, in
certain instances, more extensive care than anticipated, there could be a
material adverse effect on an Affiliated Practice and, therefore, on the
Company. In the worst case, revenue negotiated under risk-sharing or capitated
contracts would be insufficient to cover the costs of the care provided. Any
such reduction or elimination of earnings to the Affiliated Practices under such
fee arrangements could have a material adverse effect on the Company.
TOC has a non-contractual capitated arrangement covering approximately
75,000 lives and a capitated contract covering approximately 55,000 lives, and
POA has a capitated contract covering approximately 20,000 lives. These
arrangements existed at the time of the Initial Affiliation Transactions. No
other Initial Affiliated Practice has a capitated arrangement.
10
<PAGE>
The National Association of Insurance Commissioners (the 'NAIC') in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
Affiliated Practices will be precluded from entering into capitated contracts
directly with employers, individuals and benefit plans unless they qualify to do
business as HMOs or insurance companies. Currently, the Company does not intend,
on its own behalf, or on behalf of the Initial Affiliated Practices, to enter
into capitated payment or other risk-sharing arrangements other than with HMOs
or insurance companies. In addition, in December 1996, the NAIC issued a white
paper entitled 'Regulation of Health Risk Bearing Entities,' which sets forth
issues to be considered by state insurance regulators when considering new
regulations, and encourages that a uniform body of regulation be adopted by the
states. The Company believes that additional regulation at the state level will
be forthcoming in response to the NAIC initiatives. Other states have enacted
statutes or adopted regulations affecting risk assumption in the health care
industry, including statutes and regulations that subject any physician or
physician network engaged in risk-based contracting to applicable insurance laws
and regulations, which may include, among other things, laws and regulations
providing for minimum capital requirements and other safety and soundness
requirements. The Company and Affiliated Practices may not satisfy such
insurance laws or regulations. Full compliance with such laws and regulations
could result in substantial costs to the Company and the Affiliated Practices.
The inability to enter into capitated arrangements or the cost of complying with
certain applicable laws that would permit expansion of risk-based contracting
activities would have a material adverse effect on the Company.
Generally, there is no certainty that the Company and its Affiliated
Practices will be able to establish or maintain satisfactory relationships with
managed care and other third party payors, many of which already have existing
provider structures in place and may not be able or willing to change their
provider networks. In addition, any significant loss of revenue by the
Affiliated Practices as a result of the termination of third party payor
contracts or otherwise would have a material adverse effect on the Company.
NEED FOR ADDITIONAL FUNDS
The Company's acquisition and expansion strategy will require substantial
capital, and the Company anticipates that it will, in the future, seek to raise
additional funds through debt financing or the issuance of equity or debt
securities. There can be no assurance that sufficient funds will be available on
terms acceptable to the Company, if at all. If equity securities are issued,
either to raise funds or in connection with future affiliations, dilution to the
Company's stockholders may result, and if additional funds are raised through
the incurrence of debt, the Company may become subject to restrictions on its
operation and finances. Such restrictions may have an adverse effect on, among
other things, the Company's ability to pursue its acquisition strategy. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.'
COMPETITION
Competition for affiliation with additional musculoskeletal practices is
intense and may limit the availability of suitable practices with which the
Company may be able to affiliate. Several companies with established operating
histories and greater resources than the Company, including physician practice
management companies and some hospitals, clinics and health maintenance
organizations ('HMOs'), are pursuing activities similar to those of the Company.
There can be no assurance that the Company will be able to compete effectively
with such competitors, that additional competitors will not enter the market or
that such competition will not make it more difficult and costly to acquire the
assets of, and provide management services to, musculoskeletal medical practices
on terms beneficial to the Company. The Company also believes that changes in
governmental and private reimbursement policies, among other factors, have
resulted in increased competition among providers of medical services to
consumers. There can be no assurance that the Company's Affiliated Practices
will be able to compete effectively in the markets they serve. See 'Business --
Competition.'
11
<PAGE>
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent upon the ability and experience of its executive
officers and key personnel for the management of the Company and the
implementation of its business strategy. The Company currently has employment
contracts with its nine executive officers. Because of the difficulty in finding
adequate replacements for such personnel, the loss of the services of any such
personnel or the Company's inability in the future to attract and retain
management and other key personnel could have a material adverse effect on the
Company. The Company does not maintain significant key man insurance for any of
its executive officers. See 'Management -- Employment Agreements.'
POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. While the Initial Affiliated Practices
maintain malpractice insurance, there can be no assurance that any claim
asserted against any of the Initial Affiliated Practices or any other Affiliated
Practice will be covered by, or will not exceed the coverage limits, of
applicable insurance. A successful malpractice claim against any of the
Affiliated Practices, even if covered by insurance, could have a material
adverse effect on such Affiliated Practice and, as a result, on the Company.
The Company does not engage in the practice of medicine; however, the
Company could be implicated in such claims, and there can be no assurance that
claims, suits or complaints relating to services delivered by Affiliated
Practices (including claims with regard to services rendered by the Initial
Affiliated Practices prior to the Initial Affiliation Transactions) will not be
asserted against the Company in the future. Although the Company has attempted
to address this risk by maintaining insurance, there can be no assurance that
any claim asserted against the Company for professional or other liability will
be covered by, or will not exceed the coverage limits of, such insurance. The
Company's medical professional liability insurance provides coverage of up to $1
million per incident, with maximum coverage of $3 million per year. The
Company's general liability insurance provides coverage of up to $5 million per
incident, with maximum coverage of $5 million per year.
The availability and cost of professional liability insurance have been
affected by various factors, many of which are beyond the control of the
Company. There can be no assurance that the Company will be able to maintain
insurance in the future at a cost that is acceptable to the Company, or at all.
Any claim made against the Company not fully covered by insurance could have a
material adverse effect on the Company.
RISKS RELATED TO PURCHASE OF RECEIVABLES
The Initial Service Agreements provide that the Company will acquire each
Initial Affiliated Practice's accounts receivable each month. The purchase price
for such accounts receivable equals the gross amounts of the accounts receivable
recorded each month, less adjustments for contractual allowances, allowances for
doubtful accounts and other potentially uncollectible amounts based on the
practice's historical collection rate, as determined by the Company. To the
extent that the Company's actual collections are less than the amounts paid for
the receivables, or if payment of receivables is not made on a timely basis, the
Company could be materially adversely affected. See 'Business -- Contractual
Agreements with Affiliated Practices.' The Company also bears the collection
risk with respect to outstanding receivables acquired in the Initial Affiliation
Transactions.
MANAGEMENT DISCRETION IN ALLOCATION OF NET PROCEEDS
Although the Company intends to utilize the proceeds of the offering as set
forth under 'Use of Proceeds,' the Company has not determined how the proceeds
will be allocated among the specific uses described, other than with respect to
the repayment of all outstanding indebtedness of the Company under a bank credit
facility. Therefore, investors will be dependent on the judgment of management
with respect to the allocation of the proceeds of this offering not used to
repay such indebtedness. See 'Use of Proceeds.'
12
<PAGE>
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or continue after this offering. The initial public
offering price will be determined by negotiations among the Company and Credit
Suisse First Boston Corporation, Equitable Securities Corporation and Lehman
Brothers Inc. and may not be indicative of the market price for the Common Stock
after this offering. See 'Underwriting' for factors to be considered in
determining the initial public offering price. From time to time after this
offering, there may be significant volatility in the market price of the Common
Stock. Quarterly operating results of the Company, deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the health care industry or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Concern about the potential effects of
health care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock following this offering. Any such fluctuations that
occur following completion of this offering may adversely affect the market
price of the Common Stock.
QUARTERLY RESULTS FLUCTUATION
The Company's quarterly operating results may fluctuate significantly as
the result of the timing of affiliations and as a result of timing of
musculoskeletal procedures. Such fluctuation could adversely affect the price of
the Company's Common Stock. See '-- No Prior Market; Possible Volatility of
Stock Price.'
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following this offering. After giving effect to the shares of Common
Stock offered hereby, the Company will have outstanding 14,045,015 shares of
Common Stock. Of these shares, 3,198,062 shares (3,648,062 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock sold
in this offering will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the 'Securities Act'), except for any shares
purchased by 'affiliates,' as that term is defined under the Securities Act, of
the Company. The remaining 10,846,953 shares are 'restricted securities' within
the meaning of Rule 144 promulgated under the Securities Act. Of these
restricted shares, 1,265,000 shares will be eligible for sale pursuant to Rule
144 in December 1997 and the balance of the restricted shares will be eligible
for sale at various times from January 1998 through November 1998. The
Securities and Exchange Commission (the 'Commission') has proposed reducing the
initial Rule 144 holding period to one year. There can be no assurance as to
whether or when such rule changes will be enacted. If enacted, such modification
will accelerate by one year the initial date upon which all currently
outstanding Common Stock becomes eligible for resale under Rule 144.
The Company, its officers and directors and certain other stockholders of
the Company have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to any additional shares of Common Stock or securities
convertible or exchangeable or exercisable for any shares of Common Stock,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this Prospectus (the 'lock-up period'),
except (i) subsequent sales of Common Stock offered in this offering, (ii)
issuances of unregistered Common Stock by the Company in connection with
affiliation with practices, physicians and ancillary providers (although persons
receiving such shares would be subject to such restrictions for the remainder of
the lock-up period) or (iii) issuances of Common Stock by the Company pursuant
to the exercise of employee stock options outstanding on the date of this
Prospectus.
13
<PAGE>
The holders of all shares of Common Stock outstanding on the date of this
Prospectus have certain registration rights with respect to such shares and
additional shares that may be issued to such persons upon exercise of options
(subject to certain limitations on the number of shares such holders are
entitled to have registered under any registration statement), although the
holders of at least 2,437,534 of these shares have agreed to refrain from
selling their shares during the lock-up period. In addition, the Company intends
to register approximately 2,000,000 shares of Common Stock reserved for issuance
under the Company's 1996 Equity Compensation Plan as soon as practicable after
expiration of the lock-up period. The Company also intends to register an
additional 553,500 shares of Common Stock reserved for issuance under the
Company's 1996 Incentive and Non-Qualified Stock Option Plan as soon as
practicable thereafter. See 'Management' and 'Underwriting.'
CONTROL BY EXISTING STOCKHOLDERS
Following the completion of this offering, the officers and directors of
the Company and the physician owners of the Initial Affiliated Practices will
beneficially own approximately 66% of the outstanding shares of Common Stock of
the Company. Although, following this offering, no arrangements or understanding
among such persons with respect to the voting of the shares of Common Stock
beneficially owned by such persons will remain in effect, such persons may
nevertheless effectively be able to control the affairs of the Company. Each of
the Initial Affiliated Practices is represented on the Company's Board of
Directors and physician owners of the Initial Affiliated Practices constitute a
majority of the Board of Directors. See 'Principal and Selling Stockholders.'
POTENTIAL ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAWS PROVISIONS; POSSIBLE
ISSUANCES OF PREFERRED STOCK
Certain provisions of Delaware law, the Company's Amended and Restated
Certificate of Incorporation ('Certificate of Incorporation') and the Company's
Amended and Restated Bylaws ('Bylaws') could delay or impede the removal of
incumbent directors and could make it more difficult for a third party to
acquire, or could discourage a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. In
addition, shares of preferred stock may be issued by the Board of Directors
without stockholder approval on such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine. The
rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The Company has no current plans to issue any shares of
preferred stock. See 'Description of Capital Stock.'
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $6.27 per share (assuming an initial
public offering price of $8.25 per share and after giving effect to estimated
underwriting discounts and commissions). See 'Dilution.' In the event the
Company issues additional Common Stock in the future, including shares that may
be issued in connection with future affiliations, purchasers of Common Stock in
this offering may experience further dilution in the net tangible book value per
share of the Common Stock of the Company.
NO DIVIDENDS
The Company has never paid or declared any cash dividends and does not
anticipate paying any cash dividends in the foreseeable future. The Company's
credit facility with a bank prohibits the payment of any dividends without
written approval from the lender. See 'Dividend Policy.'
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,000,000 shares of Common
Stock in this offering, after deducting the underwriting discounts and
commissions and estimated expenses, are estimated to be approximately
$21,908,000 ($25,361,000 if the Underwriters' over-allotment option is exercised
in full) assuming an initial public offering price of $8.25 per share, the
midpoint of the range indicated on the cover page of this Prospectus. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders. The Company expects to use a portion of the net proceeds
to repay all outstanding indebtedness under the Company's loan agreement with
NationsBank of Tennessee, N.A. (the 'Credit Facility'). Pursuant to the terms of
the Credit Facility, the Company may borrow up to $5.0 million for working
capital and other corporate purposes (the 'Working Capital Facility') and up to
$15.0 million to finance the acquisition of assets (the 'Aquisition Facility'),
subject to a lower amount based on an 'established borrowing base,' as defined
in the Credit Facility. As of January 17, 1997, approximately $5.6 million was
outstanding under the Credit Facility, of which $3.9 million was borrowed under
the Working Capital Facility and $1.7 million was borrowed under the Acquisition
Facility. Of the amounts borrowed under the Credit Facility, approximately $1.7
million was utilized to finance the cash portion of the consideration paid by
the Company to finance the acquisition of the assets of the predecessor of ROA,
approximately $800,000 was used to fund loans by the Company to certain
physician owners of the Initial Affiliated Practices to cover anticipated cash
flow needs, and other borrowings have been used for working capital and other
corporate purposes, principally to purchase receivables from the Initial
Affilated Practices.
The Working Capital Facility matures on October 31, 1997 and the
Acquisition Facility matures on October 31, 1998. The Company can elect to
borrow on either facility at a floating rate based on the prime rate plus an
applicable margin or at a fixed rate based on LIBOR plus an applicable margin.
At January 17, 1997, the effective interest rate for both the Acquisition and
the Working Capital Facilities was 7.23% per annum. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
The balance of the net proceeds will be used to finance the acquisition of
assets of additional Affiliated Practices, for working capital, including the
acquisition of receivables from the Initial Affiliated Practices, and other
general corporate purposes. Although the Company has engaged in discussions with
practices with which it might affiliate, except as described under 'Business --
Initial Affiliated Practices,' the Company has no definitive agreements
regarding any affiliations with additional practices. Pending such uses, the net
proceeds will be invested in United States government securities and in
short-term, interest-bearing investment grade securities.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in its business. The
Credit Facility prohibits the payment of any dividends without written approval
from the lender.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 on a pro forma basis (i) to reflect the Initial Affiliation
Transactions and (ii) as adjusted to reflect the sale by the Company of
3,000,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $8.25 per share) and the application of the estimated net
proceeds therefrom. See 'Use of Proceeds.' This table should be read in
conjunction with the historical financial statements of the Company and the
Predecessor Practices, the Unaudited Pro Forma Financial Statements and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
---------- -----------
(UNAUDITED)
<S> <C> <C>
Acquisition revolving line of credit and current portion of capital
lease obligations.................................................... $1,868,023 $ 190,273
---------- -----------
---------- -----------
Capital lease obligations, less current portion........................ $ 967,989 $ 967,989
Stockholders' equity:
Preferred Stock, $.001 par value: 2,000,000 shares authorized; no
shares issued or outstanding...................................... -- --
Common Stock, $.001 par value: 50,000,000 shares authorized;
11,045,015 shares issued and outstanding pro forma; and 14,045,015
shares issued and outstanding pro forma as adjusted............... 11,045 14,045
Additional paid-in capital........................................... 8,298,156 30,203,156
Accumulated deficit.................................................. (2,285,314) (2,285,314)
---------- -----------
Total stockholders' equity............................................. 6,023,887 27,931,887
---------- -----------
Total capitalization................................................... $6,991,876 $28,899,876
---------- -----------
---------- -----------
</TABLE>
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at September 30, 1996,
after giving effect to the Initial Affiliation Transactions as if they had
occurred on that date, was $5,836,046 or $0.53 per share. 'Pro forma net
tangible book value per share' represents the amount of pro forma total tangible
assets of the Company less pro forma total liabilities divided by the number of
shares of Common Stock outstanding. After giving effect to the sale by the
Company of the 3,000,000 shares of Common Stock offered hereby (assuming an
initial public offering price of $8.25 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company) and the application of the net proceeds therefrom as
discussed under 'Use of Proceeds,' the pro forma as adjusted net tangible book
value of the Company as of September 30, 1996 would have been approximately
$27,744,046, or $1.98 per share. This represents an immediate increase in pro
forma net tangible book value of approximately $1.45 per share to existing
stockholders and an immediate dilution of approximately $6.27 per share to new
investors purchasing Common Stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................................... $ 8.25
Pro forma net tangible book value per share as of September 30, 1996............... 0.53
Increase per share attributable to new investors................................... 1.45
----
Pro forma as adjusted net tangible book value per share after this offering.......... 1.98
------
Dilution per share to new investors.................................................. $ 6.27(1)
------
------
</TABLE>
- ------------------
(1) Does not include the effect of the issuance of 1,918,748 shares of Common
Stock issuable upon exercise of outstanding options with a weighted average
exercise price of $5.74 per share (assuming an initial public offering price
of $8.25 per share with respect to options granted with an exercise price
per share equal to the price per share of the shares offered hereby).
The following table sets forth as of September 30, 1996 (i) the number of
shares of Common Stock outstanding and total and average per share amounts of
par value of outstanding Common Stock and additional paid-in capital immediately
after giving effect to the Initial Affiliation Transactions and (ii) the number
of shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share for new investors (assuming an initial
public offering price of $8.25 per share), before deducting underwriting
discounts and commissions and estimated offering expenses payable by the Company
(no effect is given to the sale of shares of Common Stock by the Selling
Stockholders):
<TABLE>
SHARES TOTAL
-------------------- ----------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... 11,045,015 79% $ 8,309,201(1) 25% $ 0.75(1)
New investors....................................... 3,000,000 21 24,750,000 75 8.25
---------- --- ----------- ---
Total.......................................... 14,045,015 100% $33,059,201 100% $ 2.35
---------- --- ----------- ---
---------- --- ----------- ---
</TABLE>
- ------------------
(1) Represents the par value of outstanding Common Stock and additional paid-in
capital immediately after giving effect to the Initial Affiliation
Transactions. See the Unaudited Pro Forma Financial Statements and Notes
thereto of Specialty Care Network, Inc. included elsewhere in this
Prospectus.
17
<PAGE>
SELECTED UNAUDITED FINANCIAL DATA
The following table sets forth certain unaudited pro forma financial data
for the Company giving effect to the Initial Affiliation Transactions, which
were accounted for using historical cost in accordance with SAB 48, and the
Initial Service Agreements. Accordingly, the Company will record the net assets
acquired at the Predecessor Practices' historical cost basis. The pro forma
statement of income data for the year ended December 31, 1995 and the nine
months ended September 30, 1996 assume that the Company was incorporated, the
Initial Affiliation Transactions had occurred and the Initial Service Agreements
were entered into on January 1, 1995. The pro forma balance sheet data assume
that the Initial Affiliation Transactions occurred on September 30, 1996.
Prior to the Initial Affiliation Transactions, each of the Predecessor
Practices operated independently and none was under common control or
management. Accordingly, the unaudited pro forma financial data may not be
indicative of the results that actually would have occurred if these
transactions had been effected on the dates indicated or the results that may be
obtained in the future. This data is qualified in its entirety by, and should be
read in conjunction with, the Unaudited Pro Forma Financial Statements and Notes
thereto, the financial statements for the Company and each of the Predecessor
Practices and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA (1)
<TABLE>
<S> <C> <C>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
STATEMENT OF INCOME DATA
- ------------------------
Revenue(2) .................................................. $31,493,723 $25,132,937
----------- -----------
Operating expenses:
Salaries and benefits ..................................... 14,214,984 10,599,417
Supplies, general and administrative expenses ............. 10,930,793 9,579,454
Depreciation and amortization ............................. 713,481 602,396
Costs to evaluate and acquire physician practices ......... -- 71,177
----------- -----------
Income from continuing operations ........................... 5,634,465 4,280,493
Interest expense and other, net ............................. (74,306) (22,648)
----------- -----------
Income from continuing operations before income tax ......... 5,560,159 4,257,845
Income tax expense .......................................... (2,112,860) (1,617,981)
----------- -----------
Net income .................................................. $ 3,447,299 $ 2,639,864
----------- -----------
----------- -----------
Total weighted average number of common shares outstanding(3) 12,101,264 12,101,264
----------- -----------
----------- -----------
Income per share amount(4) .................................. $ 0.28 $ 0.22
----------- -----------
----------- -----------
SEPTEMBER 30, 1996
------------------
BALANCE SHEET DATA
- ------------------
Total assets.................................................................. $14,744,983
Total debt.................................................................... 2,836,012
</TABLE>
- ------------------
(1) Excluded from the selected financial data above are the discontinued
operations of Vero Orthopaedics, P.A. for the year ended December 31, 1995.
(2) Revenue consists of service fees equal to (i) a percentage of pre-tax
earnings of the Predecessor Practices before physician compensation and most
fringe benefits and excluding certain expenses of the Predecessor Practices
and (ii) reimbursement for operating expenses of the Predecessor Practices
to be paid by the Company. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview.'
(3) The computation of income per share is based upon 12,101,264 weighted
average common shares outstanding and common stock equivalents. See Note 15
to the Unaudited Pro Forma Financial Statements included elsewhere in this
Prospectus for further discussion of the weighted average number of common
shares.
(4) See Note 2 to the financial statements of the Company for a description of
the computation of income (loss) per share amount.
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA -- PREDECESSOR PRACTICES
The historical financial data presented for each of the Predecessor
Practices for the years ended December 31, 1993, 1994 and 1995 are derived from
each of the Predecessor Practice's respective audited financial statements, and
the historical financial data for the nine months ended September 30, 1995 and
1996 and as of September 30, 1996 are derived from each of the Predecessor
Practice's respective unaudited financial statements.
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
- ------------------------
Net practice revenue................... $ 11,902,216 $ 13,325,350 $ 17,549,907 $ 12,431,874 $14,255,838
Income from operations before income
taxes................................ 377,445 128,803 1,460,162 774,082 374,437
Pro forma income tax expense(1)........ 152,158 62,029 555,804 293,405 139,307
Pro forma net income(1)................ 225,287 66,774 904,358 480,677 235,130
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets........................... $ 3,672,138 $ 3,701,073 $ 5,312,577 $ 5,334,817
Total debt............................. 700,000 550,000 570,000 155,699
</TABLE>
- ------------------
(1) Pro forma net income represents the effects of taxing the entity under
Subchapter C of the Internal Revenue Code.
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net practice revenue................... $ 11,552,476 $ 13,561,339 $ 13,298,164 $ 9,842,814 $11,152,357
Income (loss) from operations before
income taxes......................... (617,719) 95,371 (334,642) (25,271) 24,876
Income tax benefit (expense)........... 194,660 (35,385) 118,242 6,608 (8,707)
Net income (loss)...................... (423,059) 59,986 (216,400) (18,663) 16,169
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets........................... $ 3,807,273 $ 3,654,883 $ 3,584,722 $ 4,451,636
Total debt............................. 1,636,102 1,552,502 1,412,663 1,286,040
</TABLE>
19
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net practice revenue...................... $ 8,040,293 $ 9,455,216 $ 10,420,265 $ 7,470,881 $10,053,710
Income (loss) from operations
before income taxes..................... 261,123 351,361 103,809 (167,690) 903,425
Pro forma income tax benefit
(expense)(1)............................ (104,645) (143,143) (53,908) 54,393 (357,018)
Pro forma net income (loss)(1)............ 156,478 208,218 49,901 (113,297) 546,407
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets.............................. $ 2,527,530 $ 3,244,254 $ 5,481,617 $ 6,078,007
Total debt................................ -- -- 2,276,880 1,944,880
</TABLE>
- ------------------
(1) Pro forma net income (loss) represents the effects of taxing the entity
under Subchapter C of the Internal Revenue Code.
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net practice revenue..................................... $ 1,542,250 $ 8,207,951 $ 5,855,525 $ 6,208,360
Loss from operations before income taxes................. (286,717) (349,179) (314,296) (272,068)
Pro forma net loss(2).................................... (286,717) (349,179) (314,296) (272,068)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets............................................. $ 1,150,472 $ 1,685,062 $ 1,676,622
Total debt............................................... -- -- --
</TABLE>
- ------------------
(1) The selected financial data above includes GCOA from the period October 17,
1994 (date of inception) through September 30, 1996.
(2) Pro forma net loss represents the effects of taxing the entity under
Subchapter C of the Internal Revenue Code; however, no income tax benefit
has been provided herein due to the absence of net operating loss carryback
availability at the entity.
20
<PAGE>
VERO ORTHOPAEDICS, P.A.(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net practice revenue........................ $ 2,545,263 $ 3,204,224 $ 4,208,470 $ 3,179,034 $ 2,953,351
Income (loss) from continuing operations
before income taxes....................... (141,766) (202,494) (541,650) 49,160 306,354
Income tax benefit (expense)................ 49,618 69,646 (64,300) (5,021) (132,025)
Net income (loss) from
continuing operations..................... (92,148) (132,848) (605,950) 44,139 174,329
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets................................ $ 761,837 $ 719,150 $ 788,176 $ 846,453
Total debt.................................. 421,495 575,021 367,877 124,555
</TABLE>
- ------------------
(1) Excluded from the selected financial data above for Vero Orthopaedics, P.A.
are the discontinued operations for the years ended December 31, 1994 and
1995.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. See 'Prospectus Summary.' Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, but not limited to, those discussed in 'Risk
Factors.'
GENERAL
SCN was incorporated in 1995, but did not conduct any significant
operations until November 1996, following its affiliation with the Initial
Affiliated Practices. At the time of the Initial Affiliation Transactions, the
predecessors of the Initial Affiliated Practices and GCOA were established
businesses engaged in the provision of musculoskeletal care as separate
independent entities. The Initial Affiliated Practices currently conduct
business as separate entities obtaining services from the Company pursuant to
the Initial Service Agreements.
The following discussion of the unaudited pro forma results of operations
and financial position of the Company and of the combined results of operations
of the Predecessor Practices should be read in conjunction with the Unaudited
Pro Forma Financial Statements and Notes thereto and the financial statements
for the Company and each of the Predecessor Practices included elsewhere in this
Prospectus.
ACCOUNTING TREATMENT
The acquisition of the assets and assumption of certain liabilities of the
Predecessor Practices were accounted for by the Company at the transferors'
historical cost basis. The Common Stock being exchanged for those assets is
recorded by SCN at the Predecessor Practices' historical cost. In accordance
with SAB 48, the physician owners of the Predecessor Practices were deemed to
function as promoters in the Initial Affiliation Transactions. Cash
consideration given in these acquisitions is treated for accounting purposes as
a dividend from SCN to the physician owners who received cash.
Future acquisitions will be accounted for by either the pooling of
interests or purchase accounting methods. To the extent future acquisitions are
accounted for by the purchase method of accounting, the Company may have to
recognize substantial amounts of goodwill.
OVERVIEW
In connection with the Initial Affiliation Transactions, the Company
acquired certain assets and liabilities of the Predecessor Practices and entered
into the Initial Service Agreements with the Initial Affiliated Practices.
Pursuant to the terms of the Initial Service Agreements, the Company, among
other things, provides facilities and management, administrative and development
services, and employs most non-medical personnel, in return for management
service fees. Such fees are payable monthly and consist of the following: (i)
service fees based on a percentage (the 'Service Fee Percentage') ranging from
20%-33% of the Adjusted Pre-Tax Income of the Initial Affiliated Practices
(defined generally as revenue of the Initial Affiliated Practices related to
professional services less amounts equal to certain clinic expenses of the
Initial Affiliated Practices ('Clinic Expenses,' as defined more fully in the
Initial Service Agreements), not including physician owner compensation or most
benefits to physician owners) and (ii) amounts equal to Clinic Expenses. For the
first three years following affiliation, however, the portion of the service
fees described under clause (i) is specified to be the greater of the amount
payable as described under clause (i) above or a fixed dollar amount (the 'Base
Service Fee'), which was generally calculated by applying the respective Service
Fee Percentage of Adjusted Pre-Tax Income Predecessor Practice for the twelve
months prior to affiliation. For the Initial Affiliated Practices the lowest
Base Service Fee is $830,261 and the highest Base Service Fee is $4,080,745. The
annual Base Service Fees for the Initial Affiliated Practices is approximately
$9.5 million in the aggregate. See 'Business -- Contractual Agreements with
Affiliated Practices.' In addition, with respect to its management of certain
facilities and ancillary services associated with
22
<PAGE>
certain of the Initial Affiliated Practices, the Company receives fees ranging
from 2%-8% of net revenue related to such facilities and services.
The expenses incurred by the Company in fulfilling its obligations under
the Initial Service Agreements include the salaries, wages and benefits of
personnel (other than physician owners and certain technical medical personnel),
supplies, expenses involved in administering the clinical practices of the
Initial Affiliated Practices and general and administrative expenses, as well as
depreciation and amortization of assets acquired from the Predecessor Practices.
The Company will seek to reduce these operating costs and expenses, as a
percentage of net revenue, through purchase discounts, economies of scale and
standardization of best practices. In addition to the operating costs and
expenses discussed above, the Company has and will continue to incur personnel
and administrative expenses in connection with its corporate office, which
provides management, administrative and development services to the Initial
Affiliated Practices.
Significant factors that influence revenue of the Initial Affiliated
Practices include the number of physicians, specialty and subspecialty mix,
payor mix and associated ancillary services. The Company plans to assist the
Initial Affiliated Practices by providing management, capital and other
resources required to develop new services, to recruit additional physicians to
its Initial Affiliated Practices and to secure managed care contracts.
The Company accounts for its stock-based compensation arrangements using
the intrinsic value method under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ('APB No. 25'). In
1995, Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation ('FASB No. 123'), was issued, whereby companies may
elect to account for stock-based compensation using a fair value based method or
continue measuring compensation expense using the intrinsic value method
prescribed in APB No. 25. Currently, the Financial Accounting Standards Board
has added to its agenda a project regarding certain APB No. 25 issues including
such things as incorporating the FASB No. 123 grant date definition into APB No.
25, readdressing the criteria under broad-based plans qualifying for
noncompensatory accounting and defining what constitutes employees. Accordingly,
pending resolution of these issues, the Company's accounting for stock-based
compensation arrangements could be revised.
RESULTS OF OPERATIONS
HISTORICAL
The Company had not entered into any service agreements, and consequently
generated no revenue, prior to September 30, 1996. The Company incurred a loss
for the period from the date of its incorporation through September 30, 1996 of
approximately $2.3 million reflecting management salaries and the travel, legal
and accounting costs associated with the Initial Affiliation Transactions.
PRO FORMA
Revenue. The pro forma revenue of the Company consists almost exclusively
of amounts to be earned under the Initial Service Agreements. The revenue
included in the pro forma financial statements is that which would have been
earned based on the operating results of the Predecessor Practices for the year
ended December 31, 1995 and for the nine months ended September 30, 1996,
assuming the Initial Affiliation Transactions had occurred, and the Initial
Service Agreements had been entered into, on January 1, 1995. The pro forma
revenue of $31.5 million and $25.1 million for the year ended December 31, 1995
and for the nine months ended September 30, 1996, respectively, are based on the
amounts that would have been payable pursuant to the Initial Service Agreements,
which include management fees and the reimbursable expenses of the Initial
Affiliated Practices. The pro forma revenue includes revenue that would have
been derived from the management agreement between TOC and the Company at TOC's
MRI center and revenue that would have been derived from the service agreement
between the Company and POA relating to POA's ambulatory surgery center.
23
<PAGE>
Operating Expenses. The total pro forma operating expenses for the year
ended December 31, 1995 and for the nine months ended September 30, 1996 reflect
the operating expenses of the Predecessor Practices which would have been
payable by SCN under the Initial Service Agreements and SCN corporate costs.
Income Taxes. Pro forma income taxes assume that the Company had operated
as a tax-paying entity, subject to an effective combined tax rate for state and
federal income taxes of 38%.
LIQUIDITY AND CAPITAL RESOURCES
SCN has financed its operations to date from the proceeds of private
placements of convertible debt and equity and bank borrowings. During 1996, the
Company received net proceeds from private placements of convertible
subordinated debt and equity in an aggregate amount of approximately $2.5
million. SCN utilized bank borrowings of approximately $1.7 million to effect
the Initial Affiliation Transactions.
The Company has a $20 million Credit Facility, including a $15.0 million
Acquisition Facility and a $5.0 million Working Capital Facility to be used for
acquisitions and general corporate purposes. However, the Company's aggregate
borrowings cannot exceed an established borrowing base, which is a multiple of
the Company's trailing twelve months cash flow, subject to certain adjustments,
less existing indebtedness. The minimum rates at which the Company can borrow
are the prime rate or LIBOR plus 1.75% on the Acquisition Facility and the prime
rate or LIBOR plus 1.50% on the Working Capital Facility. At January 17, 1997,
the Company had approximately $5.6 million outstanding under the Credit
Facility, consisting of $1.7 million in Acquisition Facility debt and $3.9
million in Working Capital Facility debt. At January 17, 1997, the Company's
borrowing base under the Credit Facility was $7.0 million, and the Company's
effective rate of interest for both the Acquisition and Working Capital
Facilities was 7.23% per annum. The Credit Facility is secured by substantially
all of the assets of the Company and contains several affirmative and negative
covenants, including covenants limiting the Company's ability to incur
additional indebtedness and limiting the Company's ability to, and restricting
the terms upon which the Company can, affiliate with physician practices in the
future. The per annum commitment fee on the unused portion of the Credit
Facility is 0.25% on the Acquisition Facility and 0.20% on the Working Capital
Facility.
The Company plans to repay all outstanding indebtedness under the Credit
Facility with proceeds from this offering.
In connection with the Initial Affiliation Transactions, the Company has
committed to enter into loan agreements with certain physician owners of the
Predecessor Practices for loans in an aggregate amount of up to approximately
$4.3 million. These loans are available until November 12, 1998, and the amount
that each physician may borrow is limited. Pursuant to loan agreements, as of
January 17, 1997, the Company had loaned approximately $1 million (approximately
$800,000 of which was funded through the Credit Facility) to certain physician
owners of the Initial Affiliated Practices to cover anticipated cash flow needs
of these physician owners. The loans bear interest at a floating rate based on
prime plus 1.25% and mature at the earlier of the date on which any shares of
Common Stock held by the physicians (i) are sold pursuant to a registration
statement filed with the Commission or (ii) may otherwise be sold pursuant to
Rule 144. The loans are secured by a portion of the Common Stock owned by the
physicians.
Pursuant to separate agreements with two of the physician owners at ROA,
the Company has agreed to support the establishment of a sports medicine center
and a knee center. The Company has agreed to negotiate in good faith with one
physician owner to develop a plan for the sports medicine center by November
1997. The specifications relating to the development of the centers, including
the extent of capital commitments by the Company, have not been determined. The
development of the centers would be subject to regulatory approvals under
current law.
In connection with the Initial Affiliation Transactions, the Company
purchased, subject to adjustment, the accounts receivable of the Predecessor
Practices. In addition, pursuant to the Initial
24
<PAGE>
Service Agreements, the Company will purchase, subject to adjustment, the
accounts receivable of the Initial Affiliated Practices monthly in arrears and
anticipates that it will have a similar obligation under service agreements
entered into in the future. The Company expects to use working capital to fund
its obligation to purchase, subject to adjustment, the accounts receivable on an
ongoing basis. No adjustments will be made to reflect financing costs related to
the carrying of such receivables by the Company. The Company expects to use its
working capital to fund the receivables.
In connection with the Initial Affiliation Transactions, the Company will
record aggregate federal and state deferred tax liabilities of approximately
$3.9 million. These liabilities generally will become payable ratably over a
four year period commencing on the date of the consummation of the Initial
Affiliation Transactions.
The Company anticipates that capital expenditures during 1997 will relate
primarily to affiliations with additional practices, if any, and to the
expansion and replacement of medical and office equipment for the Initial
Affiliated Practices. It is anticipated that funding for these purposes will be
derived from the proceeds of this offering, funds borrowed under the Credit
Facility and cash flow from operations. Management believes that such sources
will be sufficient to fund the Company's capital needs for a period of in excess
of twelve months following completion of this offering. In the future, the
Company will seek to raise additional funds through borrowings or the issuance
of debt or equity securities. There can be no assurance that sufficient funds
will be available on terms acceptable to the Company, if at all.
25
<PAGE>
BUSINESS
GENERAL
Specialty Care Network is a physician practice management company focusing
exclusively on musculoskeletal disease-state management. Since November 12,
1996, the Company has provided management services under long-term agreements
with five practices, encompassing 49 physicians in five states. In addition, the
Company has entered into definitive agreements to affiliate with three single
physician practices in two of its existing markets. The Company also manages one
outpatient surgery center and one outpatient MRI center owned by two of its
Initial Affiliated Practices.
The Initial Affiliated Practices offer a broad spectrum of musculoskeletal
care, which is the treatment of conditions relating to bones, joints, muscles
and related connective tissues. The Company's affiliated physicians are trained
in a variety of musculoskeletal disciplines, including general orthopaedics,
joint replacement surgery, sports medicine, spinal care, hand and upper
extremity care, foot and ankle care, pediatric orthopaedics, physiatry, trauma
and adult neurology. In order to build networks of providers that offer access
to a full range of musculoskeletal care, the Company intends to affiliate and
otherwise contract with physicians trained in other musculoskeletal
subspecialties, including occupational medicine, neurosurgery, plastic surgery,
rehabilitation therapy and rheumatology.
SCN's goal is to build the leading musculoskeletal physician practice
management company in the United States. The Company's strategy consists of
three components: (i) affiliating with leading musculoskeletal practices in
targeted markets throughout the United States; (ii) assisting each Affiliated
Practice in managing and expanding its business by providing comprehensive
operational support, including proprietary clinical and financial information
systems; and (iii) developing integrated regional musculoskeletal networks
around its Affiliated Practices. As a first step in implementing this strategy,
the Company has entered into long-term service agreements with the Initial
Affiliated Practices, a select group of practices in Philadelphia, Pennsylvania;
Princeton, New Jersey; Tallahassee, Florida; Bainbridge, Georgia; Baltimore,
Maryland; and Vero Beach, Florida. These Initial Affiliated Practices were
selected based on a variety of factors including, but not limited to, physician
credentials and reputation; competitive market position; specialty and
subspecialty mix of physicians; historical financial performance and growth
potential; and willingness to embrace SCN's corporate philosophy.
The Company was incorporated in December 1995. Following its incorporation
through November 12, 1996, the date of the Initial Affiliation Transactions, the
Company hired personnel, raised funds through the private placement of
securities and conducted negotiations with potential affiliation candidates. On
November 12, 1996, the Company consummated the Initial Affiliation Transactions
and entered into the Initial Service Agreements with the Initial Affiliated
Practices.
INDUSTRY BACKGROUND
PHYSICIAN PRACTICE MANAGEMENT INDUSTRY
The Health Care Financing Administration ('HCFA') estimated that national
health care spending in 1994 was approximately $940 billion, with approximately
$180 billion of such expenditures directly attributable to physician services
and an additional $600 billion under physician direction. Moreover, HCFA
projects that national health care spending will be nearly $1.5 trillion in
2000. The growth in health care expenditures has increased the demand by
government and third party payors to control health care costs. The resulting
emphasis on cost containment, the consolidation of the health care market in
general, the increased market share of managed care companies and the transfer
of risk from payors to providers have precipitated and accelerated significant
changes in the way physicians organize themselves.
The Company believes that, among other factors, these market pressures have
caused physicians to affiliate with physician practice management companies that
provide comprehensive operational and financial support. Although several
companies provide such services to physicians across a variety of medical
specialties, including musculoskeletal care, management believes that, upon
completion of this offering, SCN will be the only publicly-traded physician
practice management company focusing exclusively on musculoskeletal care.
26
<PAGE>
MUSCULOSKELETAL MARKET OVERVIEW
Expenditures for musculoskeletal care in the United States are significant,
with total direct costs associated with the delivery of musculoskeletal care
exceeding $60 billion in 1988, according to the AAOS. Of this amount,
approximately $7 billion represents fees paid for physician services.
Furthermore, according to the AAOS, the 65-and-over age group accounts for
approximately 25% of musculoskeletal cases. Given the aging of the U.S.
population, the Company believes that demographic trends favor the growth of the
need for musculoskeletal care.
The spectrum of musculoskeletal care ranges from acute procedures, such as
spinal or hip surgery after trauma, to the treatment of chronic conditions, such
as arthritis and back pain. Musculoskeletal care is provided by a variety of
medical and surgical specialists. Although the orthopaedic surgeon represents
the primary musculoskeletal provider, musculoskeletal care is also provided by
neurosurgeons, neurologists, plastic surgeons, physiatrists, rheumatologists,
occupational medicine physicians, podiatrists and primary care physicians, as
well as rehabilitative therapists. Moreover, there are a number of
subspecialties of orthopaedics, including adult reconstructive (joint
replacement) surgery, spinal care, sports medicine, foot and ankle care, hand
and upper extremity care, pediatrics, oncology and trauma care. The American
Medical Association estimates that in 1995, there were approximately 23,000
orthopaedic surgeons, as well as approximately 5,500 physiatrists, 3,500
rheumatologists, 3,000 occupational medicine physicians, 11,400 neurologists and
4,900 neurosurgeons.
The payor mix for musculoskeletal care is diverse, with managed care
enrollees representing an increasing percentage of patients. According to data
from a 1994 AAOS survey, the largest percentage of patients is private pay
(28%), followed by managed care, including fee-for-service and capitation (21%),
Medicare (21%) and workers compensation (18%). Almost 80% of orthopaedic
surgeons indicated they received patients from managed care sources. While
private pay patients remain the largest category, the AAOS survey indicated that
the percentage of total private pay patients has declined from 39% in 1988 to
28% in 1994. Over the same period, patients from managed care sources increased
from 12% to 21%. The distribution of patients from other sources remained
relatively constant over this period.
STRATEGY
SCN's goal is to become the leading physician practice management company
focusing on musculoskeletal disease-state management. The Company's strategy
consists of three components: (i) affiliating with leading musculoskeletal
practices in targeted markets throughout the United States; (ii) assisting each
Affiliated Practice in managing and expanding its business by providing
comprehensive operational support, including the development of proprietary
clinical and financial information systems; and (iii) developing integrated
regional musculoskeletal networks around its Affiliated Practices.
AFFILIATE WITH LEADING MUSCULOSKELETAL GROUPS
As a result of the Initial Affiliation Transactions, the Company has
affiliated with five practices encompassing 49 physicians in five states. The
Company intends to acquire the assets of, and provide management services to,
additional leading musculoskeletal physician groups in targeted markets. The
Company evaluates potential acquisition candidates based on a variety of
factors, including, but not limited to, physician credentials and reputation;
competitive market position; specialty and subspecialty mix of physicians;
historical financial performance and growth potential; and willingness to
embrace SCN's corporate philosophy. The Company believes that it is an
attractive affiliation partner because of the depth and experience of the
Company's management team (see the descriptions of the experience of the
Company's executive officers under '-- Provide Comprehensive Operational
Support' and 'Management -- Directors and Executive Officers'); the Company's
physician-driven practice governance structure; the fee structure under the
Company's service agreements; and the Company's issuance of Common Stock in
connection with its affiliation with physician practices,
27
<PAGE>
which permits physicians to become stockholders whose interests are aligned with
those of the Company.
PROVIDE COMPREHENSIVE OPERATIONAL SUPPORT
The Company intends to provide the Affiliated Practices comprehensive
operational services designed to enable physicians to devote their full time and
effort toward their clinical practices. The Company also will seek to increase
practice revenue through physician recruitment, contracting with ancillary
musculoskeletal-related providers, enhanced managed care contracting and
improvements in billing and collection. For a discussion of the Company's
current efforts in this regard see '-- Payor Contracting.' In addition, the
Company will seek to reduce operating costs and expenses, as a percentage of net
revenue, through purchase discounts, economies of scale and standardization of
best practices.
As a key element of assisting the Affiliated Practices, the Company intends
to leverage the information systems experience of its management and utilize the
Company's proprietary information systems. Kerry R. Hicks, Chief Executive
Officer of the Company, and David G. Hicks, Vice President of Management
Information Systems of the Company, have significant experience in designing and
implementing health care information systems. The Company has established
standards at the Initial Affiliated Practices for gathering clinical and
financial information such as personal patient data, physician and procedure
identifier codes, payor class and amounts charged and reimbursed. The Company
intends to develop a proprietary clinical outcomes database to enable the
Affiliated Practices to analyze clinical outcomes at the practitioner and
practice levels on a standardized basis. Information will be gathered in areas
such as incidents rates (the number of specified procedural, diagnostic and
medical events during a specified period with respect to a specified patient
population), utilization (frequency of patient care and activity relating to the
patient) and quality of care (monitoring and evaluation of patient outcomes).
This information should assist physicians in developing clinical protocols,
measuring outcomes, ensuring that standards of quality are met and determining
the most cost-effective course for treating patients. The Company intends to use
this data, together with data derived from its financial information systems, to
produce comprehensive financial and clinical reports to be used in connection
with the negotiation, structuring and pricing of managed care contracts. See '--
SCN Operations -- Management Information Systems.'
DEVELOP INTEGRATED REGIONAL MUSCULOSKELETAL NETWORKS
The Company intends in the longer term to leverage the reputation and
market share of the Affiliated Practices to develop integrated regional
musculoskeletal care networks. In order to offer patients and payors a
multi-disciplinary continuum of care and to increase patient access points in a
given market, the Company intends to develop these networks through contracts
with additional specialists in the musculoskeletal disciplines not represented
in the Affiliated Practices. The Company also intends, to the extent permitted
by applicable law, to contract with selected musculoskeletal providers and
facilities as needed in order to offer an umbrella of care, including MRI and
X-ray, outpatient occupational medicine, physical therapy and surgery centers.
The Company's objective in developing these networks is to obtain managed care
contracts for the networks and to enhance relationships with third party payors.
The Company believes patients are treated most effectively and efficiently
when various physician, institutional and ancillary providers are integrated
vertically into an organized musculoskeletal health care delivery system.
Efficiencies can be achieved by gathering, interpreting and sharing clinical
outcomes information, standardizing referral patterns and treatment protocols
within the network and coordinating patients' clinical treatment as they move
through the continuum of care toward recovery. These efficiencies result in an
increased ability to control and predict the cost of care for various patient
diagnoses. The Company believes that organized musculoskeletal physicians in a
network, with access to reliable clinical outcomes information, are able to
deliver a higher quality of care to patients. Nevertheless, the Company is
unable to predict whether and to what extent it will be able to establish
integrated musculoskeletal networks or negotiate capitated arrangements in the
future.
28
<PAGE>
INITIAL AFFILIATED PRACTICES
The Company has affiliated, through the Initial Service Agreements, with
five practices. On November 12, 1996, the Company, through a series of
transactions including an asset purchase, a share exchange and three mergers,
acquired substantially all of the assets and certain liabilities of the
Predecessor Practices. In connection with the Initial Affiliation Transactions,
the Company issued an aggregate of 7,659,115 shares (constituting an aggregate
of $45,954,690, based on an agreed value of $6 per share) of Common Stock and
paid $1,537,872 in cash to physicians in the Initial Affiliated Practices. See
'Certain Transactions' for details regarding the Company's affiliation with the
Initial Affiliated Practices. Subsequent to the Initial Affiliation
Transactions, the Company granted to certain physicians in the Initial
Affiliated Practices options to purchase an aggregate of 382,590 shares of
Common Stock at an exercise price of $6.00 per share. In addition, the Company
has entered into definitive agreements to affiliate with three single physician
practices in Tallahassee, Florida; Thomasville, Georgia; and Baltimore,
Maryland. The Company has agreed to acquire, through merger, substantially all
of the assets and certain liabilities of the practices for an aggregate
consideration of 409,265 shares. Consummation of the transactions is subject to
certain conditions, including the Company's completion of, and satisfaction
with, its review of the practices.
The table below sets forth certain information regarding the Initial
Affiliated Practices, all of whose physicians are board certified or board
eligible:
<TABLE>
<CAPTION>
MUSCULOSKELETAL
AFFILIATED PRACTICES LOCATION(S) PHYSICIANS SUBSPECIALTIES ANCILLARY SERVICES
- --------------------------------- --------------------- ------------- --------------------- --------------------------
<S> <C> <C> <C> <C>
Reconstructive Orthopaedic Philadelphia, PA 10 3 None
Associates II, P.C.
Princeton Orthopaedic Princeton, NJ 12 7 Outpatient Surgery,
Associates II, P.A. Physical Therapy
TOC Specialists, P.L. Tallahassee, FL 14 7 MRI
Bainbridge, GA
Greater Chesapeake Baltimore, MD 8 5 None
Orthopaedic
Associates, LLC
Vero Orthopaedics II, P.A. Vero Beach, FL 5 5 None
Sebastian, FL
-----
Total 49
-----
-----
</TABLE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES II, P.C.
ROA, operating under the name The Rothman Institute, was founded in
Philadelphia, Pennsylvania in 1970 and currently has nine orthopaedic surgeons
and one anesthesiologist. ROA has its own research department and has compiled
an orthopaedic database for more than 25 years.
ROA physicians (and their specialties) are Todd J. Albert, M.D. (spine
surgery); Richard A. Balderston, M.D. (spine surgery); Arthur R. Bartolozzi,
M.D. (sports medicine); Robert E. Booth, Jr., M.D. (joint replacement surgery);
Michael G. Ciccotti, M.D. (sports medicine); William J. Hozack, M.D. (joint
replacement surgery); Philip M. Maurer, M.D. (anesthesiologist); Richard H.
Rothman, M.D., Ph.D. (joint replacement surgery); Peter F. Sharkey, M.D. (joint
replacement surgery); and Alexander R. Vaccaro, M.D. (spine surgery). All of
these physicians, other than Dr. Maurer, are physician owners of ROA.
Dr. Balderston serves as Clinical Professor, Vice Chairman of the
Department of Orthopaedics and Chief of Orthopaedic Surgery at Thomas Jefferson
University Hospital ('Jefferson'). Dr. Bartolozzi is a team physician for
several sports teams, including the Philadelphia Flyers hockey team and the
Philadelphia Eagles football team. Dr. Booth serves as Co-Chief of Orthopaedic
Surgery at Pennsylvania Hospital, and is Professor and Vice Chairman of
Orthopaedic Surgery at Jefferson. Dr. Rothman serves as the Chairman of the
Department of Orthopaedics at Jefferson and Co-Chairman of
29
<PAGE>
the Department of Orthopaedics at Pennsylvania Hospital and is the
Editor-in-Chief of the Journal of Arthroplasty, a journal of joint replacement
surgery.
Drs. Booth and Bartolozzi have entered into an agreement with the Company
and ROA that contemplates that Drs. Booth and Bartolozzi will form and own an
independent practice. The agreement provides that this practice will enter into
a separate service agreement with the Company. See 'Business -- Contractual
Agreements with Affiliated Practices.'
See "Certain Transactions" for additional information regarding the
Company's affiliation with ROA.
PRINCETON ORTHOPAEDIC ASSOCIATES II, P.A. AND PRINCETON SPORTSMEDICINE
POA was founded in 1974 in Princeton, New Jersey and currently has 10
orthopaedic surgeons, one podiatric surgeon, one physiatrist and 16 physical
therapists. POA operates three facilities, each of which has an approximately
7,000 square foot physical therapy center. One of these facilities, operating
under the name SportsMedicine Princeton, provides multi-disciplinary diagnostic
and rehabilitative care for sports-related injuries. POA also operates its own
outpatient surgery center, for which SCN provides management services for a fee.
POA physicians (and their specialties) are Jeffrey S. Abrams, M.D.
(shoulder surgery); Jon W. Ark, M.D. (hand and foot surgery); Robert N. Dunn,
M.D. (spine surgery); Richard E. Fleming, Jr., M.D. (sports medicine); Steven R.
Gecha, M.D. (sports medicine); W. Thomas Gutowski, M.D. (sports medicine);
Michael N. Jolley, M.D. (joint replacement surgery); C. Alexander Moskwa, Jr.,
M.D. (sports medicine); Michael A. Palmer, M.D. (physiatry); Harvey E. Smires,
M.D. (joint replacement surgery); David M. Smith, M.D. (general orthopaedics);
and John S. Smith, DPM (podiatry). All of these physicians, other than Drs. Ark,
Palmer and John S. Smith, are physician owners of POA.
See "Certain Transactions" for additional information regarding the
Company's affiliation with POA.
TOC SPECIALISTS, P.L.
TOC was founded in 1972 and currently has nine orthopaedic surgeons, two
non-surgical musculoskeletal specialists and three neurologists. In its main
facility in Tallahassee, Florida, TOC has an MRI center, for which SCN provides
management services for a fee. In addition, TOC physicians also practice at a
satellite facility in Bainbridge, Georgia operating under the name Southern
Orthopedic Specialists, Inc. TOC has a non-contractual capitated arrangement
with Capital Health Plans covering approximately 75,000 lives and a capitated
contract with Health Plan Southeast covering approximately 55,000 lives.
TOC physicians (and their specialties) are Gregg A. Alexander, M.D.
(musculoskeletal medicine, disorders of the spine); D. Christian Berg, M.D.
(hand and upper extremities); Richard E. Blackburn, M.D. (adult neurology);
Donald M. Dewey, M.D., C.P.O. (foot and ankle surgery, pediatric orthopaedics);
Mark E. Fahey, M.D. (general orthopaedic surgery); Thomas C. Haney, M.D. (knee
surgery, sports medicine); William D. Henderson, Jr., M.D. (knee surgery, sports
medicine); Steve E. Jordan, M.D. (general orthopaedic surgery, sports medicine);
J. Rick Lyon, M.D. (general orthopaedic surgery); Kris D. Stowers, M.D.
(musculoskeletal and sports medicine); Robert L. Thornberry, M.D. (hip and knee
surgery, sports medicine); Billy C. Weinstein, M.D. (adult neurology); Stanley
Whitney, M.D. (adult neurology); and Charles H. Wingo, M.D. (spine surgery). All
of these physicians, other than Dr. Whitney, are physician owners of TOC.
TOC physicians have served as team physicians for a number of local high
schools and colleges. Dr. Haney serves as the team physician for the Florida
State University football team. Dr. Henderson currently serves as the president
of the Herodicus Society, a national sports medicine society, and is one of the
sports medicine physicians for the U.S. National Soccer Team. Dr. Wingo
currently serves as Chairman of the Orthopaedic Section/Surgery at the
Tallahassee Memorial Regional Medical Center.
See "Certain Transactions" for additional information regarding the
Company's affiliation with TOC.
30
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
GCOA was founded in Baltimore, Maryland in 1994 and currently has eight
orthopaedic surgeons. The two main focus areas of GCOA are sports medicine and
foot and ankle services. The practice is located adjacent to Union Memorial
Hospital and is actively involved in the orthopaedic residency and fellowship
teaching programs at that institution. In addition, three of its physicians are
active in such programs at the Johns Hopkins University School of Medicine
('Johns Hopkins').
GCOA physicians (and their specialties) are Paul L. Asdourian, M.D. (spine
surgery); Frank R. Ebert, M.D. (joint replacement surgery); Leslie S. Matthews,
M.D. (sports medicine); Stuart D. Miller, M.D. (foot and ankle); Mark S.
Myerson, M.D. (foot and ankle); John B. O'Donnell, M.D. (sports medicine); Lew
C. Schon, M.D. (foot and ankle); and Martin A. Yahiro, M.D. (general
orthopaedics). All of these physicians, other than Dr. Yahiro, are physician
owners of GCOA.
Dr. Asdourian serves as Chief of Orthopaedic Spinal Surgery at Union
Memorial Hospital and is a clinical instructor in orthopaedic surgery at Johns
Hopkins. Dr. Ebert currently serves as Assistant Chief of Orthopaedic Surgery at
Union Memorial Hospital. Dr. Matthews currently serves as Chief of Orthopaedic
Surgery at Union Memorial Hospital and is Program Director for the Orthopaedic
Surgery Residency training program. Dr. Matthews also is an Assistant Professor
of orthopaedic surgery at Johns Hopkins. Dr. Myerson serves as the director of
Foot and Ankle Services at Union Memorial Hospital. Dr. O'Donnell is assistant
director of Union Memorial Hospital's Sports Medicine Fellowship Program and is
a clinical instructor in orthopaedic surgery at Johns Hopkins. Dr. Schon serves
as Associate Director of the Foot & Ankle Fellowship program at Union Memorial
Hospital. Dr. Yahiro joined the group in July 1995. He currently serves as an
orthopaedic surgeon advisor to the federal Food and Drug Administration.
See "Certain Transactions" for additional information regarding the
Company's affiliation with GCOA.
VERO ORTHOPAEDICS II, P.A.
VO was founded in Vero Beach, Florida in 1976 and currently has four
orthopaedic surgeons and one physiatrist. The practice is located near Indian
River Memorial Hospital. VO operates one satellite office in Sebastian, Florida.
VO's physicians (and their specialties) are James L. Cain, M.D. (foot and
ankle); David W. Griffin, M.D. (knee surgery); George K. Nichols, M.D. (hip
surgery); Peter G. Wernicki, M.D. (sports medicine); and Charlene Wilson, M.D.
(physiatry). All of these physicians, other than Dr. Wilson, are physician
owners of VO.
Dr. James L. Cain, founder of Vero Orthopaedics, has served as Chairman of
the Department of Orthopaedics, Chief of the Medical Staff, and as a member of
the Board of Directors of Indian River Memorial Hospital. Dr. David W. Griffin
is Director of the Joint Implant Center of the Treasure Coast at Indian River
Memorial Hospital.
See "Certain Transactions" for additional information regarding the
Company's affiliation with VO.
SCN OPERATIONS
Upon affiliation with SCN, physician practices enter into a long-term
service agreement with the Company. Under the terms of a service agreement, the
Company generally employs most of a practice's non-physician personnel, provides
facilities for the practices and provides services in the areas of practice
management, information systems and negotiation of payor contracts, all as more
specifically described below. The governance structure provided with respect to
the service agreements facilitates close cooperation between the Company and the
practices, while ensuring that the practices maintain clinical autonomy. See '--
Contractual Agreements with Affiliated Practices.'
MANAGEMENT SERVICES
Pursuant to the terms of the Service Agreements, the Company assists the
Initial Affiliated Practices in strategic planning, preparation of operating
budgets and capital project analysis. The Company intends to coordinate group
purchasing of supplies, inventory and insurance for the practices. In addition,
the Company will assist the Affiliated Practices in physician recruitment by
introducing
31
<PAGE>
physician candidates to the practices and advising the practices in structuring
employment arrangements.
The Company also provides or arranges for a variety of additional services
relating to the day-to-day non-medical operations of the practices, including
(i) management and monitoring each practice's billing levels, invoicing and
accounts receivable collection by payor type, (ii) accounting, payroll and legal
services and records and (iii) cash management and centralized disbursements.
These services are designed to reduce the amount of time physicians must
spend on administrative matters, thereby enabling the physicians to dedicate
more of their efforts toward the delivery of health care. The Company's
anticipated capital resources and assistance in preparation of budgets and
capital project analyses are intended to facilitate the establishment of
ancillary musculoskeletal facilities, such as outpatient occupational medicine,
physical therapy and surgery centers and MRI centers. Comprehensive
administrative support should facilitate more effective billings and collections
and, as the Company grows, economies of scale in effecting purchases. The
Company's proprietary accounts payable system should allow SCN to control
disbursements and identify economies in purchasing.
PRACTICE SERVICES
As a result of its affiliation with the Initial Affiliated Practices, SCN
employs most of the Initial Affiliated Practices' non-physician personnel. These
non-physician personnel, along with additional personnel at the Company's
headquarters, manage the day-to-day non-medical operations of each of the
Initial Affiliated Practices, including, among other things, by providing
secretarial, bookkeeping, scheduling and other routine services. Under the
Initial Service Agreements, the Company must provide facilities and equipment to
the Initial Affiliated Practices, and to this end, the Company entered into
lease agreements for the facilities and purchased the assets utilized by each of
the Initial Affiliated Practices.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that a key element in the implementation of its
business strategy is the development and utilization of its proprietary
management information systems. The Company is designing its information systems
to integrate and analyze financial and clinical data, improve operating
efficiency at the practice level and enhance the ability of the Company to
negotiate managed care contracts on behalf of its Affiliated Practices.
The Company has developed proprietary financial systems that have been
installed at the Company's headquarters and at each of the Initial Affiliated
Practices. These systems include an internally developed purchase order
application and electronic interfaces between payroll, general ledger, banking,
accounts payable and accounts receivable applications. These systems permit each
Initial Affiliated Practice to separately designate purchase requirements and
transfer purchase information on a daily basis. Such information allows the
Company to monitor purchases from order to receipt, to centrally control the
disbursement of funds and to identify economies in purchasing. In addition, the
Company's systems permit the Company to capture, analyze and report centrally
financial data from the various Initial Affiliated Practice locations and
provide analyses of financial data on a fully integrated basis. In addition, the
Company's management information systems personnel is designing a proprietary
clinical outcomes database. See '-- Strategy -- Provide Comprehensive
Operational Support.'
PAYOR CONTRACTING
An increasing portion of the net revenue of the Initial Affiliated
Practices is derived from managed care payors. Although rates paid by managed
care payors are generally lower than commercial rates, managed care payors can
provide access to large patient volumes.
The Company seeks to negotiate both fee-for-service and capitated contracts
on behalf of the Initial Affiliated Practices. Under capitated arrangements,
providers deliver health care services to
32
<PAGE>
managed care enrollees and would bear all or a portion of the risk that the cost
of such services may exceed capitated payments. Capitated contracts involve
various forms of risk sharing. Providers may accept risk only with respect to
the costs of physician services required by a patient (professional component)
or for all of the medical costs required by a patient including professional,
institutional and ancillary services (global capitation). Managed care
companies' arrangements with providers can be further segmented into episode of
care and per member per month capitation. Under specified episode of care
capitation, providers deliver care for covered enrollees with a specified
medical condition or who require a particular treatment on a fixed fee basis per
episode. Under per member per month capitation, the providers receive fixed
monthly fees per covered enrollee and assume the additional risk for the
incidence of medical conditions requiring procedures specified in the contract.
Currently, the Company performs analyses of the Initial Affiliated
Practices' markets to develop managed care contracting strategies and meets with
principal payors in each of these markets to enhance and establish relationships
between the Initial Affiliated Practices and such payors. In addition, the
Company is currently in the process of negotiating a capitated, episode of care
managed care contract on behalf of one of the Initial Affiliated Practices, fee
for service contracts for physician services for several of the Initial
Affiliated Practices and a fee for service contract for the surgery center at
POA. TOC has a non-contractual capitated arrangement covering approximately
75,000 lives and a capitated contract covering approximately 55,000 lives, and
POA has a capitated contract covering approximately 20,000 lives. These
arrangements existed at the time of the Initial Affiliation Transactions. No
other Initial Affiliated Practice has a capitated arrangement.
GOVERNANCE AND QUALITY ASSURANCE
The Company's current governance structure promotes physician participation
in the management of the Company. At least one physician from each Initial
Affiliated Practice serves on the Company's Board of Directors. In addition,
each Initial Affiliated Practice has a Joint Policy Board whose membership
includes an equal number of representatives from each of the Company and the
Initial Affiliated Practice. The Joint Policy Board will have responsibilities
that include developing long-term strategic objectives, developing practice
expansion and payor contracting guidelines, promoting practice efficiencies,
recommending significant capital expenditures and facilitating communication and
information exchange between the Company and each of the Initial Affiliated
Practices.
The Company intends to create an Outcomes Management and Standards Board
that will focus on the identification and communication of the best practices
and clinical protocols in the business and administrative areas. The Company
also intends to create a Medical Provider Board that will identify and
communicate the best practices and protocols in the medical area. Both of these
boards, which will consist solely of physicians from Affiliated Practices, will
receive managerial and information systems support from the Company.
CONTRACTUAL AGREEMENTS WITH AFFILIATED PRACTICES
The Company has entered into the Initial Service Agreements with each of
the Initial Affiliated Practices, and intends to enter into long-term service
agreements with each additional Affiliated Practice, to provide management,
administrative and development services. Under the Initial Service Agreements,
the Initial Affiliated Practices are solely responsible for all aspects of the
practice of medicine and the Company has the primary responsibility for the
business and administrative aspects of the Initial Affiliated Practices. The
Company employs most of the Initial Affiliated Practice's non-physician
personnel. Pursuant to the Initial Service Agreements, the Company provides or
arranges for various management, administrative and development services to the
Initial Affiliated Practices relating to the day-to-day non-medical operations
of the Initial Affiliated Practices.
The following summary of the Initial Service Agreements is intended to be a
general summary of the form of Initial Service Agreement. The Company expects to
enter into similar agreements with other Affiliated Practices in the future. The
actual terms of the individual Initial Service Agreements, and other service
agreements into which the Company may enter in the future, may vary in certain
33
<PAGE>
respects from the description below as a result of negotiations with the
individual practices and the requirements of local regulations. Each of the
Initial Service Agreements and certain related agreements are filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary is qualified in its entirety by reference to such exhibits.
For a discussion of circumstances under which a service agreement may be
rendered unenforceable, see 'Risk Factors -- Government Regulation.'
Pursuant to the Initial Service Agreements, the Company, among other
things, (i) acts as the exclusive manager and administrator of non-physician
services relating to the operation of the Initial Affiliated Practices, subject
to matters for which the Initial Affiliated Practices maintain responsibility or
which are referred to the Joint Policy Boards of the Initial Affiliated
Practices, (ii) bills patients, insurance companies and other third party payors
and collects, on behalf of the Initial Affiliated Practices, the fees for
professional medical and other services rendered, including goods and supplies
sold by the Initial Affiliated Practices, (iii) provides or arranges for, as
necessary, clerical, accounting, purchasing, payroll, legal, bookkeeping and
computer services and personnel, information management, preparation of certain
tax returns, printing, postage and duplication services and medical transcribing
services, (iv) supervises and maintains custody of substantially all files and
records (medical records of the Initial Affiliated Practices remain the property
of the Initial Affiliated Practices), (v) provides facilities for the Initial
Affiliated Practices, (vi) prepares, in consultation with the Joint Policy
Boards and the Initial Affiliated Practices, all annual and capital operating
budgets, (vii) orders and purchases inventory and supplies as reasonably
requested by the Initial Affiliated Practices, (viii) implements, in
consultation with the Joint Policy Boards and the Initial Affiliated Practices,
national and local public relations or advertising programs and (ix) provides
financial and business assistance in the negotiation, establishment, supervision
and maintenance of contracts and relationships with managed care and other
similar providers and payors. Most of the services described above are provided
by employees previously employed by the Predecessor Practices.
Under the Initial Service Agreements, the Initial Affiliated Practices
retain the responsibility for, among other things, (i) hiring and compensating
physician employees and other medical professionals, (ii) ensuring that
physicians have the required licenses, credentials, approvals and other
certifications needed to perform their duties and (iii) complying with certain
federal and state laws and regulations applicable to the practice of medicine.
In addition, the Initial Affiliated Practices maintain exclusive control of all
aspects of the practice of medicine and the delivery of medical services.
Under the Initial Service Agreements, the Company collects fees from the
Initial Affiliated Practices on a monthly basis. The fees consist of the
following: (i) service fees based on a percentage (the 'Service Fee Percentage')
ranging from 20%-33% of the Adjusted Pre-Tax Income of the Initial Affiliated
Practices (defined generally as revenue of the Initial Affiliated Practices
related to professional services less amounts equal to certain clinic expenses
of the Initial Affiliated Practices ('Clinic Expenses,' as defined more fully in
the Initial Service Agreements), not including physician owner compensation or
most benefits to physician owners) and (ii) amounts equal to Clinic Expenses.
For the first three years following the affiliation, however, the portion of the
service fees described under clause (i) above is specified to be the greater of
the amount payable as described under clause (i) above or a fixed dollar amount
(the 'Base Service Fee'), which was generally calculated by applying the
respective Service Fee Percentage of Adjusted Pre-Tax Income of the Predecessor
Practices for the twelve months prior to affiliation. In addition, with respect
to its management of certain facilities and ancillary services associated with
certain of the Initial Affiliated Practices, the Company receives fees ranging
from 2%-8% of net revenue related to such facilities and services.
Pursuant to the Initial Service Agreements, each Initial Affiliated
Practice agrees to sell and assign to the Company, and the Company agrees to
buy, all of the Initial Affiliated Practice's accounts receivable each month
during the existence of the Initial Service Agreement. The purchase price for
such accounts receivable will equal the face amounts of the accounts receivable
recorded each month less adjustments for contractual allowances, allowances for
doubtful accounts and other potentially uncollectible amounts based on the
practice's historical collection rate, as determined by the Company.
34
<PAGE>
However, the Company and the Initial Affiliated Practices have discussed
making periodic adjustments so that amounts paid by the Company for the accounts
receivable will be adjusted upwards or downwards based on the Company's actual
collection experience. While the Company believes, based on its discussions with
the Initial Affiliated Practices, that this arrangement is acceptable to them,
the Company cannot assure that this arrangement will be effected.
The Initial Service Agreements have initial terms of forty years, with
automatic extensions (unless specified notice is given) of additional five-year
terms. The Initial Service Agreement may be terminated by either party if the
other party (i) files a petition in bankruptcy or other similar events occur or
(ii) defaults on the performance of a material duty or obligation, which default
continues for a specified term after notice. In addition, the Company may
terminate the agreement if the Affiliated Practice's Medicare or Medicaid number
is terminated or suspended as a result of some act or omission of the Affiliated
Practice or the physicians, and the Affiliated Practice may terminate the
agreement if the Company misapplies funds or assets or violates certain laws.
Upon termination of an Initial Service Agreement by the Company for one of
the reasons set forth above, the Company has the option to require the Initial
Affiliated Practice to purchase and assume the assets and liabilities related to
the Initial Affiliated Practice at the fair market value thereof. In addition,
upon termination of an Initial Service Agreement by the Company during the first
five years of the term, the physician owners of the Initial Affiliated Practice
are required to pay the Company or return to the Company an amount of cash or
stock of the Company equal to one-third of the total consideration received by
such physicians in connection with the Company's affiliation with the practice.
Under the Initial Service Agreements, each physician owner must give the
Company twelve months notice of an intent to retire from the Initial Affiliated
Practice. If a physician gives such notice during the first five years of the
agreement, the physician must also locate a replacement physician or physicians
acceptable to the Joint Policy Board and pay an amount based on a formula
relating to any loss of service fee for the first five years of the term. The
agreement also provides that after the fifth year no more than 20% of the
physician owners at the Initial Affiliated Practice may retire within a one-year
period.
The Initial Affiliated Practices and the physician owners of the Initial
Affiliated Practices generally agree with the Company not to compete with the
Company in providing services similar to those provided by the Company under the
Initial Service Agreements, and the physician owners also generally agree with
the Company not to compete with an Initial Affiliated Practice, within a
specified geographic area. Non-competition restrictions generally apply to
physicians during their affiliation with the Initial Affiliated Practices and
for three years thereafter. In addition, the Initial Service Agreement requires
the Initial Affiliated Practice to enter into non-competition agreements with
all physicians in the Initial Affiliated Practice, of which agreements the
Company will be a third party beneficiary. After the fifth year of the term of
the Initial Service Agreement, physician owners of the Initial Affiliated
Practices may be released from the non-competition provisions upon payment of
certain amounts to the Company, which may be paid in the form of Common Stock.
The Initial Service Agreements generally require the Initial Affiliated
Practices to pursue enforcement of the non-competition agreement with physicians
or assign to the Company the right to pursue enforcement.
The Company has entered into an agreement with ROA and Drs. Booth and
Bartolozzi pursuant to which there will be a division of ROA and Drs. Booth and
Bartolozzi will establish an independent practice ('BB One'). The agreement
provides that the Company will enter into a service agreement with BB One, and
amend the service agreement with ROA so that the aggregate Base Service Fee for
ROA and BB One will be equal to ROA's current Base Service Fee. In addition,
unless BB One exercises the right described below, in the event that the Base
Service Fee of either (but not both) of the practices is more than the service
fee (the 'Percentage-Based Service Fee') that would result from the application
of the Service Fee Percentage to the practice's Adjusted Pre-Tax Income (a 'Base
Fee Deficit'), the other practice will offset against the deficit the amount, if
any, by which its Percentage-Based Service Fee exceeds its Base Service Fee.
Thereafter, if any deficit remains, (i) the Company will forgive one-third of
the remaining Base Fee Deficit, up to $120,000, (ii) the practice that did not
have the Base Fee Deficit will pay to the Company one-third of the remaining
Base Fee Deficit, up to
35
<PAGE>
$120,000 and (iii) the practice with the Base Fee Deficit will pay to the
Company all additional remaining Base Fee Deficit. If both practices have a Base
Fee Deficit, (i) BB One will pay to SCN one-third of ROA's Base Fee Deficit, up
to $120,000, (ii) the Company will forgive one-third of ROA's Base Fee Deficit,
up to $120,000, (iii) ROA will pay the remainder of the Base Fee Deficit and
(iv) BB One will pay to the Company the entire amount of its Base Fee Deficit.
The agreement provides that BB One has the right, prior to July 15, 1997,
to increase its Service Fee Percentage by a stipulated amount. In the event that
the right is exercised, BB One's Base Service Fee will be increased by a
stipulated amount, and Dr. Booth will receive options from the Company to
purchase shares of Common Stock, based on a specified multiple of the increase
in the Base Service Fee (which multiple will increase if the right is exercised
following the date of this Prospectus), the product of which will be divided by
$10.00 (if the right is exercised prior to the date of this Prospectus) or the
greater of $10.00 or the closing bid price of Company Common Stock on the Nasdaq
National Market on the date the right is exercised (if the right is exercised
after the date of this Prospectus). If the right is exercised, the Company will
have no obligation to forgive any Base Fee Deficit of either ROA or BB One.
The agreement also provides that in the event Dr. Bartolozzi does not join
with Dr. Booth in forming BB One, then ROA and the Company will enter into
arrangements with Dr. Booth on terms proportionately consistent with the
economic principles underlying the above described arrangement. In the event Dr.
Bartolozzi remains with ROA or leaves BB One, BB One's Base Service Fee and
Service Fee Percentage and the amount of the increase in the Base Service Fee in
the event the right is exercised will be modified.
The parties have agreed that in the event additional issues arise in the
process of completing definitive agreements, or amendments to existing
agreements, and such issues are not resolved, then such issues will be submitted
to binding arbitration.
In addition, the Company has entered into an agreement with Dr. Bartolozzi
pursuant to which the Company has agreed to support the development of a sports
medicine center. If the Company and Dr. Bartolozzi have not agreed to a plan for
the development of the center by November 1997, Dr. Bartolozzi may terminate the
service agreement as it pertains to him, with three months written notice to the
Company. Upon such a termination, Dr. Bartolozzi must return to the Company an
amount equal to (i) the after-tax amount of the consideration received by Dr.
Bartolozzi in the merger transaction between ROA and the Company less (ii) the
after-tax amount of Dr. Bartolozzi's pro rata portion of service fees paid to
SCN during the term of the service agreement. In the event of such termination,
the Base Service Fee to be paid by BB One (or ROA if Dr. Bartolozzi elects to
remain with ROA), to SCN will be proportionally reduced by the pro rata portion
of the consideration paid to Dr. Bartolozzi at the closing of the merger between
SCN and ROA.
The Initial Affiliated Practices are responsible for obtaining professional
liability and worker's compensation insurance for the physicians and other
medical employees of the Initial Affiliated Practices, as well as general
liability umbrella coverage. The Company is responsible for obtaining
professional liability and worker's compensation insurance for employees of the
Company and general liability and property insurance for the Initial Affiliated
Practices.
The Initial Service Agreements contain indemnification provisions, pursuant
to which the Company indemnifies the Initial Affiliated Practices for damages
resulting from negligent acts or omissions by the Company or its agents,
employees or shareholders. In addition, the Initial Affiliated Practices
indemnify the Company for any damages resulting from any negligent act or
omissions by any affiliated physicians, agents or employees of the Initial
Affiliated Practice, other than damages resulting from claims arising from the
performance or nonperformance of medical services. See 'Risk Factors --
Potential Liability and Insurance; Legal Proceedings.'
36
<PAGE>
GOVERNMENT REGULATION AND SUPERVISION
The delivery of health care services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and the individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services. Federal law and regulations are based primarily upon
the Medicare program and the Medicaid program, each of which is financed, at
least in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment.
The Company believes its operations are in material compliance with
applicable laws; however, the Company has not received or applied for a legal
opinion from counsel or from any federal or state judicial or regulatory
authority to this effect, and many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation. The
laws applicable to the Company are subject to evolving interpretations, and
therefore, there can be no assurance that a review of the Company or the
Affiliated Practices by a court or law enforcement or regulatory authority will
not result in a determination that could have a material adverse effect on the
Company or the Affiliated Practices. Furthermore, there can be no assurance that
the laws applicable to the Company will not be amended in a manner that could
have a material adverse effect on the Company.
FEDERAL LAW
The federal health care laws apply in any case in which an Affiliated
Practice is providing an item or service that is reimbursable under Medicare or
Medicaid or in which the Company is claiming reimbursement from Medicare or
Medicaid on behalf of physicians with whom the Company has a service agreement.
The principal federal laws include those that prohibit the filing of false or
improper claims with the Medicare or Medicaid programs, those that prohibit
unlawful inducements for the referral of business reimbursable under Medicare or
Medicaid and those that prohibit the provision of certain services by a provider
to a patient if the patient was referred by a physician with which the provider
has certain types of financial relationships.
False and Other Improper Claims. The federal government is authorized to
impose criminal, civil and administrative penalties on any health care provider
that files a false claim for reimbursement from Medicare or Medicaid. Criminal
penalties are also available in the case of claims filed with private insurers
if the government can show that the claims constitute mail fraud or wire fraud.
While the criminal statutes are generally reserved for instances evincing an
obviously fraudulent intent, the criminal and administrative penalty statutes
are being applied by the government in an increasingly broad range of
circumstances. The government has taken the position, for example, that a
pattern of claiming reimbursement for unnecessary services violates these
statutes if the claimant should have known that the services were unnecessary.
The government has also taken the position that claiming reimbursement for
services that are substandard is a violation of these statutes if the claimant
should have known that the care was substandard.
The Company believes that its billing activities on behalf of the Initial
Affiliated Practices are in material compliance with such laws, but there can be
no assurance that the Company's activities will not be challenged or scrutinized
by governmental authorities. A determination that the Company had violated such
laws could have a material adverse impact on the Company.
Anti-Kickback Law. A federal law commonly known as the 'Anti-kickback
Amendments' prohibits the offer, solicitation, payment or receipt of anything of
value (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce the referral of Medicare or Medicaid patients, or the
ordering of items or services reimbursable under those programs. The law also
prohibits remuneration that is intended to induce the recommendation of, or the
arranging for, the provision of items or services reimbursable under Medicare
and Medicaid. The law has been broadly interpreted by a number of courts to
prohibit remuneration that is offered or paid for otherwise legitimate purposes
if the circumstances show that one purpose of the arrangement is to induce
referrals. Even bona fide investment interests in a health care provider may be
questioned under the Anti-kickback Amendments
37
<PAGE>
if the government concludes that the opportunity to invest was offered as an
inducement for referrals. The penalties for violations of this law include
criminal sanctions and exclusion from the federal health care program.
In part to address concerns regarding the implementation of the
Anti-kickback Amendments, the federal government in 1991 published regulations
that provide exceptions or 'safe harbors,' for certain transactions that will
not be deemed to violate the Anti-kickback Amendments. Among the safe harbors
included in the regulations were provisions relating to the sale of physician
practices, management and personal services agreements and employee
relationships. Subsequently, regulations were published offering safe harbor
protection to additional activities, including referrals within group practices
consisting of active investors. Proposed amendments clarifying the existing safe
harbor regulations were published in 1994. If any of the proposed regulations
are ultimately adopted, they would result in substantive changes to existing
regulations. The failure of an activity to qualify under a safe harbor
provision, while potentially leading to greater regulatory scrutiny, does not
render the activity illegal.
There are several aspects of the Company's relationships with physicians to
which the anti-kickback law may be relevant. In some instances, for example, the
government may construe some of the marketing and managed care contracting
activities of the Company as arranging for the referral of patients to the
physicians with whom the Company has a Service Agreement.
Although neither the investments in the Company by physicians nor the
Initial Service Agreements between the Company and the Initial Affiliated
Practices qualify for protection under the safe harbor regulations, the Company
does not believe that these activities fall within the type of activities the
Anti-kickback Amendments were intended to prohibit. A determination that the
Company had violated the Anti-kickback Amendments would have a material adverse
effect on the Company.
The Stark Self-Referral Law. The Stark Self-Referral Law (the 'Stark Law')
prohibits a physician from referring a patient to a health care provider for
certain designated health services reimbursable by Medicare or Medicaid if the
physician has a financial relationship with that provider, including an
investment interest, a loan or debt relationship or a compensation relationship.
In addition to the conduct directly prohibited by the law, the statute also
prohibits schemes that are designed to obtain referrals indirectly that cannot
be made directly. The penalties for violating the law include (i) a refund of
any Medicare or Medicaid payments for services that resulted from an unlawful
referral, (ii) civil fines and (iii) exclusion from the Medicare and Medicaid
programs.
The Company does not currently provide any designated health service under
the Stark Law. However, because the Company will provide management services
related to those designated health services provided by physicians affiliated
with the Initial Affiliated Practices, there can be no assurance that the
Company will not be deemed the provider for those services for purposes of the
Stark Law and, accordingly, the recipient of referrals from physicians
affiliated with the Affiliated Practices. In that event, such referrals will be
permissible only if (i) the financial arrangements under the service agreements
with the Affiliated Practices meet certain exceptions in the Stark Law and (ii)
the ownership of stock in the Company by the referring physicians meets certain
investment exceptions under the Stark Law. The Company believes that the
financial arrangements under the Initial Service Agreements qualify for
applicable exceptions under the Stark Law; however, there can be no assurance
that a review by courts or regulatory authorities would not result in a contrary
determination. In addition, the Company will not meet the Stark Law exception
related to investment interest until the Company's stockholders' equity exceeds
$75 million.
STATE LAW
State Anti-Kickback Laws. Many states have laws that prohibit payment of
kickbacks in return for the referral of patients. Some of these laws apply only
to services reimbursable under state Medicaid programs. However, a number of
these laws apply to all health care services in the state, regardless of the
source of payment for the service. Based on court and administrative
interpretation of federal anti-kickback laws, the Company believes that these
laws prohibit payments to referral sources
38
<PAGE>
where a purpose for payment is for the referral. However, the laws in most
states regarding kickbacks have been subjected to limited judicial and
regulatory interpretation and therefore, no assurances can be given that the
Company's activities will be found to be in compliance. Noncompliance with such
laws could have an adverse effect upon the Company and subject it and physicians
affiliated with the Affiliated Practices to penalties and sanctions.
State Self-Referral Laws. A number of states have enacted self-referral
laws that are similar in purpose to the Stark Law but which impose different
restrictions. Some states, for example, only prohibit referrals when the
physician's financial relationship with a health care provider is based upon an
investment interest. Other state laws apply only to a limited number of
designated health services. Some states do not prohibit referrals, but require
only that a patient be informed of the financial relationship before the
referral is made. The Company believes that its operations are in material
compliance with the self-referral law of the states in which the Initial
Affiliated Practices are located.
Fee-Splitting Laws. Many states prohibit a physician from splitting with a
referral source the fees generated from physician services. Other states have a
broader prohibition against any splitting of a physician's fees, regardless of
whether the other party is a referral source. In most states, it is not
considered to be fee-splitting when the payment made by the physician is
reasonable reimbursement for services rendered on the physician's behalf.
The Company will be reimbursed by physicians on whose behalf the Company
provides management services. The compensation provisions of the Initial Service
Agreements have been designed to comply with applicable state laws relating to
fee-splitting. There can be no certainty, however, that, if challenged, the
Company and its Affiliated Practices will be found to be in compliance with each
state's fee-splitting laws. A determination in any state that the Company is
engaged in any unlawful fee-splitting arrangement could render any service
agreement between the Company and an Affiliated Practice located in such state
unenforceable or subject to modification in a manner adverse to the Company.
Corporate Practice of Medicine. Most states prohibit corporations from
engaging in the practice of medicine. Many of these state doctrines prohibit a
business corporation from employing a physician. States differ, however, with
respect to the extent to which a licensed physician can affiliate with corporate
entities for the delivery of medical services. Some states interpret the
'practice of medicine' broadly to include activities of corporations such as the
Company that have an indirect impact on the practice of medicine, even where the
physician rendering the medical services is not an employee of the corporation
and the corporation exercises no discretion with respect to the diagnosis or
treatment of a particular patient.
The Company intends that, pursuant to its service agreements, it will not
exercise any responsibility on behalf of affiliated physicians that could be
construed as affecting the practice of medicine. Accordingly, the Company
believes that its operations do not violate applicable state laws relating to
the corporate practice of medicine. Such laws and legal doctrines have been
subjected to only limited judicial and regulatory interpretation and there can
be no assurance that, if challenged, the Company would be considered to be in
compliance with all such laws and doctrines. A determination in any state that
the Company is engaged in the corporate practice of medicine could render any
service agreement between the Company and an Affiliated Practice located in such
state unenforceable or subject to modification in a manner adverse to the
Company.
Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers. While these laws do not generally apply to
companies that provide management services to networks of physicians, there can
be no assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that its proposed operations are in compliance with these laws in the
states in which it currently does business, but there can be no assurance that
future interpretations of insurance and health care network laws by regulatory
authorities in these states or in the states into which the Company may expand
will not require
39
<PAGE>
licensure or a restructuring of some or all of the Company's operations. See
'Risk Factors -- Government Regulation.'
The National Association of Insurance Commissioners ('NAIC') in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
Affiliated Practices will be precluded from entering into capitated contracts
directly with employers, individuals and benefit plans unless they qualify to do
business as HMOs or insurance companies. Currently, the Company does not intend,
on its own behalf, or on behalf of the Initial Affiliated Practices, to enter
into capitated payment or other risk-sharing arrangements other than with HMOs
or insurance companies. In addition, in December 1996, the NAIC issued a white
paper entitled 'Regulation of Health Risk Bearing Entities,' which sets forth
issues to be considered by state insurance regulators when considering new
regulations and encourages that a uniform body of regulation be adopted by the
states. The Company believes that additional regulation at the state level will
be forthcoming in response to the NAIC initiatives. Other states have enacted
statutes or adopted regulations affecting risk assumption in the health care
industry, including statutes and regulations that subject any physician or
physician network engaged in risk-based contracting to applicable insurance laws
and regulations, which may include, among other things, laws and regulations
providing for minimum capital requirements and other safety and soundness
requirements.
COMPETITION
The Company competes with many other entities to affiliate with
musculoskeletal practices. Several companies that have established operating
histories and greater resources than the Company are pursuing the acquisition of
the assets of general and specialty practices and the management of such
practices. Physician practice management companies and some hospitals, clinics
and HMOs engage in activities similar to the activities of the Company. There
can be no assurance that the Company will be able to compete effectively with
such competitors, that additional competitors will not enter the market, or that
such competition will not make it more difficult to affiliate with, and to enter
into agreements to provide management services to, practices on terms beneficial
to the Company.
Affiliated Practices will compete with local musculoskeletal care service
providers as well as some managed care organizations. The Company believes that
changes in governmental and private reimbursement policies and other factors
have resulted in increased competition for consumers of medical services. The
Company believes that the cost, accessibility and quality of services provided
are the principal factors that affect competition. There can be no assurance
that the Affiliated Practices will be able to compete effectively in the markets
that they serve. The inability of the Affiliated Practices to compete
effectively would materially adversely affect the Company.
Further, the Affiliated Practices compete with other providers for managed
musculoskeletal care contracts. The Company believes that trends toward managed
care have resulted in increased competition for such contracts. Other practices
and management service organizations may have more experience than the Initial
Affiliated Practices and the Company in obtaining such contracts. There can be
no assurance that the Company and the Affiliated Practices will be able to
successfully acquire sufficient managed care contracts to compete effectively in
the markets they serve. The inability of the Affiliated Practices to compete
effectively for such contracts could materially adversely affect the Company.
EMPLOYEES
As of January 17, 1997, the Company has approximately 219 employees, of
whom 21 are located at the Company's headquarters and 198 are located at the
Initial Affiliated Practices. The Company believes that its relationship with
its employees is good.
40
<PAGE>
LEGAL PROCEEDINGS
On January 8, 1997, Michael A. Feiertag, M.D. filed a lawsuit against the
Company in the Circuit Court of the 19th Judicial Circuit in and for Indian
River County, Florida. Dr. Feiertag's complaint alleges that Vero Orthopaedics
breached his employment agreement by failing to offer him a 'full partnership'
in accordance with the agreement. Dr. Feiertag claims that he is entitled to
damages consisting of amounts he allegedly should have received in connection
with the Company's merger with Vero Orthopaedics had he been a partner prior to
the merger. Dr. Feiertag also claims that he has not been paid certain vacation
and bonus pay. Dr. Feiertag is seeking damages in excess of $500,000. The
Company intends to file an answer to the complaint denying liability and intends
to vigorously contest the action. Accordingly, the Company is not yet
able to assess its potential exposure in this case. On February 3, 1997, the
Company initiated proceedings that have the case removed to the United States
Dstrict Court for the Southern District of Florida.
There can be no assurance that additional claims will not be asserted
against the Company in the future. The Company may become subject to certain
pending claims as the result of successor liability in connection with the
assumption of certain liabilities of the Initial Affiliated Practices;
nevertheless, the Company believes that the ultimate resolution of such
additional claims will not have a material adverse effect on the Company. See
'Risk Factors -- Potential Liability and Insurance; Legal Proceedings.'
PROPERTIES
The Company has a five-year lease for its headquarters in Lakewood,
Colorado, which provides for annual lease payments of approximately $80,000. In
addition, in connection with the Initial Affiliation Transactions, the Company
entered into leases for the facilities utilized by the Initial Affiliated
Practices for annual lease payments of approximately $2.3 million. For
additional information, see 'Certain Transactions.'
CORPORATE LIABILITY AND INSURANCE
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. However, the Company does not influence or
control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. As a result of the relationship between the
Company and the Affiliated Practices, the Company may become subject to some
medical malpractice actions under various theories, including successor
liability. There can be no assurance that claims, suits or complaints relating
to services and products provided by Affiliated Practices will not be asserted
against the Company in the future. The Company's medical professional liability
insurance provides coverage of up to $1 million per incident, with maximum
coverage of $3 million per year. The Company's general liability insurance
provides coverage of up to $5 million per incident, with maximum coverage of $5
million per year. The Company believes that such insurance will extend to
professional liability claims that may be asserted against employees of the
Company that work on site at Affiliated Practice locations. In addition,
pursuant to the Service Agreements, the Initial Affiliated Practices are
required (and the other Affiliated Practices will be required) to maintain
comprehensive professional liability insurance. The availability and cost of
such insurance has been affected by various factors, many of which are beyond
the control of the Company and Affiliated Practices. The cost of such insurance
to the Company and Affiliated Practices may have a material adverse effect on
the Company. In addition, successful malpractice or other claims asserted
against Affiliated Practices or the Company that exceed applicable policy limits
would have a material adverse effect on the Company.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors, executive officers and key personnel of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard H. Rothman, M.D., Ph.D....................... 60 Chairman of the Board of Directors
Kerry R. Hicks....................................... 37 President, Chief Executive Officer and Director
Patrick M. Jaeckle................................... 38 Executive Vice President of Finance/Development and
Director
William C. Behrens................................... 45 Executive Vice President of Practice Management and
Director
Robert E. Booth, Jr., M.D............................ 54 Director
James L. Cain, M.D................................... 57 Director
Peter H. Cheesbrough................................. 44 Director
Richard E. Fleming, Jr., M.D......................... 50 Director
Thomas C. Haney, M.D................................. 54 Director
Leslie S. Matthews, M.D.............................. 45 Director
D. Paul Davis........................................ 38 Vice President of Finance/Controller
Peter A. Fatianow.................................... 33 Vice President of Development
David G. Hicks....................................... 38 Vice President of Management Information Systems
Timothy D. O'Hare.................................... 43 Vice President, Payor Operations
Fran W. Hempstead.................................... 43 Manager, Practice Operations
M. John Neal......................................... 29 Manager, Finance and Development
Michael M. Nuzzo..................................... 26 Manager, Payor Operations
</TABLE>
RICHARD H. ROTHMAN, M.D., PH.D. has been Chairman of the Board of Directors
of the Company since December 1996. Since 1970, Dr. Rothman has been Chairman of
The Rothman Institute at Pennsylvania Hospital and since 1986, has been Chairman
of the Department of Orthopaedic Surgery at Thomas Jefferson University. Dr.
Rothman is Editor-in-Chief of The Journal of Arthroplasty, a journal of joint
replacement surgery. Dr. Rothman received a B.A. degree from the University of
Pennsylvania, an M.D. degree from the University of Pennsylvania School of
Medicine and a Ph.D. degree from Jefferson Medical College.
KERRY R. HICKS, a founder of the Company, has served as President and Chief
Executive Officer and as a director of the Company since its inception. From
1985 to March 1996, Mr. Hicks served as Senior Vice President of LBA Health Care
Management ('LBA'), a developer of health care and management information
services. LBA provided management consulting services (including over 150
orthopaedic projects) to over 400 medical centers to support the purchasing,
planning, marketing and delivery of health care. Mr. Hicks was principally
responsible for developing LBA's orthopaedic product line and its information
systems. LBA's orthopaedic product line established quality and cost benchmarks
and developed clinical protocols and patient care algorithms intended to enhance
both the quality and effectiveness of the delivery of orthopaedic care. From
1993 to March 1996, Mr. Hicks consulted with more than 350 hospitals and more
than 100 musculoskeletal clients.
PATRICK M. JAECKLE, a founder of the Company, has served as Executive Vice
President of Finance/Development and as a director of the Company since its
inception. From February 1994 to March 1996, Dr. Jaeckle served as director of
health care corporate finance at Morgan Keegan & Company, Inc., a regional
investment banking firm. Prior to February 1994, Dr. Jaeckle was a member of the
health care investment banking groups at both Credit Suisse First Boston
Corporation (from June 1992 to February 1994) and Smith Barney, Inc. (from May
1991 to June 1992). Dr. Jaeckle holds an M.B.A. degree from Columbia
42
<PAGE>
Business School, a D.D.S. degree from Baylor College of Dentistry and a B.A.
degree from The University of Texas at Austin.
WILLIAM C. BEHRENS has been the Company's Executive Vice President of
Practice Management Service since he joined the Company in June 1996 and as a
director of the Company since June 1996. From June 1992 to July 1996, he served
as Chief Executive Officer and President of The Hughston Sports Medicine
Foundation, a non-profit foundation focused on furthering orthopaedic clinical
studies. From 1984 to June 1992, Mr. Behrens served as Executive Administrator
for Knoxville Orthopaedic Center in Knoxville, Tennessee. In these positions,
Mr. Behrens participated in the development of medical office buildings,
out-patient surgery centers and services as well as diagnostic centers. Mr.
Behrens received his B.S. degree from Alderson-Broaddus College and a Masters
degree in Public Health & Administration from the University of South Carolina.
ROBERT E. BOOTH, JR., M.D. has served as a director of the Company since
December 1996. Since 1977, Dr. Booth has been an orthopaedic surgeon at The
Rothman Institute at Pennsylvania Hospital and since 1990, he has been Co-Chief
of Orthopaedic Surgery at Pennsylvania Hospital. Dr. Booth received a B.A.
degree from Princeton University and an M.D. degree from the University of
Pennsylvania.
JAMES L. CAIN, M.D. has served as a director of the Company since December
1996. Since 1976, Dr. Cain has been an orthopaedic surgeon at, and the physician
manager of, Vero Orthopaedics in Vero Beach, Florida. Dr. Cain received a B.A.
degree from Emory University and an M.D. degree from the Tulane University
School of Medicine.
PETER H. CHEESBROUGH has served as a director of the Company since December
1996. Since June 1993, Mr. Cheesbrough has been the Senior Vice
President-Finance and Chief Finance Officer of Echo Bay Mines Ltd., a company
engaged in precious metals mining. From April 1988 to June 1993, he was Echo Bay
Mines' Vice President and Controller. Mr. Cheesbrough is a Fellow of the
Institute of Chartered Accountants of England and Wales and also a chartered
accountant in Canada.
RICHARD E. FLEMING, JR., M.D. has served as a director of the Company since
December 1996. Since 1979, Dr. Fleming has been an orthopaedic surgeon at
Princeton Orthopaedic Associates, P.A. Dr. Fleming received a B.A. degree from
Princeton University and an M.D. degree from Columbia University College of
Physicians and Surgeons.
THOMAS C. HANEY, M.D. has served as a director of the Company since
December 1996. Since 1973, Dr. Haney has been an orthopaedic surgeon at
Tallahassee Orthopedic Clinic, Inc. Dr. Haney received a B.A. degree from
Florida State University and an M.D. degree from Emory University School of
Medicine.
LESLIE S. MATTHEWS, M.D. has served as a director of the Company since
December 1996. Since October 1994, Dr. Matthews has been an orthopaedic surgeon
at Greater Chesapeake Orthopaedic Associates, LLC and since 1990, has been the
Chief of Orthopaedic Surgery at Union Memorial Hospital. From July 1982 to
October 1994, Dr. Matthews was in private practice. Dr. Matthews received a B.A.
degree from Johns Hopkins University and an M.D. degree from the Baylor College
of Medicine.
D. PAUL DAVIS has served as Vice President of Finance/Controller of the
Company since March 1996. From January 1993 to March 1996, Mr. Davis served as
Vice President of Finance for Surgical Partners of America, Inc. From April 1987
to January 1993, he served as Chief Financial Officer for Anesthesia Service
Medical Group, Inc. Mr. Davis received a B.S. degree in Accounting from the
University of Utah. He is a certified public accountant.
PETER A. FATIANOW has been Vice President of Development of the Company
since March 1996. From July 1994 to February 1996, Mr. Fatianow worked at Morgan
Keegan & Company, Inc., most recently as an Associate Vice President in health
care corporate finance. From July 1992 to July 1994, Mr. Fatianow was a member
of the health care investment banking group at Credit Suisse First Boston
43
<PAGE>
Corporation in New York. Mr. Fatianow received a B.S. degree in Business
Management with an emphasis in Finance from Brigham Young University.
DAVID G. HICKS has served as Vice President of Management Information
Systems of the Company since March 1996. From November 1994 to March 1996, Mr.
Hicks worked as Manager of Information Technology for the Association of
Operating Room Nurses, responsible for information technology maintenance and
development. From February 1993 to November 1994, he served as Manager of
Information Systems Administration for Coors Brewing Company, and from January
1982 to February 1993, Mr. Hicks served as Manager of Internal Systems for
Martin Marietta Data Systems. Mr. Hicks received a B.S. degree in Management
Information Systems from Colorado State University.
TIMOTHY D. O'HARE joined the Company as Vice President, Payor Operations in
August 1996. From May 1994 to July 1996, Mr. O'Hare served as Executive Director
of Kaiser Foundation HealthPlan of North Carolina, where his responsibilities
included the negotiation of capitated and incentive contracts with hospitals,
physician hospital organizations and physician group practices. From April 1987
to May 1994, Mr. O'Hare served as Vice President/Executive Director of CIGNA
Health Care of North Carolina. From March 1986 to April 1987, Mr. O'Hare served
as Vice President of Operations for a Preferred Health Network. Mr. O'Hare
received a B.S. degree from Virginia Polytechnic Institute and State University
and a Masters degree in Health Administration from Virginia Commonwealth
University.
FRAN W. HEMPSTEAD has served as Manager of Practice Operations since
joining the Company in July 1996. Ms. Hempstead has over 16 years experience in
the operations aspects of an orthopaedic practice. From September 1988 to April
1996, Ms. Hempstead was employed in various capacities by The Hughston Clinic
P.C., an orthopaedic practice in Columbus, Georgia including as Chief Operating
Officer from June 1994 to April 1996 and as the Director of Operations from June
1992 to May 1994. She is currently on the Board of the Orthopaedic Practice
Assembly of the Medical Group Management Association ('MGMA'). Ms. Hempstead
received a B.A. degree in Business Administration from the University of
Georgia.
M. JOHN NEAL has served as Manager of Finance and Development of the
Company since March 1996. From July 1994 to March 1996, Mr. Neal worked as an
investment banking associate with Morgan Keegan & Company, Inc. Previously, Mr.
Neal served two years as a financial analyst for Service Merchandise, Inc. Mr.
Neal received a B.S. in Finance and an M.B.A. in Economics and Finance from the
University of Tennessee at Knoxville.
MICHAEL M. NUZZO has been Manager of Payor Operations of the Company since
July 1996. From June 1992 to July 1996, Mr. Nuzzo worked as an associate with
Medimetrix Group, Inc., a health care consulting company. Prior to joining
Medimetrix, Mr. Nuzzo received a B.A. degree from Kenyon College.
Drs. Cain, Fleming, Haney, Matthews and Rothman were elected to the Board
of Directors pursuant to the terms of a Stockholders Agreement among the holders
of the Company's outstanding Common Stock. Dr. Booth was elected to the Board of
Directors pursuant to an agreement between the Company and Dr. Booth. The
provisions of the agreements relating to election of these persons to the Board
of Directors will not be in effect following completion of this offering.
Kerry R. Hicks and David G. Hicks are brothers.
DIRECTOR COMPENSATION AND COMMITTEES
The directors do not currently receive compensation for their service on
the Board of Directors or any committee thereof but are reimbursed for their
out-of-pocket expenses for serving on the board of directors. However, under the
Company's 1996 Equity Compensation Plan, non-employee directors are eligible to
receive option grants, and, in December 1996, each non-employee director other
than Mr. Cheesbrough was granted an option to purchase 10,000 shares of Common
Stock that, as amended, has an exercise price equal to the price per share of
the Shares offered hereby and Mr. Cheesbrough was granted an option to purchase
20,000 shares of Common
44
<PAGE>
Stock that, as amended, has an exercise price per share equal to the price
per share of the shares offered hereby. The options vest in three substantially
equal increments on the first, second and third anniversary of the date of
grant. See 'Stock Plans.'
The Board of Directors intends to establish a Compensation Committee and an
Audit Committee, each of which will be comprised of two independent directors.
It is anticipated that the Compensation Committee and the Audit Committee will
be comprised of Mr. Cheesbrough and a second independent director to be elected
by the Board of Directors. The Board of Directors plans to elect the second
independent director within 90 days after listing the Common Stock on the Nasdaq
National Market. The Compensation Committee will determine compensation for
executive officers of the Company and administer the Company's stock option
plans. The Audit Committee will recommend the appointment of the Company's
independent public accountants and will review the scope and results of audits
and internal accounting controls.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since its inception, the Company has not had a Compensation Committee of
the Board of Directors. The compensation of the Company's executive officers has
been determined by Kerry R. Hicks and Patrick M. Jaeckle, the Company's
President and Executive Vice President of Finance/Development, respectively,
through December 1996. Options were granted in December 1996 and cash annual
incentive awards were approved in December 1996 by the Board of Directors. The
Board of Directors intends to establish, within 90 days following the completion
of this offering, a Compensation Committee that will determine compensation for
the Company's executive officers and administer the Company's stock option
plans.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information concerning the compensation paid by the Company to the Chief
Executive Officer of the Company during the fiscal year ending December 31, 1995
and the Chief Executive Officer and the four other most highly paid executive
officers (collectively, the 'Named Executive Officers') during 1996. No
executive officer of the Company earned any salary or bonus for services
rendered during the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION -------------
-------------------- STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (1)
- --------------------------- ---- --------- --------- -------------
<S> <C> <C> <C> <C>
Kerry R. Hicks
President and Chief Executive Officer.............................. 1996 $ 138,876 $ 140,625 75,000
1995 $ -- $ -- --
Patrick M. Jaeckle
Executive Vice President of Finance/Development.................... 1996 $ 147,210 $ 140,625 75,000
William C. Behrens
Executive Vice President of Practice Management.................... 1996 $ 83,516 $ 85,938 545,825
Peter A. Fatianow
Vice President of Development...................................... 1996 $ 89,339 $ 67,500 30,000
D. Paul Davis
Vice President of Finance.......................................... 1996 $ 89,338 $ 64,125 30,000
</TABLE>
- ------------------
(1) The exercise price per share is equal to the price per share of the shares
offerd hereby, except with respect to an option to purchase 500,000
shares held by Mr. Behrens, the exercise price per share of which is $1.0.
45
<PAGE>
Option Grants. The following table sets forth certain information
regarding stock options granted during 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- --------------------------------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ------------ ------------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kerry R. Hicks..................... 75,000 6.0% (1) 12/4/2006 $389,129 $986,128
Patrick M. Jaeckle................. 75,000 6.0% (1) 12/4/2006 $389,129 $986,128
William C. Behrens................. 500,000 40.1% 1.00 3/22/2006 $314,448 $796,871
45,825 3.7% (1) 12/4/2006 $237,758 $602,524
D. Paul Davis...................... 30,000 2.4% (1) 12/4/2006 $155,651 $394,451
Peter A. Fatianow.................. 30,000 2.4% (1) 12/4/2006 $155,651 $394,451
</TABLE>
- ------------------
(1) The options were initially granted at $6.00 per share. The exercise price
per share has been amended to equal the price per share of the shares
offered hereby.
(2) Based on an assumed public offering price of $8.25 per share (which is the
assumed per share price to the public in this offering).
The following table sets forth certain information regarding stock options
held as of December 31, 1996 by the Named Executive Officers. None of the Named
Executive Officers exercised stock options during 1996.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END (#) AT FISCAL YEAR-END($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kerry R. Hicks............................................ 0 75,000 0 0
Patrick M. Jaeckle........................................ 0 75,000 0 0
William C. Behrens........................................ 0 545,825 0 $3,625,000
D. Paul Davis............................................. 0 30,000 0 0
Peter A. Fatianow......................................... 0 30,000 0 0
</TABLE>
- ------------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. These values have been calculated on the basis of an assumed initial
public offering price of $8.25 per share (which is the assumed per share
price to the public in this offering), minus the applicable per share
exercise price.
1996 EQUITY COMPENSATION PLAN
The Company's 1996 Equity Compensation Plan (the 'Plan') provides for
grants of stock options ('Options') to selected employees, officers, directors,
consultants and advisers of the Company. By encouraging stock ownership, the
Company seeks to attract, retain and motivate such persons and to encourage them
to devote their best efforts to the business and financial success of the
Company.
The Plan authorizes up to 2,000,000 shares of the Company's Common Stock
(subject to adjustment in certain circumstances) for issuance pursuant to the
terms of the Plan. If Options expire or are terminated for any reason without
being exercised, the shares of Common Stock subject to such Options again will
be available for grant.
46
<PAGE>
The Plan may be administered by the Board of Directors (the 'Board') or by
a committee of the Board (references to the 'Committee' refers to the committee,
if one is appointed, and otherwise to the Board). Grants under the Plan may
consist of (i) options intended to qualify as incentive stock options ('ISOs')
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended (the 'Code') or (ii) 'non-qualified stock options' that are not intended
so to qualify ('NQSOs'). Options may be granted to any employee (including
officers and directors) of the Company, members of the Board who are not
employees, and consultants and advisers who perform services to the Company or
any of its subsidiaries ('Key Advisers'). 'Key Advisers' include personnel of
medical practices that have entered into and remain subject to management
agreements with the Company or any of its subsidiaries. During any calendar
year, no grantee may receive Options for more than 500,000 shares of the
Company's Common Stock.
The option price of any ISO granted under the Plan will not be less than
the fair market value of the underlying shares of Common Stock on the date of
grant. The option price of a NQSO will be determined by the Committee, in its
sole discretion, and may be greater than, equal to or less than the fair market
value of the underlying shares of Common Stock on the date of grant. The
Committee will determine the term of each Option, provided that the exercise
period may not exceed ten years from the date of grant. The option price of an
ISO granted to a person who owns more than 10% of the total combined voting
power of all classes of stock of the Company must be at least equal to 110% of
the fair market value of Common Stock on the date of grant, and the ISO's term
may not exceed five years. A grantee may pay the option price (i) in cash, (ii)
by delivering shares of Common Stock already owned by the grantee and having a
fair market value on the date of exercise equal to the option price, or (iii) by
such other method as the Committee may approve. The Committee may impose on
Options such vesting and other conditions as the Committee deems appropriate.
Options may be exercised while the grantee is an employee, Key Adviser or member
of the Board or within a specified period after termination of the grantee's
employment or services.
In the event of a change of control (as defined in the Plan), all
outstanding Options will become fully exercisable, unless the Committee
determines otherwise. Except as provided below, unless the Committee determines
otherwise, in the event of a merger where the Company is not the surviving
corporation, all outstanding Options will be assumed by or replaced with
comparable options by the surviving corporation. The Committee may require that
grantees surrender their outstanding Options in the event of a change of control
and receive a payment in cash or Common Stock equal to the amount by which the
fair market value of the shares of Common Stock subject to the Options exceeds
the exercise price of the Options.
All options issued under the Plan will be granted subject to any applicable
federal, state and local withholding requirements; the Company can deduct from
wages paid to the grantee any such taxes required to be withheld with respect to
the options. If the Company so permits, a grantee may choose to satisfy the
Company's income tax withholding obligation with respect to an option by having
shares withheld up to an amount that does not exceed the grantee's maximum
marginal tax rate for federal, local and state taxes.
The Board may amend or terminate the Plan at any time; provided that, if
the Common Stock becomes publicly traded, the Board may not make any amendment
that requires stockholder approval pursuant to Section 162(m) of the Code
without stockholder approval. As of January 17, 1997, options to purchase
1,365,248 shares of Common Stock were outstanding under the Plan. The Plan will
terminate on October 14, 2006, unless terminated earlier by the Board or
extended by the Board with approval of the stockholders.
1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
The Specialty Care Network, Inc. 1996 Incentive and Non-Qualified Stock
Option Plan (the 'Incentive Plan') provides incentives to attract and retain
directors, officers, advisors, consultants and key employees. As of January 17,
1997, options to purchase 553,500 shares of Common Stock were
47
<PAGE>
outstanding under the Incentive Plan. The Incentive Plan was terminated by the
Board of Directors in January 1997.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Kerry R. Hicks and
Patrick M. Jaeckle dated as of April 1, 1996 and an employment agreement with
William Behrens dated as of March 11, 1996. Each agreement has an initial term
of five years and is renewable automatically for one year periods unless
terminated by one of the parties. The agreements provide for an annual salary
rate to each officer of $187,500 for 1996, $215,000 for 1997 and $250,000 for
1998, with cost of living increases for the years following the third year. In
addition, the agreements provide for annual incentive compensation to each
officer equal to up to 100% of his base salary based on performance targets
established by the Board of Directors, and on December 4, 1996, the Board of
Directors approved annual incentive compensation awards to Messrs. Hicks,
Jaeckle and Behrens of $140,625, $140,625 and $85,938, respectively. In the
event that the officer is terminated without cause and there has been no change
of control of the Company, the Company will pay such officer his base salary for
the remaining term of the agreement and any earned but unpaid salary and
incentive compensation. In the event the officer is terminated with cause,
regardless of whether there has been a change of control of the Company, the
Company will pay such officer his base salary for 60 days following such
termination. If the officer is terminated without cause upon a change of control
of the Company, he is entitled to receive a lump sum payment upon such
termination equal to 300% of his base salary plus 300% of his annual incentive
compensation for the prior year. Each agreement contains certain confidentiality
and non-competition covenants.
The Company has an employment agreement with Peter A. Fatianow dated as of
March 1, 1996 and an agreement with D. Paul Davis dated as of February 22, 1996.
Each agreement has an initial term of five years and is renewable automatically
for one year periods unless terminated by one of the parties. The agreements
provide for an annual salary rate to each officer of $108,000 for 1996, $125,000
for 1997 and $144,000 for 1998, with cost of living increases for the years
following the third year. In addition, the agreements provide for annual
incentive compensation to each officer equal to up to 75% of his base salary
based on performance targets established by the Board of Directors and on
December 4, 1996, the Board of Directors approved annual incentive compensation
awards to Mr. Fatianow in the amount of $67,500 and to Mr. Davis in the amount
of $64,125. In the event that the officer is terminated without cause and there
has been no change of control of the Company, the Company will pay such officer
his base salary for the remaining term of the agreement and any earned but
unpaid salary and incentive compensation. In the event the officer is terminated
with cause, regardless of whether there has been a change of control of the
Company, the Company will pay such officer his base salary for 60 days following
such termination. If the officer is terminated without cause upon a change of
control of the Company, he is entitled to receive a lump sum payment upon such
termination equal to 300% of his base salary plus 300% of his annual incentive
compensation for the prior year. Each agreement contains certain confidentiality
and non-competition covenants.
48
<PAGE>
CERTAIN TRANSACTIONS
Following the Company's incorporation in December 1995, the following
individuals purchased shares of Common Stock, at a price of $.001 per share:
Kerry R. Hicks purchased 500,000 shares; Patrick M. Jaeckle purchased 500,000
shares; D. Paul Davis purchased 50,000 shares; Peter A. Fatianow purchased
50,000 shares.
In addition, since January 15, 1996, various executive officers, directors
and principal stockholders have participated in the Company's debt and equity
financings. These financings have included the following.
From January 1, 1996 through July 1, 1996, the Company sold 5% convertible
debentures in the aggregate principal amount of $1,870,000. On November 12,
1996, the convertible debentures, along with the accrued interest thereon, were
converted into 1,920,332 shares of Common Stock at a rate of one share of Common
Stock for each $1.00 of indebtedness. The securities were issued to certain
executive officers of the Company as follows: Kerry R. Hicks and Patrick M.
Jaeckle each converted $200,000 of convertible debentures and $5,418 in accrued
interest into 205,418 shares of Common Stock, William C. Behrens converted
$75,000 of convertible debentures and $1,645 in accrued interest into 76,645
shares of Common Stock, Peter A. Fatianow converted $35,000 in convertible
debentures and $1,236 of accrued interest into 36,236 shares of Common Stock and
D. Paul Davis converted $35,000 of convertible debentures and $899 in accrued
interest into 35,899 shares of Common Stock. In addition, securities were issued
to certain non-employee directors of the Company as follows: Richard H. Rothman,
M.D., Ph.D. and Richard Balderston, M.D. each converted $233,333 of convertible
debentures and $7,085 in accrued interest into 240,418 shares of Common Stock
and Richard E. Booth, Jr., M.D. converted $83,333 of convertible debentures and
$3,483 in accrued interest into 86,816 shares of Common Stock.
On October 1, 1996, the Company sold to GCOA 5% convertible debentures in
the aggregate principal amount of $300,000. On November 12, 1996, the
convertible debentures, along with the accrued interest thereon of $1,707, was
converted into 100,569 shares of Common Stock at a rate of one share of Common
Stock for each $3.00 in indebtedness. Leslie S. Matthews, M.D., a director of
the Company, is a physician owner of GCOA.
On November 4, 1996, the Company sold to TOC 100,000 shares of Common Stock
for an aggregate purchase price of $300,000. Thomas C. Haney, M.D., a director
of the Company, is a physician owner of TOC.
On November 12, 1996, pursuant to the Initial Affiliation Transactions, the
Company entered into agreements with each of the Predecessor Practices pursuant
to which the Company merged with or acquired stock or certain assets of the
Predecessor Practices. The Company also assumed certain liabilities of the
Predecessor Practices, including obligations under acquired contracts (including
facilities leases and vendor or supplier contracts). In connection with the
Initial Affiliation Transactions, the Company issued shares of Common Stock to
the physician owners of the Initial Affiliated Practices. The specific issuances
of Company securities in each of the Initial Affiliation Transactions is
described below.
The Company entered into an Asset Exchange Agreement with GCOA and the
individual physicians who are owners of GCOA, including Leslie S. Matthews,
M.D., a director of the Company. Pursuant to the terms of the agreement, the
Company purchased certain assets of GCOA and assumed certain liabilities
relating to those assets. Pursuant to the terms of the agreement, the Company
issued 1,568,922 shares of its Common Stock, valued at $6 per share, including
280,721 shares to Dr. Matthews. The Company also entered into an Initial Service
Agreement with GCOA and its physician owners. The Company leases the facilities
utilized by GCOA from an entity of which Dr. Matthews is a partial owner, for an
aggregate annual lease payment of approximately $300,000.
The Company entered into a Stock Exchange Agreement with the individual
physicians who are members of POA, including Richard E. Fleming, Jr., M.D., a
director of the Company. Pursuant to the terms of the agreement, the Company
purchased all of the outstanding shares of the predecessor of
49
<PAGE>
POA. The company issued 1,196,793 shares of Common Stock, valued at $6 per
share, including 132,977 shares issued to Dr. Fleming. The Company also entered
into an Initial Service Agreement with POA and its physician owners. The Company
leases the facilities utilized by POA from an entity of which Dr. Fleming is a
partial owner, for an aggregate annual lease payment of approximately $1.4
million.
The Company entered into a Merger Agreement with a predecessor of ROA whose
physicians included Richard H. Rothman, M.D., Ph.D., the Chairman of the Board
of Directors of the Company and Robert E. Booth, Jr., M.D., a director of the
Company, pursuant to which the predecessor of ROA merged with and into Company,
with the Company surviving the merger. Pursuant to the terms of the agreement,
the outstanding shares of Common Stock of the predecessor of ROA were converted
into 3,169,379 shares of Common Stock valued at $6 per share and $1,388,000 in
cash was paid to two former shareholders of the predecessor of ROA. In addition,
$149,872 was paid by the Company in satisfaction of outstanding indebtedness of
the predecessor of ROA. The Company issued 462,484 shares of Common Stock and
approximately $694,000 in cash to Dr. Rothman, and 462,484 shares of Common
Stock and approximately $694,000 in cash to Dr. Booth. The Company also entered
into an Initial Service Agreement with ROA and its physician owners. The Company
leases the facilities utilized by ROA from an entity of which Drs. Rothman and
Booth are partial owners, for an aggregate annual lease payment of approximately
$160,000.
The Company entered into a Merger Agreement with a predecessor of TOC,
pursuant to which the predecessor of TOC merged with and into Company, with the
Company surviving the Merger. Pursuant to the terms of the agreement, each
outstanding share of Common Stock of the predecessor of TOC was converted into
1,032.02 shares of Common Stock, with the result that the Company issued an
aggregate of 1,072,414 shares, valued at $6 per share, to the former
shareholders of the predecessor of TOC, including 103,202 shares to Thomas C.
Haney, M.D., a director of the Company. The Company also entered into an Initial
Service Agreement with TOC and its physician owners. The Company leases the
facilities utilized by TOC from an entity of which Dr. Haney is a partial owner,
for an aggregate annual lease payment of approximately $500,000.
The Company entered into a Merger Agreement with a predecessor of VO,
pursuant to which the predecessor of VO merged with and into Company, with the
Company surviving the merger. Pursuant to the terms of the agreement, each
outstanding share of Common Stock of the predecessor of VO was converted into
6,516.07 shares of Common Stock, with the result that the Company issued an
aggregate of 651,607 shares, valued at $6 per share, to the former shareholders
of the predecessor of VO. In addition, pursuant to the terms of the agreement,
one medical employment of the predecessor of VO was granted an option to
purchase 50,000 shares of Common Stock at an exercise price of $6 per share. In
connection with the transaction, James L. Cain, M.D., a director of the Company,
received 103,410 shares of Common Stock. The Company also entered into an
Initial Service Agreement with VO and its physician owners. The Company leases
the facilities utilized by VO from an entity of which Dr. Cain is a partial
owner, for an aggregate annual lease payment of approximately $8,000.
For a description of the terms of the Initial Service Agreements, see
'Business -- Contractual Agreements with Affiliated Practices.'
For a description of registration rights that apply to Shares of Common
Stock held by certain directors, officers and 5% stockholders, see 'Shares
Eligible for Future Sale.'
In connection with the Initial Affiliation Transactions, the Company has
committed to enter into loan agreements with certain physician owners of the
Predecessor Practices for loans in an aggregate amount of up to approximately
$4.3 million. These loans are available until November 12, 1998 and the amount
that each physician may borrow is limited. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Speciality Care
Network, Inc. -- Liquidity and Capital Resources.'
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of January 17, 1997, as
adjusted to reflect the sale of the shares offered pursuant to this Prospectus,
by (i) each Selling Stockholder, (ii) each person known to the Company to own
beneficially more than 5% of the Company's Common Stock (including their
address), (iii) each Named Executive Officer of the Company, (iv) each director
of the Company and (v) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED SUBSEQUENT
TO OFFERING(1) SHARES TO OFFERING(1)
------------------- BEING --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Richard H. Rothman, M.D., Ph.D. (2)...................... 464,902 4.2% 464,902 3.3%
Kerry R. Hicks (3)(4).................................... 645,418 5.8 645,418 4.6
Patrick M. Jaeckle (3)(5)................................ 605,418 5.5 605,418 4.3
William C. Behrens (3)(6)................................ 243,311 2.2 243,311 1.7
Robert E. Booth, Jr., M.D................................ 549,300 5.0 549,300 3.9
James L. Cain, M.D....................................... 132,721 1.2 132,721 *
Peter H. Cheesbrough..................................... 0 * 0 *
Richard E. Fleming, Jr., M.D. (7)........................ 158,454 1.4 158,454 1.1
Thomas C. Haney, M.D..................................... 110,549 1.0 110,549 *
Leslie S. Matthews, M.D.................................. 295,088 2.7 295,088 2.1
D. Paul Davis............................................ 85,899 * 85,899 *
Peter A. Fatianow (8).................................... 71,236 * 71,236 *
David G. Hicks (9)....................................... 102,281 * 102,281 *
Richard Balderston, M.D. (10)............................ 794,524 7.2 794,524 5.7
Jeffrey S. Abrams, M.D. (11)(12)......................... 165,579 1.5 20,518 145,061 1.0
Todd J. Albert, M.D. (13)(14)............................ 306,063 2.8 22,000 284,063 2.0
Michael G. Ciccotti, M.D. (13)........................... 213,028 1.9 22,964 190,064 1.4
Steven R. Gecha, M.D. (11)(15)........................... 165,588 1.5 20,518 145,070 1.0
W. Thomas Gutowski, M.D. (11)(16)........................ 153,359 1.4 20,518 132,841 *
William J. Hozack, M.D. (13)............................. 324,062 2.9 24,062 300,000 2.1
Michael N. Jolley, M.D. (11)............................. 165,588 1.5 20,518 145,070 1.0
Peter F. Sharkey, M.D. (13).............................. 213,028 1.9 22,964 190,064 1.4
Alexander R. Vaccaro, M.D. (13).......................... 316,062 2.9 24,000 292,062 2.1
All directors and executive officers as a group (17
persons) (17).......................................... 3,543,306 32.1 3,543,306 25.2
</TABLE>
- ------------------
* Less than one percent.
51
<PAGE>
(1) Applicable percentage of ownership is based on 11,045,015 shares of Common
Stock outstanding as of January 31, 1997 and 14,045,015 shares of Common
Stock outstanding upon consummation of this offering. Beneficial ownership
is determined in accordance with the rules of the Commission and includes
voting or investment power with respect to securities. Shares of Common
Stock issuable upon the exercise of stock options currently exercisable or
convertible, or exercisable or convertible within 60 days of January 31,
1997 are deemed outstanding and to be beneficially owned by the person
holding such option for purposes of computing such person's percentage
ownership, but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. Except for shares held jointly
with a person's spouse or subject to applicable community property laws, or
as indicated in the footnotes to this table, each stockholder identified in
the table possesses sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by such stockholder.
(2) Does not include 200,000 shares of Common Stock held in the Richard H.
Rothman 1996 'SCN' Annuity Trust dated November 26, 1996 and 3,000 shares
of Common Stock held by each of the U/I/T of Richard H. Rothman dated
September 5, 1995 f/b/o Daniel Sheerr Kapp and the U/I/T of Richard H.
Rothman dated September 5, 1995 f/b/o Samuel Rothman Kapp, with respect to
which Dr. Rothman disclaims beneficial ownership. Dr. Rothman's business
address is 800 Spruce Street, Philadelphia, Pennsylvania 19107.
(3) Messrs. Hicks, Jaeckle and Behren's business address is 44 Union Boulevard,
Suite 600, Lakewood, Colorado 80228.
(4) Includes 60,000 shares of Common Stock held in the Linda Wratten Trust,
20,000 shares of Common Stock in each of the Frank Nemick III Trust, the
William Nemick Trust and the Jeanette Baysinger Trust and 10,000 shares of
Common Stock in each of the Frank Nemick, Jr. Trust and the Julie Nemick
Trust. Does not include 60,000 shares of Common Stock held by The Hicks
Family Irrevocable Trust, for which shares Mr. Hicks disclaims beneficial
ownership.
(5) Does not include 100,000 shares of Common Stock held by The Patrick M.
Jaeckle Family Irrevocable Children's Trust, for which shares Mr. Jaeckle
disclaims beneficial ownership.
(6) Includes options to purchase 166,666 shares of Common Stock that will vest
on March 22, 1997.
(7) Includes 20,382 shares and 5,095 shares of Common Stock held by the Fleming
Charitable Remainder Unitrust and the Fleming Family Foundation,
respectively. Does not include 2,547 shares of Common Stock held by each of
the Irrevocable Trust FBO M. Fleming and the Irrevocable Trust FBO A.
Fleming, respectively, for which Dr. Fleming disclaims beneficial
ownership.
(8) Does not include 15,000 shares of Common Stock held by the Fatianow Family
Irrevocable Children's Trust, for which shares Mr. Fatianow disclaims
beneficial ownership.
(9) Does not include 10,000 shares of Common Stock held by The David G. Hicks
Irrevocable Children's Trust, for which shares Mr. Hicks disclaims
beneficial ownership.
(10) Dr. Balderston's business address is 800 Spruce Street, Philadelphia,
Pennsylvania 19107.
(11) Drs. Abrams, Gecha, Gutowski, Jolley and Smires are each physician owners
of POA, one of the Initial Affiliated Practices.
(12) Represents shares of Common Stock held by the Abrams Family Holding
Company, L.L.C.
(13) Drs. Albert, Ciccotti, Hozack, Sharkey and Vaccaro are physician owners of
the predecessor of ROA, one of the Initial Affiliated Practices.
(14) Excludes 3,333 shares of Common Stock held by each of Jonathan Albert,
Trustee of Agreement of Trust of Todd J. Albert for Stuart J. McCormick
dated December 23, 1996, Jonathan Albert, Trustee of Agreement of Trust of
Todd J. Albert for Elliot T. Albert dated December 23, 1996 and Jonathan
Albert, Trustee of Agreement of Trust of Todd J. Albert for Emily K. Albert
dated December 23, 1996, with respect to which Dr. Albert disclaims
beneficial ownership.
(15) Represents shares of Common Stock held by the Gecha Family Holding Company,
L.L.C.
(16) Does not include 4,076 shares of Common Stock held by each of the Andrew
Gutowski 1995 Irrevocable Trust, Christina Gutowski 1995 Irrevocable Trust
and Alexandra Gutowski 1995 Irrevocable Trust, for which Dr. Gutowski
disclaims beneficial ownership.
(17) Includes options to purchase 183,333 shares of Common Stock that will vest
on March 22, 1997.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share (the 'Preferred Stock'). As of January 31,
1997, there were 11,045,015 shares of Common Stock outstanding. No shares of
Preferred Stock are currently outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on each
matter to be decided by the stockholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of Common Stock entitled to vote
in any election of directors may elect all of the directors standing for
election. The holders of Common Stock have no preemptive, redemption or
conversion rights. The holders of the Common Stock will be entitled to receive
ratably such dividends, if any, as the Board of Directors may declare from time
to time out of funds legally available for such purpose. In the event of
liquidation, dissolution or winding up of the affairs of the Company, after
payment or provision for payment of all of the Company's debts and obligations
and any preferential distributions to holders of Preferred Stock, if any, the
holders of the Common Stock will be entitled to share ratably in the Company's
remaining assets. All outstanding shares of Common Stock are, and the Common
Stock offered hereby will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
stockholders, to provide for the issuance of shares of Preferred Stock as a
class without series or in one or more series, to establish the number of shares
in each class or series and to fix the designation, powers, preferences and
rights of each such class or series and the qualifications, limitations or
restrictions thereof. Because the Board of Directors has the power to establish
the preferences and rights of each class or series of Preferred Stock, the Board
of Directors may afford the holders of any class or series of Preferred Stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Stock. The issuance of Preferred Stock could have the effect
of delaying or preventing a change in control of the Company. As of the date of
this Prospectus, the Company has not authorized the issuance of any Preferred
Stock and there are no plans, agreements or understandings for the issuance of
any shares of Preferred Stock.
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the 'GCL'). Section 203 prohibits a
publicly held Delaware corporation from engaging in a 'business combination'
with an 'interested stockholder' for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A 'business
combination' includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an 'interested stockholder' is a person who, together with affiliates and
associates, owns, or within three years prior to the proposed business
combination has owned, 15% or more of the corporation's voting stock.
The Company's Certificate of Incorporation provides that liability of
directors of the Company is eliminated to the fullest extent permitted under
Section 102(b)(7) of the GCL. As a result, no director of the Company will be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for any willful or negligent payment of an unlawful
dividend, stock purchase or redemption; or (iv) for any transaction from which
the director derived an improper personal benefit. The Company's Bylaws
generally provide that the Company shall indemnify its directors, employees and
other agents to the fullest extent provided by Delaware law.
53
<PAGE>
In addition, the Company's Certificate of Incorporation requires the vote
of 66 2/3% of the outstanding voting securities to effect certain actions,
including a sale of substantially all of the assets of the Company, certain
mergers and consolidations, and dissolution and liquidation of the Company
unless such actions have been approved by a majority of the directors. The
'supermajority' voting rights could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from seeking to
acquire, control of the Company.
The Bylaws of the Company provide that stockholders must follow an advance
notification procedure for certain stockholder nominations of candidates for the
Board of Directors and for certain other stockholder business to be conducted at
an annual meeting. These provisions could, under certain circumstances, operate
to delay, defer or prevent a change in control of the Company.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Co., New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following this offering. After giving effect to the shares of Common
Stock offered hereby, the Company will have outstanding 14,045,015 shares of
Common Stock. Of these shares, the 3,198,062 shares (3,648,062 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock sold
in this offering will be freely tradeable without restriction under the
Securities Act, except for any shares purchased by 'affiliates,' as that term is
defined under the Securities Act, of the Company. The remaining 10,846,953
shares are 'restricted securities' within the meaning of Rule 144 promulgated
under the Securities Act. Of these restricted shares, 1,265,000 shares will be
eligible for the sale pursuant to Rule 144 in December 1997 and the balance of
the restricted shares will be eligible for sale at various times from January
1998 through November 1998. The Securities and Exchange Commission (the
'Commission') has proposed reducing the initial Rule 144 holding period to one
year. There can be no assurance as to whether or when such rule changes will be
enacted. If enacted, such modification will accelerate by one year the initial
date upon which all currently outstanding Common Stock becomes eligible for
resale under Rule 144.
The Company, its officers and directors and certain other stockholders of
the Company have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to any additional shares of Common Stock or securities
convertible or exchangeable or exercisable for any shares of Common Stock
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this Prospectus (the 'lock-up period'),
except (i) subsequent sales of Common Stock offered in this offering, (ii)
issuances of unregistered Common Stock by the Company in connection with
affiliation with practices, physicians and ancillary providers (although persons
receiving such shares would be subject to such restrictions for the remainder of
the lock-up period) or (iii) issuances of Common Stock by the Company pursuant
to the exercise of employee stock options outstanding on the date of this
Prospectus.
Pursuant to an agreement with the Company the holders of all shares of
Common Stock outstanding on the date of this Prospectus have certain
registration rights with respect to such shares and additional shares that may
be issued to such persons upon exercise of options (subject to certain
limitations on the number of shares such holders are entitled to have registered
under any registration statement), although the holders of at least 2,437,534 of
these shares have agreed to refrain from selling their shares during the lock-up
period. In addition, the Company intends to register approximately 2,000,000
shares of Common Stock reserved for issuance under the Company's 1996 Equity
Compensation Plan as soon as practicable after expiration of the lock-up period.
The Company intends to register an additional 553,500 shares of Common Stock
reserved for issuance under the Company's 1996 Incentive and Non-Qualified Stock
Option Plan as soon as practicable thereafter. See 'Management' and
'Underwriting.'
54
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the 'Underwriting Agreement'), the
Underwriters named below (the 'Underwriters'), for whom Credit Suisse First
Boston Corporation, Equitable Securities Corporation and Lehman Brothers Inc.
are acting as representatives (the 'Representatives') have severally but not
jointly agreed to purchase from the Company and the Selling Stockholders the
following respective numbers of shares of Common Stock:
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Credit Suisse First Boston Corporation.......................
Equitable Securities Corporation.............................
Lehman Brothers Inc..........................................
---------
Total........................................................ 3,198,062
---------
---------
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below), if any are purchased. The Underwriting Agreement provides
that, in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of the non-defaulting Underwriter may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring on the
close of business on the 30th day after the date of this Prospectus, to purchase
up to 450,000 additional shares at the initial public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of the additional shares of Common
Stock as it was obligated to purchase pursuant to the Underwriting Agreement.
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the shares of Common Stock will be
determined by negotiation among the Company and the Representatives and will be
based on, among other things, the Company's financial and operating history and
condition, its prospects and the prospects for its industry in general, the
management of the Company and the market prices for the securities of companies
in businesses similar to that of the Company.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares offered hereby to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of $_____ per share, and the
Underwriters and such dealers may allow a discount of $______ per share on sales
to certain other dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
Representatives.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the Shares being offered
hereby.
The Company, its officers and directors and certain other stockholders of
the Company have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to any additional shares of Common Stock or securities
convertible into or exchangeable or exercisable for any shares of Common Stock
without the prior written consent of
55
<PAGE>
Credit Suisse First Boston Corporation for a period of 180 days from the date of
this Prospectus, except (i) subsequent sales of Common Stock offered in this
offering, (ii) issuances of unregistered Common Stock by the Company issued in
connection with affiliation with Acquired Practices or (iii) issuances of Common
Stock by the Company pursuant to the exercise of employee stock options
outstanding on the date of this Prospectus.
At the request of the Company, the Underwriters are reserving up to 150,000
shares of Common Stock (approximately 4.7% of the shares to be offered) for sale
to employees, directors and friends of the Company. The number of shares
available for sale to the general public in this offering will be reduced to the
extent such persons purchase such reserved shares. Shares purchased by
employees, directors and friends of the Company will be at the public offering
price as set forth on the cover page of this Prospectus. Any reserved shares not
so purchased will be offered by the Underwriters to the general public in this
offering.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters may be required
to make in respect thereof.
The Company has agreed to indemnify the Selling Stockholders against
certain liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Selling Stockholders may be required to make in
respect thereof.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol 'SCNI.'
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent and (iii) such purchaser has reviewed
the text above under 'Resale Restrictions.'
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulations under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against the issuer or such
persons outside of Canada.
56
<PAGE>
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any such
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blank
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain
health care regulatory matters will be passed upon for the Company by Baker,
Donelson, Bearman & Caldwell, Memphis, Tennessee. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.
EXPERTS
The financial statements of Specialty Care Network, Inc., Greater
Chesapeake Orthopaedic Associates, LLC, Princeton Orthopaedic Associates, P.A.,
Reconstructive Orthopaedic Associates, Inc., Tallahassee Orthopedic Clinic, Inc.
and Vero Orthopaedics, P.A., appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, to the
extent indicated in their reports thereon also appearing elsewhere herein and in
the Registration Statement. Such financial statements have been included herein
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act (the 'Registration Statement') with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement, including the exhibits and schedules thereto. For
further information with respect to the Company and the shares of Common Stock,
reference is made to the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's
Regional Offices at Seven World Trade Center, Suite 1300, New York, New York
10048, and Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies may be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the registration statement and certain
other filings made with the Commission through its Electronic Data Gathering
Analysis and Retrieval ('EDGAR') system are publicly available through the
Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF SPECIALTY CARE NETWORK, INC.:
Basis of Presentation......................................................... F-2
Unaudited Pro Forma Balance Sheet at September 30, 1996....................... F-3
Unaudited Pro Forma Statements of Income for the year ended
December 31, 1995 and for the nine months ended September 30, 1996......... F-4 - F-5
Notes to Unaudited Pro Forma Financial Statements............................. F-6
SPECIALTY CARE NETWORK, INC.:
Report of Independent Auditors................................................ F-13
Balance Sheet................................................................. F-14
Statement of Operations....................................................... F-15
Statement of Stockholders' Deficiency......................................... F-16
Statement of Cash Flows....................................................... F-17
Notes to Financial Statements................................................. F-18
RECONSTRUCTIVE ORTHOPAEDICS ASSOCIATES, INC.:
Report of Independent Auditors................................................ F-26
Balance Sheets................................................................ F-27
Statements of Income.......................................................... F-28
Statements of Stockholders' Equity............................................ F-29
Statements of Cash Flows...................................................... F-30
Notes to Financial Statements................................................. F-31
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.:
Report of Independent Auditors................................................ F-35
Balance Sheets................................................................ F-36
Statements of Operations...................................................... F-37
Statements of Stockholders' Equity............................................ F-38
Statements of Cash Flows...................................................... F-39
Notes to Financial Statements................................................. F-40
TALLAHASSEE ORTHOPEDIC CLINIC, INC.:
Report of Independent Auditors................................................ F-45
Balance Sheets................................................................ F-46
Statements of Income.......................................................... F-47
Statements of Stockholders' Equity............................................ F-48
Statements of Cash Flows...................................................... F-49
Notes to Financial Statements................................................. F-50
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC:
Report of Independent Auditors................................................ F-55
Balance Sheets................................................................ F-56
Statements of Operations...................................................... F-57
Statements of Members' Equity................................................. F-58
Statements of Cash Flows...................................................... F-59
Notes to Financial Statements................................................. F-60
VERO ORTHOPAEDICS, P.A.:
Report of Independent Auditors................................................ F-65
Balance Sheets................................................................ F-66
Statements of Operations...................................................... F-67
Statements of Stockholders' Equity............................................ F-68
Statements of Cash Flows...................................................... F-69
Notes to Financial Statements................................................. F-70
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OF SPECIALTY CARE NETWORK, INC.
BASIS OF PRESENTATION
The following unaudited pro forma financial statements give effect to the
acquisition by Specialty Care Network, Inc. (the 'Company'), a Delaware
corporation, of substantially all of the net assets of the Predecessor
Practices, in exchange for shares of the Company's Common Stock, cash and the
assumption of certain liabilities, and the effects of the provisions of the
Initial Service Agreements between the Company and each of the Initial
Affiliated Practices.
Reconstructive Orthopaedic Associates, Inc.
Princeton Orthopaedic Associates, P.A.
Tallahassee Orthopedic Clinic, Inc.
Greater Chesapeake Orthopaedic Associates, LLC
Vero Orthopaedics, P.A.
The unaudited pro forma financial statements have been prepared by the
Company based upon the historical financial statements of Specialty Care
Network, Inc. and the Predecessor Practices included elsewhere in this
prospectus, and certain preliminary estimates and assumptions deemed appropriate
by management of the Company. These pro forma financial statements may not be
indicative of actual results as if the transaction had occurred on the dates
indicated or which may be realized in the future. Neither expected benefits nor
cost reductions anticipated by the Company following consummation of the Initial
Affiliation Transactions and the execution of the Initial Service Agreements
have been reflected in such pro forma financial statements; however, additional
estimated future corporate overhead and direct costs of the Company have been
reflected in the pro forma financial statements. The pro forma balance sheet as
of September 30, 1996 gives effect to the Initial Affiliation Transactions as if
such transactions had occurred, and the Initial Service Agreements were
executed, on September 30, 1996. The pro forma statements of income for the nine
months ended September 30, 1996 and the year ended December 31, 1995 assume the
Initial Affiliation Transactions were completed on January 1, 1995 and exclude
the discontinued operations of Vero Orthopaedics, P.A. for the year ended
December 31, 1995.
The pro forma financial statements should be read in conjunction with the
historical financial statements of the Company and the individual Predecessor
Practices, including the related notes thereto, and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' that appear elsewhere
in this prospectus.
F-2
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SPECIALTY PRO FORMA
CARE PRO FORMA ADJUSTMENT
NETWORK, INC. ADJUSTMENTS LEGEND PRO FORMA
------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash................................................. $ 132,105 $ 600,000 (3) $ 732,105
Accounts receivable, net............................. -- 10,119,180 (2) 10,119,180
Inventories.......................................... -- 80,324 (2) 80,324
Due from related parties............................. -- 605,538 (2) 605,538
Prepaid expenses..................................... 20,130 99,529 (2) 119,659
----------- ----------- -----------
Total current assets................................... 152,235 11,504,571 11,656,806
Furniture, fixtures and equipment, net................. 251,560 2,320,187 (2) 2,571,747
Intangible assets...................................... 25,457 139,800 (1) 187,841
22,584 (2)
Prepaid offering costs................................. 250,142 -- 250,142
Other assets........................................... 51,733 26,714 (2) 78,447
----------- ----------- -----------
Total assets........................................... $ 731,127 $14,013,856 $14,744,983
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 92,332 $ 376,483 (2) $ 468,815
Accrued compensation and benefits.................... 496,939 257,622 (2) 754,561
Revolving line of credit............................. -- 1,677,750 (1) 1,677,750
Current portion of capital lease obligations......... -- 190,273 (2) 190,273
Convertible debentures............................... 1,870,000 (1,870,000) (3) --
Deferred tax liability............................... -- 251,635 (2) 1,637,094
1,385,459 (4)
Other accrued expenses............................... 555,905 (39,254) (3) 764,651
248,000 (5)
----------- ----------- -----------
Total current liabilities.............................. 3,015,176 2,477,968 5,493,144
Deferred tax liability................................. 124,776 (2) 2,259,963
-- 2,135,187 (4)
Capital lease obligations, less current portion........ -- 967,989 (2) 967,989
----------- ----------- -----------
Total liabilities...................................... 3,015,176 5,705,920 8,721,096
Stockholders' equity (deficit)
Common stock......................................... 1,265 9,780 (3) 11,045
Additional paid-in capital (owners' equity).......... -- (1,537,950) (1) 8,298,156
(9,780) (3)
11,105,278 (2)
1,870,000 (3)
39,254 (3)
600,000 (3)
(3,520,646) (4)
(248,000) (5)
Accumulated deficit.................................. (2,285,314) -- (2,285,314)
----------- ----------- -----------
Total stockholders' equity (deficit)................... (2,284,049) 8,307,936 6,023,887
----------- ----------- -----------
Total liabilities and stockholders' equity (deficit)... $ 731,127 $14,013,856 $14,744,983
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-3
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SPECIALTY PRO FORMA
CARE PRO FORMA ADJUSTMENT
NETWORK, INC. ADJUSTMENTS LEGEND PRO FORMA
------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue................................................. $ -- $31,493,723 (8) $31,493,723
Operating expenses:
Salaries and benefits................................. -- 11,366,021 (6) 14,214,984
2,848,963 (9)
Supplies, general and administrative expenses......... -- 9,968,982 (6) 10,930,793
961,811 (10)
Depreciation and amortization......................... -- 554,434 (6) 713,481
159,047 (11)
----------- ----------- -----------
Income from continuing operations....................... -- 5,634,465 5,634,465
Interest expense and other, net......................... -- (74,306) (6) (74,306)
----------- ----------- -----------
Income from continuing operations before
income tax............................................ -- 5,560,159 5,560,159
Income tax expense...................................... -- (2,112,860) (14) (2,112,860)
----------- ----------- -----------
Net income.............................................. $ -- $ 3,447,299 $ 3,447,299
----------- ----------- -----------
----------- ----------- -----------
Net income per share.................................... $ 0.28
Weighted average common shares outstanding and common
stock equivalents..................................... 12,101,264
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-4
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
PRO FORMA STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SPECIALTY PRO FORMA
CARE PRO FORMA ADJUSTMENT
NETWORK, INC. ADJUSTMENTS LEGEND PRO FORMA
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue....................................................... $ -- $25,132,937 (8) $25,132,937
Operating expenses:
Salaries and benefits....................................... 1,223,923 8,556,147 (7) 10,599,417
819,347 (9)
Supplies, general and administrative expenses............... 480,905 8,858,096 (7) 9,579,454
240,453 (10)
Depreciation and amortization............................... 37,482 483,111 (7) 602,396
81,803 (11)
Costs to evaluate and acquire physician practices........... 509,656 (438,479) (12) 71,177
----------- ----------- -----------
Income (loss) from operations................................. (2,251,966) 6,532,459 4,280,493
Interest expense and other, net............................... (33,348) (28,554) (7) (22,648)
39,254 (13)
----------- ----------- -----------
Income (loss) from operations before income tax............... (2,285,314) 6,543,159 4,257,845
Income tax expense............................................ -- (1,617,981) (14) (1,617,981)
----------- ----------- -----------
Net income (loss)............................................. $(2,285,314) $ 4,925,178 $ 2,639,864
----------- ----------- -----------
----------- ----------- -----------
Net income per share.......................................... $ 0.22
Weighted average common shares outstanding and common stock
equivalents................................................. 12,101,264
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-5
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
1. Reflects the distributions to certain owners of Reconstructive Orthopaedic
Associates, Inc. of $1,537,950 in connection with the Initial Affiliation
Transactions and the application of SAB 48. These payments are accounted for
as dividends to such owners of Reconstructive Orthopaedic Associates, Inc.
The cash necessary to effectuate these dividend payments was primarily
provided by a bank pursuant to a new $20 million Revolving Loan and Security
Agreement established between the Company and the bank on November 1, 1996.
Accordingly, this accounting treatment results in (i) a $1,537,950 reduction
in additional paid-in capital, (ii) an increase in the revolving line of
credit of $1,677,750, and (iii) an increase of intangible assets for deferred
debt issuance costs of $139,800. The pro forma financial statements do not
reflect an adjustment for interest expense on the revolving line of credit
because management expects that the outstanding principal will be fully
repaid with the proceeds from the initial public offering of the Company's
common stock and, accordingly, there is no continuing effect for a period of
at least twelve months after the Initial Affiliation Transactions.
2. Historical assets and liabilities to be included in the pro forma balance
sheet pursuant to the terms and conditions of the underlying acquisition
agreements executed with the Predecessor Practices are summarized on the
following page. In addition, the pro forma balance sheet reflects certain
excluded assets and liabilities that are comprised of the following
significant items: assets and liabilities on an ambulatory surgery center and
an MRI facility that were not acquired as part of the Initial Affiliation
Transactions; substantially all cash and cash equivalents, accrued physician
compensation and benefits that were retained by the owners of Predecessor
Practices and GCOA under the Initial Affiliation Transactions; and all
short-term notes and lines of credit related to the Predecessor Practices
that were paid prior to the Initial Affiliation Transactions.
F-6
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
RECONSTRUCTIVE PRINCETON TALLAHASSEE
ORTHOPAEDIC ORTHOPAEDIC ORTHOPEDIC
ASSOCIATES, ASSOCIATES, CLINIC,
INC. P.A. INC.
-------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 831,472 $ 632,059 $ 647,863
Accounts receivable, net.................................... 3,905,093 2,338,764 2,611,574
Inventories................................................. 19,100 -- 68,224
Due from related parties.................................... -- 465,924 815,341
Prepaid expenses............................................ -- 80,006 180,677
---------- ---------- ----------
Total current assets.......................................... 4,755,665 3,516,753 4,323,679
Furniture, fixtures and equipment, net........................ 563,048 934,883 1,744,788
Intangible assets............................................. -- -- --
Other assets.................................................. 16,104 -- 9,540
---------- ---------- ----------
Total assets.................................................. $5,334,817 $4,451,636 $6,078,007
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings....................................... $ -- $ -- $ 400,000
Current portion of long-term notes payable.................. 66,000 70,000 409,708
Current portion of capital lease obligations................ -- 107,489 49,976
Accounts payable............................................ 119,338 439,629 113,613
Accrued compensation and
benefits.................................................. 160,949 1,588,076 211,551
Accrued profit sharing
contribution.............................................. 285,750 300,000 427,072
Income taxes payable........................................ -- -- --
Deferred tax liability...................................... -- 251,635 --
Due to related parties...................................... 168,356 165,377 201,173
Other accrued expenses...................................... -- -- 7,304
---------- ---------- ----------
Total current liabilities..................................... 800,393 2,922,206 1,820,397
Deferred tax liability........................................ -- -- --
Notes payable, less current portion........................... 89,699 339,428 896,077
Capital lease obligations, less current portion............... -- 769,123 189,119
---------- ---------- ----------
Total liabilities............................................. 890,092 4,030,757 2,905,593
Total owners' equity.......................................... 4,444,725 420,879 3,172,414
---------- ---------- ----------
Total liabilities and owners' equity.......................... $5,334,817 $4,451,636 $6,078,007
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
GREATER EXCLUDED
CHESAPEAKE VERO ASSETS
ORTHOPAEDIC ORTHOPAEDICS, AND PRO FORMA
ASSOCIATES, LLC P.A. LIABILITES ADJUSTMENT
--------------- ------------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 448,196 $135,228 $(2,694,818) $ --
Accounts receivable, net.................................... 1,136,958 564,425 (437,634) 10,119,180
Inventories................................................. -- -- (7,000) 80,324
Due from related parties.................................... -- 40,692 (716,419) 605,538
Prepaid expenses............................................ 49,892 32,367 (243,413) 99,529
---------- -------- ----------- -----------
Total current assets.......................................... 1,635,046 772,712 (4,099,284) 10,904,571
Furniture, fixtures and equipment, net........................ 18,992 72,671 (1,014,195) 2,320,187
Intangible assets............................................. 22,584 -- -- 22,584
Other assets.................................................. -- 1,070 -- 26,714
---------- -------- ----------- -----------
Total assets.................................................. $1,676,622 $846,453 $(5,113,479) $13,274,056
---------- -------- ----------- -----------
---------- -------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings....................................... $ -- $ -- $ (400,000) $ --
Current portion of long-term notes payable.................. -- 82,000 (627,708) --
Current portion of capital lease obligations................ -- 32,808 -- 190,273
Accounts payable............................................ 30,287 13,245 (339,629) 376,483
Accrued compensation and
benefits.................................................. 1,431,935 40,676 (3,175,565) 257,622
Accrued profit sharing
contribution.............................................. -- -- (1,012,822) --
Income taxes payable........................................ -- 107,994 (107,994) --
Deferred tax liability...................................... -- -- -- 251,635
Due to related parties...................................... 122,932 -- (657,838) --
Other accrued expenses...................................... -- -- (7,304) --
---------- -------- ----------- -----------
Total current liabilities..................................... 1,585,154 276,723 (6,328,860) 1,076,013
Deferred tax liability........................................ -- 124,776 -- 124,776
Notes payable, less current portion........................... -- -- (1,325,204) --
Capital lease obligations, less current portion............... -- 9,747 -- 967,989
---------- -------- ----------- -----------
Total liabilities............................................. 1,585,154 411,246 (7,654,064) 2,168,778
Total owners' equity.......................................... 91,468 435,207 2,540,585 11,105,278
---------- -------- ----------- -----------
Total liabilities and owners' equity.......................... $1,676,622 $846,453 $(5,113,479) $13,274,056
---------- -------- ----------- -----------
---------- -------- ----------- -----------
</TABLE>
F-7
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
3. Pursuant to equity transactions executed as part of, or contemporaneously
with, the Initial Affiliation Transactions, 11,045,015 shares of the
Company's $0.001 par value Common Stock became outstanding immediately
thereafter, inclusive of the conversion of all of the outstanding convertible
debentures into Common Stock. Accordingly, the pro forma financial statements
reflect (i) a reclassification of $9,780 from additional paid-in capital to
Common Stock, (ii) a $1,870,000 reclassification from convertible debentures
to additional paid-in capital, (iii) a $39,254 reclassification from accrued
expenses to additional paid-in capital, and (iv) increases of $600,000 in
cash and additional paid-in capital for the issuance of Common Stock to one
of the Predecessor Practices subsequent to September 30, 1996 and the
issuance/conversion of an incremental $300,000 in convertible debentures to
another one of the Predecessor Practices, also in the period subsequent to
September 30, 1996.
4. Reflects the resulting deferred income taxes in accordance with Statement of
Accounting Standards No. 109, Accounting for Income Taxes, for the Internal
Revenue Code Section 481 net federal and state deferred tax liabilities to be
assumed by the Company based on the underlying cash basis net assets of the
Predecessor Practices. This pro forma adjustment results in (i) a $1,385,459
increase in the short-term deferred tax liability, (ii) a $2,135,187 increase
in the long-term deferred tax liability, and (iii) a corresponding $3,520,646
reduction in additional paid-in capital. A full valuation allowance remains
on the net deferred tax asset of the Company because, notwithstanding the pro
forma statements of income included herein, there can be no objective
measurement of the Company's ability to generate sufficient future taxable
income of the appropriate nature and character to provide reasonable
assurance that the net deferred tax asset will be recoverable in a timely
fashion. Subsequent to November 12, 1996, to the extent that the operations
of the Predecessor Practices have been assumed by the Company, those
operations will be reflected in the income tax return of the Company. Taxable
income or loss of the separate Initial Affiliated Practices will be included
in their individual income tax returns.
5. Reflects the incremental costs necessary to effectuate the acquisition of the
Predecessor Practices, resulting in an increase of $248,000 in accrued
expenses and a corresponding reduction in additional paid-in capital.
6. For purposes of deriving the pro forma financial statements of the Company
based on the terms and conditions of the underlying long-term service
agreements with the Initial Affiliated Practices, the following adjustments
have been made to the Predecessor Practices' combined historical financial
information for the year ended December 31, 1995 for pro forma purposes.
F-8
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
RECONSTRUCTIVE PRINCETON GREATER
ORTHOPAEDIC ORTHOPAEDIC TALLAHASSEE CHESAPEAKE
ASSOCIATES, ASSOCIATES, ORTHOPEDIC ORTHOPAEDIC
INC. P.A. CLINIC, INC. ASSOCIATES, LLC
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Net practice revenue......................................... $17,549,907 $13,298,164 $10,420,265 $8,207,951
Operating expenses:
Physician compensation..................................... 9,288,516 4,968,251 3,473,978 6,432,601
Salaries and benefits...................................... 3,874,636 4,057,086 4,028,185 1,113,570
Supplies, general and administrative expenses.............. 2,792,588 4,235,715 2,471,876 1,003,915
Depreciation and amortization.............................. 133,450 258,497 224,054 12,338
----------- ----------- ----------- ----------
Total operating expenses..................................... 16,089,190 13,519,549 10,198,093 8,562,424
----------- ----------- ----------- ----------
Income (loss) from operations................................ 1,460,717 (221,385) 222,172 (354,473)
Interest expense, net........................................ (555) (113,257) (118,363) --
Other income (expense) net................................... 5,294
----------- ----------- ----------- ----------
Income (loss) from continuing operations before income
taxes...................................................... 1,460,162 (334,642) 103,809 (349,179)
Income tax benefit (expense)................................. -- 118,242 -- --
----------- ----------- ----------- ----------
Net income (loss) from continuing operations................. $ 1,460,162 $ (216,400) $ 103,809 $ (349,179)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
<CAPTION>
VERO
ORTHOPAEDICS, ADJUSTMENT PRO FORMA
P.A. ADJUSTMENTS LEGEND ADJUSTMENT
------------- ------------ ---------- ------------
Net practice revenue......................................... $4,208,470 $(53,684,757) (a) $ --
Operating expenses:
Physician compensation..................................... 2,865,311 (27,028,657) (b) --
Salaries and benefits...................................... 1,023,481 (2,730,937) (c) 11,366,021
Supplies, general and administrative expenses.............. 786,036 (1,321,148) (d) 9,968,982
Depreciation and amortization.............................. 61,361 (135,266) (e) 554,434
---------- ------------ ------------
Total operating expenses..................................... 4,736,189 (31,216,008) 21,889,437
---------- ------------ ------------
Income (loss) from operations................................ (527,719) (22,468,749) (21,889,437)
Interest expense, net........................................ (20,391) 166,506 (f) (86,060)
Other income (expense) net................................... 6,460 -- 11,754
---------- ------------ ------------
Income (loss) from continuing operations before income
taxes...................................................... (541,650) (22,302,243) (21,963,743)
Income tax benefit (expense)................................. (64,300) (53,942) (g) --
---------- ------------ ------------
Net income (loss) from continuing operations................. $ 605,950) $(22,356,185) $(21,963,743)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
<TABLE>
<S> <C>
(a) Reflects the following adjustments to net practice revenue:
(i) Elimination of net practice revenue from recurring business
segments....................................................... ($53,018,325)
(ii) Reduction for nonrecurring business segments...................... (666,432)
-----------
(53,684,757)
(b) Reflects the following adjustment to physician compensation:
(i) Elimination of all physician compensation......................... ($27,028,657)
(c) Reflects the following adjustments to salaries and benefits:
(i) Elimination of physician owner fringe benefit expenses............ ($2,697,549)
(ii) Incremental employee benefit plan costs........................... 61,413
(iii) Reduction for nonrecurring business segments...................... (94,801)
-----------
(2,730,937)
(d) Reflects the following adjustments to supplies, general and
administrative expenses:
(i) Reduction for nonrecurring business segments...................... $(208,150)
(ii) Elimination of nonclinical expenses assumed by shareholder
physicians..................................................... (1,112,998)
-----------
(1,321,148)
(e) Reflects the following adjustment to depreciation and amortization:
(i) Reduction for nonrecurring business segments...................... $(135,266)
(f) Reflects the following adjustments to interest expense related to:
(i) Elimination of debt assumed by shareholder physicians............. $ 81,076
(ii) Elimination of debt related to nonrecurring business segments..... 85,430
-----------
166,506
(g) Reflects the following adjustment to the provision for income taxes:
(i) Elimination of income tax benefit retained by Predecessor
Practices...................................................... $ (53,942)
</TABLE>
F-9
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
7. For purposes of deriving the pro forma financial statements of the Company
based on the terms and conditions of the underlying long-term service
agreements with the Initial Affiliated Practices, the following adjustments
have been made to the Predecessor Practices' combined unaudited historical
financial information for the nine months ended September 30, 1996 for pro
forma purposes.
<TABLE>
<CAPTION>
RECONSTRUCTIVE PRINCETON GREATER
ORTHOPAEDIC ORTHOPAEDIC TALLAHASSEE CHESAPEAKE VERO
ASSOCIATES, ASSOCIATES, ORTHOPEDIC ORTHOPAEDIC ORTHOPAEDICS,
INC. P.A. CLINIC, INC. ASSOCIATES, LLC P.A.
------------- ----------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Net practice revenue................................... $14,255,838 $11,152,357 $10,053,710 $6,208,360 $2,953,351
Operating expenses:
Physician compensation............................... 8,051,782 4,084,772 3,052,624 4,580,750 1,186,879
Salaries and benefits................................ 2,205,990 3,350,844 3,453,082 948,270 828,882
Supplies, general and administrative expenses........ 3,512,248 3,464,665 2,133,338 965,778 571,716
Depreciation and amortization........................ 98,972 137,054 394,337 12,205 43,382
----------- ----------- ----------- ---------- ----------
Total operating expenses............................... 13,868,992 11,037,335 9,033,381 6,507,003 2,630,859
----------- ----------- ----------- ---------- ----------
Income (loss) from operations.......................... 386,846 115,022 1,020,329 (298,643) 322,492
Interest expense, net.................................. (12,409) (90,146) (116,904) -- (21,460)
Other income, net...................................... -- -- -- 26,575 5,322
----------- ----------- ----------- ---------- ----------
Income (loss) from operations before income taxes...... 374,437 24,876 903,425 (272,068) 306,354
Income tax expense..................................... -- (8,707) -- -- (132,025)
----------- ----------- ----------- ---------- ----------
Net income (loss)...................................... $ 374,437 $ 16,169 $ 903,425 $(272,068) $ 174,329
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
<CAPTION>
ADJUSTMENT PRO FORMA
ADJUSTMENTS LEGEND ADJUSTMENT
------------- ---------- ------------
Net practice revenue................................... $(44,623,616) (a) $ --
Operating expenses:
Physician compensation............................... (20,956,807) (b) --
Salaries and benefits................................ (2,230,921) (c) 8,556,147
Supplies, general and administrative expenses........ (1,789,649) (d) 8,858,096
Depreciation and amortization........................ (202,839) (e) 483,111
------------ ------------
Total operating expenses............................... (25,180,216) 17,897,354
------------ ------------
Income (loss) from operations.......................... (19,443,400) (17,897,354)
Interest expense, net.................................. 180,468 (f) (60,451)
Other income, net...................................... -- 31,897
------------ ------------
Income (loss) from operations before income taxes...... (19,262,932) (17,925,908)
Income tax expense..................................... 140,732 (g) --
------------ ------------
Net income (loss)...................................... $(19,122,200) $(17,925,908)
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
(a) Reflects the following adjustments to net practice revenue:
(i) Elimination of net practice revenue from recurring business
segments....................................................... ($42,605,438)
(ii) Reduction for nonrecurring business segments...................... (2,018,178)
------------
(44,623,616)
(b) Reflects the following adjustment to physician compensation:
(i) Elimination of all physician compensation......................... ($20,956,807)
(c) Reflects the following adjustment to salaries and benefits:
(i) Elimination of physician owner fringe benefit expenses............ $(2,082,904)
(ii) Incremental employee benefit plan costs........................... (41,360)
(iii) Reduction for nonrecurring business segments...................... (106,657)
------------
(2,230,921)
(d) Reflects the following adjustments to supplies, general and
administrative expenses:
(i) Reduction for nonrecurring business segments...................... $ (610,287)
(ii) Elimination of Predecessor Practices' costs to effectuate the
Initial Affiliation Transactions............................... (174,612)
(iii) Elimination of nonclinical expenses assumed by shareholder
physicians..................................................... (1,004,750)
------------
(1,789,649)
(e) Reflects the following adjustment to depreciation and amortization:
(i) Reduction for nonrecurring business segments...................... $ (202,839)
(f) Reflects the following adjustments to interest expense related to:
(i) Elimination of debt assumed by shareholder physicians............. $ 86,917
(ii) Elimination of debt related to nonrecurring business segments..... 93,551
------------
180,468
(g) Reflects the following adjustment to the provision for income taxes:
(i) Elimination of income tax expense retained by Predecessor
Practices...................................................... $ 140,732
</TABLE>
F-10
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPT. 30,
1995 1996
------------- ---------------
<S> <C> <C>
8. Reflects the following adjustments to revenue:
(i) Recognition of service fee revenue based on long-term management
service agreements (Base Service Fee)................................ $ 9,516,759 $ 7,234,430
(ii) Reimbursement of clinic operating expenses ......................... 21,976,964 17,898,507
----------- -----------
31,493,723 25,132,937
</TABLE>
Pursuant to the terms of the Management Service Agreements, the above fees
consist of the following: (i) service fees based on a percentage ranging from
20%-33% of the Adjusted Pre-Tax Income of the Initial Affiliated Practices
(defined as revenue of the Initial Affiliated Practices related to professional
services less amounts equal to certain clinic expenses of the Initial Affiliated
Practices ('Clinic Expenses,' as defined more fully in the Management Service
Agreements), not including physician owner compensation or most benefits to
physician owners) and (ii) amounts equal to Clinic Expenses. For the first three
years following affiliation, however, the portion of the service fees described
under clause (i) is specified to be the greater of the amount payable as
described under clause (i) above or a fixed dollar amount (the 'Base Service
Fee'), which was generally calculated by applying the respective Service Fee
Percentage of Adjusted Pre-Tax Income of the Predecessor Practices for the
twelve months prior to affiliation. The aggregate annual Base Service Fee for
all of the Initial Affiliated Practices is approximately $9.5 million. This base
service fee was used to calculate the above pro-forma service fee adjustment for
both periods presented. For the nine months ended September 30, 1996, as
reflected on a pro forma basis, two of the Initial Affiliated Practices are at
or above the Base Service Fee by approximately $70,000 in the aggregate. The
remaining three Initial Affiliated Practices are below the Base Service Fee by
approximately $326,000 in the aggregate. In addition, with respect to its
management of certain facilities and ancillary services associated with certain
of the Initial Affiliated Practices, the Company receives fees ranging from
2%-8% of net revenue.
<TABLE>
<S> <C> <C>
9. Reflects the following adjustments to salaries and benefits:
(i) Corporate office and officer compensation............................ $ 2,492,063 $ 799,128
(ii) Corporate office and officer fringe benefit expenses................ 356,900 20,219
----------- -----------
2,848,963 819,347
10. Reflects the following adjustment to supplies, general and administrative
expenses:
(i) Annualized historical corporate supplies, general and administrative
expenses............................................................. $ 961,811 $ 240,453
Adjustments to historical corporate supplies, general and administrative expense are based upon projected
operational requirements, including rent, insurance, travel, recruiting and utilities.
11. Reflects the following adjustment to depreciation and amortization:
(i) Annualized historical corporate overhead charges..................... $ 159,047 $ 81,803
Adjustments to historical corporate depreciation and amortization expense are based on projected capital
asset and corporate financing requirement.
12. Reflects the following adjustment to costs to evaluate and acquire
practices:
(i) Elimination of one-time costs to evaluate and acquire the Initial
Affiliated Practices................................................. $ -- $ (438,479)
13. Reflects the following adjustment to interest expense related to:
(i) Elimination of convertible debentures................................ $ -- $ 39,254
14. Reflects the following adjustment to the provision for income taxes:
(i) Provide for an expected combined federal and state effective income
tax rate of 38%...................................................... $(2,112,860) $(1,617,981)
</TABLE>
F-11
<PAGE>
15. The computation of pro forma income per share is based upon 12,101,264
weighted average common shares outstanding and common stock
equivalents, calculated by using the treasury stock method and an
assumed initial public offering price of $8.25 per share and includes
(i) 7,659,115 shares distributed to the shareholders of the Predecessor
Practices, (ii) 1,517,905 weighted average common shares outstanding
during the period ended September 30, 1996 and the year ended December
31, 1995, (iii) 100,000 shares issued to TOC subsequent to September
30, 1996, (iv) 2,020,901 shares converted from debt and accrued
interest into common stock by debenture holders, (v) 1,616,934 common
stock equivalents attributable to stock options outstanding at December
4, 1996, and (vi) 186,409 common stock equivalents arising from cash
paid to certain owners of the predecessor of ROA in lieu of common
shares that otherwise would have been issued as part of the Initial
Affiliated Transactions.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Specialty Care Network, Inc.
We have audited the accompanying balance sheet of Specialty Care Network, Inc.
(the 'Company') as of September 30, 1996, and the related statements of
operations, stockholders' deficiency, and cash flows for the period from
December 22, 1995 (date of incorporation) through September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Specialty Care Network, Inc. at
September 30, 1996, and the results of its operations and its cash flows for the
period from December 22, 1995 (date of incorporation) through September 30, 1996
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP_________________
Ernst & Young LLP
Denver, Colorado
November 12, 1996,
except for Note 9, as
to which the date is
February 4, 1997
F-13
<PAGE>
SPECIALTY CARE NETWORK, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
Cash.............................................................................................. $ 132,105
Prepaid expenses.................................................................................. 20,130
-----------
Total current assets.............................................................................. 152,235
Property and equipment, net of accumulated depreciation........................................... 251,560
Intangible assets, net of accumulated amortization of $4,127...................................... 25,457
Prepaid offering costs............................................................................ 250,142
Other assets...................................................................................... 51,733
-----------
Total assets...................................................................................... $ 731,127
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable.................................................................................. $ 92,332
Accrued payroll, incentive compensation and related expenses...................................... 496,939
Accrued expenses.................................................................................. 555,905
Convertible debentures............................................................................ 1,870,000
-----------
Total current liabilities......................................................................... 3,015,176
Commitments
Stockholders' deficiency:
Preferred stock, $.001 par value, 2,000,000 shares authorized,
no shares issued or outstanding........................................................... --
Common stock, $.001 par value, 50,000,000 nontransferable shares authorized, 1,265,000 shares
issued and outstanding..................................................................... 1,265
Accumulated deficit.......................................................................... (2,285,314)
-----------
Total stockholders' deficiency.................................................................... (2,284,049)
-----------
Total liabilities and stockholders' deficiency.................................................... $ 731,127
-----------
-----------
</TABLE>
See accompanying notes.
F-14
<PAGE>
SPECIALTY CARE NETWORK, INC.
STATEMENT OF OPERATIONS
PERIOD FROM DECEMBER 22, 1995
(DATE OF INCORPORATION) THROUGH SEPTEMBER 30, 1996
<TABLE>
<S> <C>
Interest income.................................................................................. $ 5,906
Costs and expenses:
Salaries, wages and incentive compensation..................................................... 1,069,919
Fringe benefits and payroll taxes.............................................................. 154,004
Costs to evaluate and acquire physician practices.............................................. 509,656
Depreciation and amortization.................................................................. 37,482
Other general and administrative expenses...................................................... 480,905
Interest expense on convertible debentures..................................................... 39,254
-----------
2,291,220
-----------
Net loss......................................................................................... $(2,285,314)
-----------
-----------
Net loss per common share........................................................................ $ (0.19)
-----------
-----------
Weighted average common shares outstanding and common stock equivalents.......................... 12,101,264
-----------
-----------
</TABLE>
See accompanying notes.
F-15
<PAGE>
SPECIALTY CARE NETWORK, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
PERIOD FROM DECEMBER 22, 1995
(DATE OF INCORPORATION) THROUGH SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
$0.001 PAR VALUE $0.001 PAR VALUE
---------------------- ------------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 22, 1995............... -- $ -- -- $ -- $ -- $ --
Shares issued pursuant to a private
placement................................ -- -- 1,690,000 1,690 -- 1,690
Purchase and retirement of common stock in
connection with a severance agreement.... -- -- (425,000) (425) -- (425)
Net loss................................... -- -- -- -- (2,285,314) (2,285,314)
--------- ----------- ----------- ----------- ------------ ------------
Balance at September 30, 1996.............. -- $ -- 1,265,000 $ 1,265 $ (2,285,314) $ (2,284,049)
--------- ----------- ----------- ----------- ------------ ------------
--------- ----------- ----------- ----------- ------------ ------------
</TABLE>
See accompanying notes.
F-16
<PAGE>
SPECIALTY CARE NETWORK, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM DECEMBER 22, 1995
(DATE OF INCORPORATION) THROUGH SEPTEMBER 30, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss.......................................................................................... $(2,285,314)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................................... 37,482
Changes in operating assets and liabilities:
Prepaid expenses and other assets............................................................ (71,863)
Accounts payable............................................................................. 92,332
Accrued payroll, incentive compensation and related expenses................................. 496,939
Accrued expenses............................................................................. 555,905
-----------
Net cash used in operating activities (1,174,519)
INVESTING ACTIVITIES
Purchases of property and equipment............................................................... (284,915)
Increases in intangible assets.................................................................... (29,584)
-----------
Net cash used in investing activities............................................................. (314,499)
FINANCING ACTIVITIES
Proceeds from convertible debentures (Note 4)..................................................... 1,870,000
Capital contributions, net........................................................................ 1,265
Prepaid offering costs............................................................................ (250,142)
-----------
Net cash provided by financing activities......................................................... 1,621,123
-----------
Net increase in cash.............................................................................. 132,105
Cash at beginning of period....................................................................... --
-----------
Cash at end of period............................................................................. $ 132,105
-----------
-----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid..................................................................................... $ --
-----------
-----------
Income taxes paid................................................................................. $ --
-----------
-----------
</TABLE>
See accompanying notes.
F-17
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. DESCRIPTION OF BUSINESS
Specialty Care Network, Inc. (the 'Company'), which was incorporated on
December 22, 1995, is a national physician practice management company focusing
exclusively on musculoskeletal disease-state management. Commencing on or about
November 12, 1996, the Company began providing comprehensive management services
under long-term management service agreements with five physician practices in
various states and managing an outpatient surgery center in Princeton, New
Jersey.
The accompanying financial statements reflect the Company's activity during
its start-up and organizational phase. See Note 8 for further discussion of the
Company's activities subsequent to September 30, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes. Although these estimates are based on management's knowledge of
current events and actions they may undertake in the future, actual results
could differ from those estimates.
Net Loss Per Common Share
Earnings (loss) per common share is based upon the weighted average of
common and common equivalent shares outstanding during the period. Primary and
fully diluted earnings per share are the same. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletins and staff policy, common and
common equivalent shares issued during the 12-month period prior to an initial
public offering at prices below the public offering price are presumed to have
been issued in contemplation of the public offering, even if antidilutive, and
have been included in the calculation as if these common and common equivalent
shares were outstanding for all periods presented (using the treasury stock
method and the estimated initial public offering price for the Company's common
stock).
The Company has filed a Registration Statement on Form S-1 covering the
proposed sale of shares of common stock in an initial public offering (the
'Offering'). Management intends to use a portion of the proceeds from the
Offering to repay borrowings under the Company's Revolving Loan and Security
Agreement. If the shares to be issued to repay amounts outstanding under the
Company's Revolving Loan and Security Agreement were outstanding for the period
December 22, 1995 (date of incorporation) through September 30, 1996, the loss
per common share would not have changed from the amount reported.
F-18
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
The carrying amounts of financial instruments as reported in the
accompanying balance sheet approximate their fair value.
Prepaid Offering Costs
Prepaid offering costs of $250,142, which primarily relate to legal and
accounting services, will be used to reduce the expected proceeds from the
Company's initial public offering of its common stock. If the initial public
offering is unsuccessful, the costs will be charged to the statement of
operations in that future period.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the three to five year estimated useful lives of
the underlying assets. Costs of repairs and maintenance are expensed as
incurred.
Intangible Assets
Intangible assets, which are stated at cost, consist of organization costs
($29,854) that are being amortized over a three-year period.
Income Taxes
The Company provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. The liability method requires recognition of deferred income
taxes based on temporary differences between the financial reporting and income
tax bases of assets and liabilities, using currently enacted income tax rates
and regulations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards, expiring in 2011.......... $ 693,196
Deferred compensation....................................... 154,435
Vacation pay................................................ 8,669
---------
856,300
---------
Deferred tax liability:
Property and equipment...................................... (4,952)
---------
Valuation allowance........................................... (851,348)
---------
Net deferred tax asset........................................ $ --
---------
---------
A full valuation allowance has been recognized by the Company because
there can be no objective measurement of the Company's ability to generate
sufficient future taxable income of the appropriate nature and character to
provide reasonable assurance that the net deferred tax asset will be recoverable
in a timely fashion.
F-19
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements under
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ('APB No. 25'). In 1995, Financial Accounting
Standards Board Statement No. 123, Accounting for Stock-Based Compensation
('FASB No. 123'), was issued, whereby companies may elect to account for stock-
based compensation using a fair value based method or continue measuring
compensation expense using the intrinsic value method prescribed in APB No. 25.
FASB No. 123 requires that companies electing to continue to use the intrinsic
value method make pro forma disclosure of net income and net income per share as
if the fair value based method of accounting had been applied.
The fair value for these options was estimated at the date of grant using
an option pricing model with the following weighted-average assumptions for
1996: risk-free rate of 6%; no dividend yield; and an expected three year life
of the options. The estimated fair value for these options was calculated using
the minimum value method and may not be indicative of the future impact since
this model does not take into consideration volatility.
The pro forma effects of adopting FASB No. 123's fair value based method
for the period ended September 30, 1996 were not materially different than from
the corresponding APB No. 25 intrinsic value methodology because the weighted
average grant-date fair value of options granted during the period was
negligible. However, the effects of applying FASB No. 123 during 1996 are not
likely to be representative of the effects on pro forma net income for future
years because the vesting of options will cause additional incremental expense
to be recognized in future periods.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Computer equipment................................................. $160,327
Furniture and fixtures............................................. 116,197
Other.............................................................. 8,391
--------
284,915
Accumulated depreciation........................................... 33,355
--------
Net property and equipment......................................... $251,560
--------
--------
4. CONVERTIBLE DEBENTURES
The Company raised $1.87 million of short-term unsecured convertible debt
pursuant to two private placements during the period ended September 30, 1996.
The proceeds thereof have been utilized to fund the Company's start-up and
organizational phase until such time as certain physician practices were
acquired on or about November 12, 1996 (see Note 8).
Contemporaneous with the acquisitions of the founding physician practices,
the holders of the debentures converted the unpaid principal amount plus any
accrued interest thereon (calculated at 5.0%), into the Company's common stock
at the conversion ratio of $1.00 of debenture principal and
F-20
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. CONVERTIBLE DEBENTURES -- (CONTINUED)
accrued interest for one share of common stock. The following table summarizes
the September 30, 1996 financial position of the debenture holders:
<TABLE>
<CAPTION>
ACCRUED
PRINCIPAL INTEREST TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Stockholders of the Company............................................. $ 640,000 $14,406 $ 654,406
Founding physician practices and related stockholders................... 1,230,000 24,848 1,254,848
---------- ------- ----------
$1,870,000 $39,254 $1,909,254
---------- ------- ----------
---------- ------- ----------
</TABLE>
Subsequent to September 30, 1996, the Company issued an additional $300,000
of convertible debentures to one of the founding practices on substantially the
same terms as described above, except that the conversion ratio was $3.00 of
debenture principal and accrued interest for one share of common stock.
Concurrent with its acquisition by the Company, the founding practice executed
its right to convert the debentures and accrued interest thereon into the
Company's common stock.
5. COMMON STOCK
At September 30, 1996, 1,180,000 and 85,000 shares of outstanding
nontransferable common stock are held by current employees and former employees,
respectively. Pursuant to certain common stock subscription agreements and a
related Stockholders Agreement, executed by the Company and its employees, the
1,180,000 shares vest, based upon continued employment with the Company, as
follows:
December 31, 1996............................................. 393,333
December 31, 1997............................................. 393,333
December 31, 1998............................................. 393,334
---------
1,180,000
---------
---------
Certain events, including an initial public offering of the Company's
common stock, provide for the immediate and full vesting of the aforementioned
employee owned shares. However, prior to vesting, the holders retain voting
rights with respect to such shares. Of the 85,000 shares attributable to former
employees, 75,000 will fully vest solely upon the consummation of an initial
public offering and the remaining 10,000 shares are fully vested as of September
30, 1996.
Subsequent to September 30, 1996, the Company issued an additional 100,000
shares of nontransferable common stock to one of the founding practices (see
Note 8) at $3.00 per share.
6. STOCK OPTION PLANS
On March 22, 1996, the Company adopted the 1996 Incentive and Non-Qualified
Stock Option Plan (the 'Plan') pursuant to which nontransferable options to
purchase up to 5,000,000 shares of common stock of the Company may be granted to
eligible directors, officers, advisors, consultants and key employees in order
to provide incentive for such personnel to serve the Company and have a greater
interest in its overall success. The Plan will terminate no later than December
31, 2005, after which no additional stock options will be granted thereunder.
Pursuant to the Plan, the exercise price for incentive stock options shall not
be less than the fair market value of each share at the date of the grant. The
option period shall not exceed ten years. Options, which are generally
contingent on continued employment with the Company, may be exercised only in
accordance with a vesting schedule established by the Company's Board of
Directors. As of September 30, 1996, 4,446,500 shares of the Company's common
stock were available for future grants under the Plan. Only 3,500 of
F-21
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLANS -- (CONTINUED)
the options which are outstanding under the Plan at September 30, 1996 were
exercisable at such date, and no options were forfeited or expired during the
period then ended.
<TABLE>
<CAPTION>
SHARES
OPTION UNDER
PRICE OPTION
------ ------
<S> <C> <C>
Outstanding at September 30 1996, which generally vest ratably on March
22, 1997, 1998 and 1999 and expire on March 22, 2006................. $1.00 553,500
</TABLE>
On October 15, 1996, the Company's Board of Directors approved the 1996
Equity Compensation Plan (the 'Equity Plan'), which provides for the granting of
options to purchase up to two million shares of the Company's common stock. Both
incentive stock options and nonqualified stock options may be issued under the
provisions of the Equity Plan. Employees of the Company and any future
subsidiaries, members of the Board of Directors and certain key advisors are
eligible to participate in this plan, which shall terminate no later than
October 14, 2006. The granting and vesting of the options under the Equity Plan
are provided by the Company's Board of Directors. Subsequent to October 15,
1996, the Company's Board of Directors approved grants under the Equity Plan for
both incentive and non-qualified options exercisable for approximately 1,365,000
of common shares at exercise prices ranging from $6.00 per share to $10.00 per
share.
7. COMMITMENTS
The Company is obligated under operating lease agreements for an office and
certain equipment. Future minimum payments under noncancelable operating leases
with lease terms in excess of one year are summarized as follows for the years
ending September 30:
1997........................................................... $ 84,072
1998........................................................... 85,416
1999........................................................... 86,040
2000........................................................... 86,988
2001........................................................... 43,830
--------
$386,346
--------
--------
Rent expense for the period ended September 30, 1996 under all operating
leases was approximately $62,100.
The Company has entered into certain employment agreements that provide key
executives and employees with minimum base pay, annual incentive awards and
other fringe benefits. The Company expenses all costs related thereto in the
period that the service is rendered by the employee. In the event of death,
disability, termination with or without cause, voluntary employee termination,
change in ownership of the Company, etc., the Company may be partially or wholly
relieved of its financial obligations to such individuals. However, under
certain circumstances, a change in control of the Company may provide
significant and immediate enhanced compensation to the employees possessing
employment contracts. At September 30, 1996, the Company was contractually
obligated for the following base pay compensation amounts (summarized by fiscal
year ending September 30):
F-22
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS -- (CONTINUED)
1997.......................................................... $1,273,167
1998.......................................................... 1,458,604
1999.......................................................... 1,551,000
2000.......................................................... 1,551,000
2001.......................................................... 840,417
----------
$6,674,188
----------
----------
As required by one of its vendors, the Company established a $50,000
irrevocable letter of credit in favor of such vendor, which expires on February
3, 1997. The letter of credit will generally continue to exist beyond the
expiration date as long as the Company continues to maintain its relationship
with such vendor. The letter of credit is secured by a $50,000 savings account,
which is included in other long-term assets in the accompanying financial
statements.
8. PHYSICIAN PRACTICE ACQUISITIONS
As noted in the accompanying financial statements, the Company expended
approximately $510,000 during the period ended September 30, 1996 in order to
evaluate the acquisition of substantially all the assets, liabilities and
business of certain physician practices. Effective November 12, 1996, the
Company acquired substantially all of the assets, such as accounts receivable
and fixed assets, and certain liabilities of the five Predecessor Practices. The
physician owners, functioning as promoters, effectively contributed these assets
and liabilities in exchange for an aggregate of 7,659,115 shares of common stock
of the Company and $1,537,872 in cash. Upon closing, the Company, under signed
agreements, assumed all risks of ownership related to these assets. The
following table summarizes certain financial information (unaudited) related to
this transaction and the five individual founding physician practices:
<TABLE>
<CAPTION>
COMMON
STOCK
CONSIDERATION
PAID CASH
BY THE CONSIDERATION
COMPANY PAID BY THE
------------- COMPANY
(SHARES) -------------
<S> <C> <C>
Reconstructive Orthopaedic Associates, Inc........................... 3,169,379 $1,537,872
Princeton Orthopaedic Associates, P.A................................ 1,196,793 --
Tallahassee Orthopedic Clinic, P.A................................... 1,072,414 --
Greater Chesapeake Orthopaedic Associates, LLC....................... 1,568,922 --
Vero Orthopaedics, P.A............................................... 651,607(1) --
</TABLE>
(1) Excludes non-qualified stock options to purchase an additional 50,000 shares
of the Company's common stock at $6.00 per share which fully vest on
November 12, 1998.
On November 1, 1996, the Company entered into a $20 million Revolving Loan
and Security Agreement with a bank, which provided certain amounts necessary to
effectuate the aforementioned acquisition transactions. At November 12, 1996,
the outstanding amount thereunder was approximately $1.7 million, and such
amount is secured by a first collateral interest on substantially all of the
assets owned by the Company or thereafter acquired. Additionally,
contemporaneous with the acquisitions of the founding physician practices, the
Company extended lines of credit to the former stockholders of certain founding
practices aggregating approximately $4.3 million. Such lines of credit will
generally remain in existence through November 12, 1998. Advances thereunder,
which aggregated approximately $1,000,000 subsequent to September 30, 1996, bear
interest at the prime lending rate plus 1.25% and will be collateralized by the
Company's common stock owned by the individual physician.
F-23
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. PHYSICIAN PRACTICE ACQUISITIONS -- (CONTINUED)
Concurrent with the acquisitions, the successors to the Predecessor
Practices (the "Initial Affiliated Practices") simultaneously entered into
long-term service agreements (the "Initial Service Agreements") with the
Company. Pursuant to the terms of the service agreements, the Company, among
other things, provides facilities and management, administrative and development
services, and employs most non-medical personnel, in return for service fees.
Such fees are payable monthly and consist of the following: (i) service fees
based on a percentage ranging from 20%-33% of the adjusted pre-tax income of the
Initial Affiliated Practices (defined as revenue of the Initial Affiliated
Practices related to professional services less amounts equal to certain clinic
expenses but not including physician owner compensation or most benefits to
physician owners) plus (ii) reimbursement of certain clinic expenses. For the
first three years following affiliation, however, the portion of the service
fees described under clause (i) is specified to be the greater of the amount
payable as described under clause (i) above or a fixed dollar amount (the 'Base
Service Fee'), which was generally calculated by applying the respective service
fee percentage of adjusted pre-tax income of the Initial Affiliated Practices
for the twelve months prior to affiliation. The aggregate annual Base Service
Fee for all of the Initial Affiliated Practices is approximately $9.5 million.
In addition, with respect to its management of certain facilities and ancillary
services associated with certain of the Initial Affiliated Practices, the
Company receives fees ranging from 2%-8% of net revenue.
The Initial Service Agreements have initial terms of forty years, with
automatic extensions (unless specified notice is given) of additional five-year
terms. The Initial Service Agreement may be terminated by either party if the
other party (i) files a petition in bankruptcy or other similar events occur or
(ii) defaults on the performance of a material duty or obligation, which default
continues for a specified term after notice. In addition, the Company may
terminate the agreement if the Initial Affiliated Practice's Medicare or
Medicaid number is terminated or suspended as a result of some act or omission
of the Initial Affiliated Practice or the physicians, and the Initial Affiliated
Practice may terminate the agreement if the Company misapplies funds or assets
or violates certain laws.
Upon termination of an Initial Service Agreement by the Company for one of
the reasons set forth above, the Company has the option to require the Initial
Affiliated Practice to purchase and assume the assets and liabilities related to
the Initial Affiliated Practice at the fair market value thereof. In addition,
upon termination of an Initial Service Agreement by the Company during the first
five years of the term, the physician owners of the Initial Affiliated Practice
are required to pay the Company or return to the Company an amount of cash or
stock of the Company equal to one-third of the total consideration received by
such physicians in connection with the Company's affiliation with the practice.
Under the Initial Service Agreements, each physician owner must give the
Company twelve months notice of an intent to retire from the Initial Affiliated
Practice. If a physician gives such notice during the first five years of the
agreement, the physician must also locate a replacement physician or physicians
acceptable to a Joint Policy Board and pay an amount based on a formula
relating to any loss of service fee for the first five years of the term. The
agreement also provides that after the fifth year no more than 20% of the
physician owners at the Initial Affiliated Practice may retire within a one-year
period.
The Initial Affiliated Practices and the physician owners of the Initial
Affiliated Practices generally agree not to compete with the Company in
providing services similar to those provided by the Company under the Initial
Service Agreements, and the physician owners also generally agree with the
Company not to compete with an Initial Affiliated Practice, within a specified
geographic area. Non-competition restrictions generally apply to physicians
during their affiliation with the Initial Affiliated Practices and for three
years thereafter. In addition, the Initial Service Agreement requires the
Initial Affiliated Practice to enter into non-competition agreements with all
physicians in the Initial Affiliated Practice, of which agreements the Company
will be a third party beneficiary. After the fifth year of the term
F-24
<PAGE>
of the Initial Service Agreement, physician owners of the Initial Affiliated
Practices may be released from the non-competition provisions upon payment of
certain amounts to the Company, which may be paid in the form of common stock.
The Initial Service Agreements generally require the Initial Affiliated
Practices to pursue enforcement of the non-competition agreement with physicians
or assign to the Company the right to pursue enforcement.
9. SUBSEQUENT EVENTS
On January 8, 1997, the Company was sued by Michael A. Feiertag, M.D. (a
former physician at Vero Orthopaedics, P.A.) for alleged breach of his
employment agreement. Dr. Feiertag is seeking damages in excess of $500,000. SCN
intends to file an answer to the complaint denying liability and intends to
vigorously contest the action. The Company believes that the ultimate resolution
of the case will not have a material adverse effect on the Company's financial
statements. On February 3, 1997, SCN initiated proceedings to have the case
removed to the United States District Court for the Southern District of
Florida.
In December 1996, the Company entered into separate definitive agreements
to affiliate with three single physician practices in Florida, Georgia and
Maryland. The Company has agreed to acquire, through merger, substantially all
of the assets and certain liabilities of the practices for an aggregate
consideration of 409,265 common shares of the Company. These business
combinations will be afforded the purchase method of accounting treatment.
Consummation of the transactions is subject to certain conditions, including the
Company's completion of, and satisfaction with, its review of the practices.
On January 10, 1997, the Board of Directors voted to terminate the 1996
Incentive and Non-Qualified Stock Option Plan.
On February 4, 1997, the Board of Directors voted to amend the exercise
price for options to purchase approximately 726,000 shares granted under the
1996 Equity Compensation Plan from $6.00 per share to a price per share equal
to the initial public offering price per share in the Company's initial public
offering.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Reconstructive Orthopaedic Associates, Inc.
We have audited the accompanying balance sheets of Reconstructive Orthopaedic
Associates, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, l995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reconstructive Orthopaedic
Associates, Inc. as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP_________________
Ernst & Young LLP
Denver, Colorado
July 12, 1996
F-26
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
--------------------- ------------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 234,883 $ 246,203 $ 831,472
Accounts receivable, net.......................................... 2,623,768 4,288,456 3,905,093
Inventories....................................................... 25,200 19,100 19,100
Due from related parties.......................................... 57,716 -- --
Prepaid expenses.................................................. 247,152 122,793 --
---------- ---------- ----------
Total current assets................................................ 3,188,719 4,676,552 4,755,665
Furniture, fixtures and equipment, net.............................. 510,077 617,053 563,048
Other assets........................................................ 2,277 18,972 16,104
---------- ---------- ----------
Total assets........................................................ $3,701,073 $5,312,577 $5,334,817
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................. $ 550,000 $ 570,000 $ --
Current portion of long-term debt................................. -- -- 66,000
Accounts payable.................................................. 151,316 271,333 119,338
Accrued compensation and benefits................................. 117,995 81,924 160,949
Accrued profit sharing contribution............................... 160,398 245,819 285,750
Due to related parties............................................ -- -- 168,356
Other accrued expenses............................................ 888 2,863 --
---------- ---------- ----------
Total current liabilities........................................... 980,597 1,171,939 800,393
Long-term debt, less current portion................................ -- -- 89,699
---------- ---------- ----------
Total liabilities................................................... 980,597 1,171,939 890,092
Commitments
Stockholders' equity:
Common stock, $1 par value:
Authorized and outstanding shares -- 1,000..................... 1,000 1,000 1,000
Retained earnings.............................................. 2,744,489 4,164,651 4,539,088
Treasury stock................................................. (25,013) (25,013) (25,013)
Less note receivable from stockholder.......................... -- -- (70,350)
---------- ---------- ----------
Total stockholders' equity.......................................... 2,720,476 4,140,638 4,444,725
---------- ---------- ----------
Total liabilities and stockholders' equity.......................... $3,701,073 $5,312,577 $5,334,817
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-27
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue................................ $11,902,216 $13,325,350 $17,549,907 $12,431,874 $14,255,838
Operating expenses:
Physician compensation................... 6,741,664 7,711,380 9,288,516 7,546,155 8,051,782
Salaries and benefits.................... 2,623,412 3,288,766 3,874,636 1,916,237 2,205,990
Supplies, general and administrative
expenses............................... 2,022,581 2,066,795 2,792,588 2,108,595 3,512,248
Depreciation............................. 126,889 124,304 133,450 84,869 98,972
----------- ----------- ----------- ----------- -----------
Total operating expenses................... 11,514,546 13,191,245 16,089,190 11,655,856 13,868,992
----------- ----------- ----------- ----------- -----------
Income from operations..................... 387,670 134,105 1,460,717 776,018 386,846
Interest expense........................... (10,225) (5,302) (555) (1,936) (12,409)
----------- ----------- ----------- ----------- -----------
Net income................................. $ 377,445 $ 128,803 $ 1,460,162 $ 774,082 $ 374,437
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
NUMBER RECEIVABLE
OF COMMON RETAINED TREASURY FROM
SHARES STOCK EARNINGS STOCK STOCKHOLDER TOTAL
-------- -------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992................. 1,000 $1,000 $2,318,241 $ (25,013) $ -- $2,294,228
Net income............................... -- -- 377,445 -- -- 377,445
------ ------ ---------- --------- -------- ----------
Balance, December 31, 1993................. 1,000 1,000 2,695,686 (25,013) -- 2,671,673
Net income............................... -- -- 128,803 -- -- 128,803
Dividends paid........................... -- -- (80,000) -- -- (80,000)
------ ------ ---------- --------- -------- ----------
Balance, December 31, 1994................. 1,000 1,000 2,744,489 (25,013) -- 2,720,476
Net income............................... -- -- 1,460,162 -- -- 1,460,162
Dividends paid........................... -- -- (40,000) -- -- (40,000)
------ ------ ---------- --------- -------- ----------
Balance, December 31, 1995................. 1,000 1,000 4,164,651 (25,013) -- 4,140,638
Net income (unaudited)................... -- -- 374,437 -- -- 374,437
Purchase of treasury stock (unaudited)... (660) -- -- (141,700) -- (141,700)
Sale of treasury stock (unaudited)....... 660 -- -- 141,700 (70,350) 71,350
------ ------ ---------- --------- -------- ----------
Balance, September 30, 1996 (unaudited).... 1,000 $1,000 $4,539,088 $ (25,013) $(70,350) $4,444,725
------ ------ ---------- --------- ---------- ----------
------ ------ ---------- --------- ---------- ----------
</TABLE>
See accompanying notes.
F-29
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 377,445 $ 128,803 $ 1,460,162 $ 774,082 $ 374,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 126,889 124,304 133,450 84,869 98,972
Changes in assets and liabilities:
Accounts receivable.......................... (161,437) (167,932) (1,664,688) (900,289) 383,363
Inventories.................................. -- -- 6,100 -- --
Due from related parties..................... (39,629) 92,356 57,716 (580,214) --
Prepaid expenses............................. (112,300) (71,379) 124,359 176,117 122,793
Other assets................................. 6,927 (409) (16,695) (142,588) 2,868
Accounts payable............................. 9,900 14,321 120,017 90,228 (151,995)
Accrued compensation and benefits............ 6,684 32,695 (36,071) 42,692 79,025
Other accrued expenses....................... 11,697 (14,307) 1,975 34,766 (2,863)
Due to related parties....................... -- -- -- 58,885 26,656
Accrued profit sharing contribution.......... 30,225 97,423 85,421 19,602 39,931
Accrued bonuses.............................. -- -- -- 2,581,783 --
--------- --------- ----------- ---------- ---------
Net cash provided by operating activities.......... 256,401 235,875 271,746 2,239,933 973,187
INVESTING ACTIVITIES
Sale of investments................................ 75,000 69,631 -- -- --
Purchases of furniture, fixtures and equipment..... (216,383) (39,061) (240,426) (240,862) (44,967)
--------- --------- ----------- ---------- ---------
Net cash provided by (used in) investing
activities....................................... (141,383) 30,570 (240,426) (240,862) (44,967)
FINANCING ACTIVITIES
Proceeds from short-term borrowings................ -- -- 570,000 -- --
Repayment of short-term borrowings................. -- -- (550,000) (550,000) (570,000)
Proceeds from long-term debt....................... -- -- -- -- 200,000
Principal payments on long-term debt............... (47,000) (150,000) -- -- (44,301)
Proceeds from sale of treasury stock............... -- -- -- -- 71,350
Dividends paid..................................... -- (80,000) (40,000) -- --
--------- --------- ----------- ---------- ---------
Net cash used in financing activities.............. (47,000) (230,000) (20,000) (550,000) (342,951)
--------- --------- ----------- ---------- ---------
Net increase in cash and cash equivalents.......... 68,018 36,445 11,320 1,449,071 585,269
Cash and cash equivalents at beginning of year..... 130,420 198,438 234,883 234,883 246,203
--------- --------- ----------- ---------- ---------
Cash and cash equivalents at end of year........... $ 198,438 $ 234,883 $ 246,203 $1,683,954 $ 831,472
--------- --------- ----------- ---------- ---------
--------- --------- ----------- ---------- ---------
Supplemental noncash operating and financing
activities:
Acquisition of treasury stock for payable to
related parties.............................. $ -- $ -- $ -- $ -- $ 141,700
Sale of treasury stock for note receivable from
stockholder.................................. $ -- $ -- $ -- $ -- $ 70,350
</TABLE>
See accompanying notes.
F-30
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND 1996 AND SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Reconstructive Orthopaedic Associates, Inc. (the Company) is an orthopaedic
physician practice which services the surrounding communities of Philadelphia,
Pennsylvania. The Company is organized as a corporation under the laws of the
state of Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity and contractual adjustments. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation is
determined using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives used are as follows:
Computer equipment and automobiles............................... 5 years
Furniture, fixtures and equipment................................ 7 years
Leasehold improvements........................................... 15 years
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through an
occurrence-based commercial insurance policy.
Income Taxes
The Company is a Subchapter S corporation under the Internal Revenue Code,
and, accordingly, is not taxed as a separate entity. The Company's taxable
income or loss is allocated to each stockholder and recognized as taxable income
on their individual tax returns.
F-31
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
---------- -----------
<S> <C> <C>
Gross patient accounts receivable........................... $6,433,550 $10,952,124
Less allowance for contractual adjustments and
uncollectibles............................................ 3,809,782 6,663,668
---------- -----------
$2,623,768 $ 4,288,456
---------- -----------
---------- -----------
</TABLE>
Net revenue consisted of the following:
<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
Gross patient revenue........................................... $ 23,996,688 $ 29,666,524 $ 39,767,311
Less contractual adjustments and uncollectibles................. 12,094,472 16,341,174 22,217,404
-------------- -------------- --------------
$ 11,902,216 $ 13,325,350 $ 17,549,907
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Concentration of credit risk related to accounts receivable is limited by
the diversity and number of providers, patients and payors.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures........................................ $ 410,185 $ 475,394
Equipment..................................................... 289,715 463,757
Automobiles................................................... 171,432 171,432
Leasehold improvements........................................ 441,294 442,519
---------- ----------
1,312,626 1,553,102
Less accumulated depreciation................................. 802,549 936,049
---------- ----------
Furniture, fixtures and equipment, net........................ $ 510,077 $ 617,053
---------- ----------
---------- ----------
</TABLE>
F-32
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LINE OF CREDIT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
-------- --------
<S> <C> <C>
Line of credit with a bank, due on demand, plus interest at
8.50%........................................................... $550,000 $570,000
-------- --------
-------- --------
</TABLE>
The Company has a $700,000 line of credit with Mellon Bank, of which
$150,000 and $130,000 was available at December 31, 1994 and 1995, respectively.
Borrowings under the line of credit bear an interest rate equal to 8.50%.
Accounts receivable collateralize the line of credit with the bank.
6. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that covers substantially all of its
employees. Eligible employees may contribute up to 15% of their compensation.
The Company contributes a discretionary amount which is allocated proportionally
based upon the salaries of participating employees. The profit sharing plan
expense was $178,225, $263,898 and $247,894 for the years ended December 31,
1993, 1994 and 1995, respectively.
7. RELATED PARTY TRANSACTIONS
The Company advanced money to certain stockholders in exchange for notes
receivable. As of December 31, 1994, the outstanding balance was $57,716.
8. OPERATING LEASES
The Company leases its office facilities on an annual basis. Rent expense
for the years ended December 31, 1993, 1994 and 1995 totaled $121,259, $126,090
and $121,139, respectively.
9. SUBSEQUENT EVENT
Subsequent to year end, the Company reorganized by repurchasing a portion
of the outstanding common stock from the two existing stockholders and selling
additional common stock to several additional physicians. This transaction had
no effect on the total number of shares outstanding.
Effective November 12, 1996, the Company entered into a tax-free merger
(the Merger) with Specialty Care Network, Inc. (SCN) in a reorganization,
whereby the stockholders of the Company agreed to exchange their outstanding
common stock for 3,169,379 shares of common stock of SCN and $1,537,872 in cash.
In connection with the Merger, SCN will provide administrative services and
manage the non-medical operations of the Company and enter into a long-term
service agreement with the physician stockholders of the Company, pursuant to
which the physicians will continue to provide medical services through a new
entity. In addition, certain of the Company's physician stockholders have
purchased $550,000 of convertible debentures of SCN that are convertible into
common stock of SCN at $1 a share.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet as of September 30, 1996 and the statements of income,
stockholders' equity and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
F-33
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. UNAUDITED INTERIM FINANCIAL INFORMATION -- (CONTINUED)
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
11. PRO FORMA TAX INFORMATION (UNAUDITED)
As discussed elsewhere in these footnotes, the Company operates under
Subchapter S of the Internal Revenue Code and is not subject to corporate
federal or state income taxes. In connection with the merger with Specialty Care
Network, Inc. (See Note 9), the Subchapter S election was terminated. As a
result, the Company will be subject to federal and state corporate income taxes
subsequent to the termination of the Subchapter S status. The Company had net
operating income for income tax purposes of $413,474, $168,556 and $1,510,336
for the years ended December 31, 1993, 1994 and 1995, respectively. The
corresponding net operating income for income tax purposes for the nine months
ended September 30, 1995 and 1996 were $797,297 and $378,552, respectively. Had
the Company filed federal and state income tax returns as a regular Subchapter C
corporation, the income tax expense under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, would have
been as follows:
Year ended December 31, 1993.................................. $ 152,158
Year ended December 31, 1994.................................. 62,029
Year ended December 31, 1995.................................. 555,804
Nine months ended September 30, 1995.......................... 293,405
Nine months ended September 30, 1996.......................... 139,307
The effect of recognizing the deferred taxes will be included in income
from continuing operations. If the termination of the Subchapter S corporation
status had occurred at September 30, 1996, the net deferred tax liability would
have been approximately $1,280,142.
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Princeton Orthopaedic Associates, P.A.
We have audited the accompanying balance sheets of Princeton Orthopaedic
Associates, P.A. as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, l995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Princeton Orthopaedic
Associates, P.A. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-------------------------------------
Ernst & Young LLP
Denver, Colorado
August 28, 1996
F-35
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
---------------------- -------------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 63,242 $ 117,277 $ 632,059
Accounts receivable, net....................................... 1,826,429 1,954,380 2,338,764
Prepaid expenses............................................... 360,960 320,025 80,006
Due from related parties....................................... 2,700 49,866 465,924
---------- ---------- ----------
Total current assets............................................. 2,253,331 2,441,548 3,516,753
Furniture, fixtures and equipment, net........................... 1,401,552 1,143,174 934,883
---------- ---------- ----------
Total assets..................................................... $3,654,883 $3,584,722 $4,451,636
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term note payable...................... $ 70,000 $ 70,000 $ 70,000
Current portion of capital lease obligations................... 69,839 100,038 107,489
Deferred tax liability......................................... 361,170 242,928 251,635
Accounts payable............................................... 102,002 101,810 439,629
Accrued compensation and benefits.............................. 647,377 911,033 1,588,076
Accrued profit sharing contribution 293,529 432,100 300,000
Due to related parties......................................... 17,340 37,924 165,377
Other accrued expenses......................................... 59,853 41,554 --
---------- ---------- ----------
Total current liabilities........................................ 1,621,110 1,937,387 2,922,206
Long-term note payable, less current portion..................... 461,928 391,928 339,428
Capital lease obligations, less current portion.................. 950,735 850,697 769,123
---------- ---------- ----------
Total liabilities................................................ 3,033,773 3,180,012 4,030,757
Commitments
Stockholders' equity:
Common stock, no par value:
Authorized, issued and outstanding
shares--900........................................... -- -- --
Additional paid-in capital............................... 17,308 17,308 17,308
Retained earnings........................................ 853,802 637,402 653,571
Treasury stock........................................... (250,000) (250,000) (250,000)
---------- ---------- ----------
Total stockholders' equity....................................... 621,110 404,710 420,879
---------- ---------- ----------
Total liabilities and stockholders' equity....................... $3,654,883 $3,584,722 $4,451,636
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-36
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue................................. $11,552,476 $13,561,339 $13,298,164 $9,842,814 $11,152,357
Operating expenses:
Physician compensation.................... 4,273,893 5,194,385 4,968,251 3,854,871 4,084,772
Salaries and benefits..................... 3,904,184 4,099,459 4,057,086 2,758,435 3,350,844
Supplies, general and administrative
expenses................................ 3,623,877 3,837,396 4,235,715 2,937,658 3,464,665
Depreciation and amortization............. 246,815 218,440 258,497 193,872 137,054
----------- ----------- ----------- ---------- -----------
Total operating expenses.................... 12,048,769 13,349,680 13,519,549 9,744,836 11,037,335
----------- ----------- ----------- ---------- -----------
Income (loss) from operations............... (496,293) 211,659 (221,385) 97,978 115,022
Interest expense, net....................... (121,426) (116,288) (113,257) (123,249) (90,146)
----------- ----------- ----------- ---------- -----------
Income (loss) before income taxes........... (617,719) 95,371 (334,642) (25,271) 24,876
Income tax benefit (expense)................ 194,660 (35,385) 118,242 6,608 (8,707)
----------- ----------- ----------- ---------- -----------
Net income (loss)........................... $ (423,059) $ 59,986 $ (216,400) $ (18,663) $ 16,169
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
See accompanying notes.
F-37
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992................ 900 $ -- $17,308 $1,216,875 $(250,000) $ 984,183
Net loss................................ -- -- -- (423,059) -- (423,059)
---------- --------- --------- ---------- --------- ---------
Balance, December 31, 1993................ 900 -- 17,308 793,816 (250,000) 561,124
Net income.............................. -- -- -- 59,986 -- 59,986
---------- --------- --------- ---------- --------- ---------
Balance, December 31, 1994................ 900 -- 17,308 853,802 (250,000) 621,110
Net loss................................ -- -- -- (216,400) -- (216,400)
---------- --------- --------- ---------- --------- ---------
Balance, December 31, 1995................ 900 -- 17,308 637,402 (250,000) 404,710
Net income (unaudited).................. -- -- -- 16,169 -- 16,169
---------- --------- --------- ---------- --------- ---------
Balance, September 30, 1996............... --
(unaudited)............................. 900 $ -- $17,308 $ 653,571 $(250,000) $ 420,879
---------- --------- --------- ---------- --------- ---------
---------- --------- --------- ---------- --------- ---------
</TABLE>
See accompanying notes.
F-38
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $(423,059) $ 59,986 $(216,400) $ (18,663) $ 16,169
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 246,815 218,440 258,497 193,872 137,054
Deferred income tax provision.................... (194,660) 35,385 (118,242) (6,608) 8,707
Changes in assets and liabilities:
Accounts receivable, net....................... 305,886 (245,447) (127,951) (33,928) (384,384)
Due from related parties....................... 7,500 (2,700) (47,166) (103,224) (416,058)
Prepaid expenses............................... (19,219) (10,165) 40,935 270,720 240,019
Due to related parties......................... 29,722 (12,382) 20,584 (17,340) 127,453
Accounts payable............................... (6,332) 48,334 (192) 35,104 337,819
Accrued compensation and benefits.............. 422,642 (217,099) 263,656 811,292 677,043
Accrued profit sharing contribution............ 24,500 (30,971) 138,571 30,471 (132,100)
Other accrued expenses......................... 1,896 47,957 (18,299) (59,853) (41,554)
--------- --------- --------- ---------- ---------
Net cash provided by (used in) operating
activities......................................... 395,691 (108,662) 193,993 1,101,843 570,168
INVESTING ACTIVITIES
(Purchases) sales of furniture, fixtures and
equipment, net..................................... (72,073) 7,608 (119) 71,103 71,237
--------- --------- --------- ---------- ---------
Net cash provided by (used in) investing
activities......................................... (72,073) 7,608 (119) 71,103 71,237
FINANCING ACTIVITIES
Principal payments on long-term debt and capital
lease obligations.................................. (113,098) (83,600) (139,839) (104,246) (126,623)
--------- --------- --------- ---------- ---------
Net cash used in financing activities................ (113,098) (83,600) (139,839) (104,246) (126,623)
--------- --------- --------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents........................................ 210,520 (184,654) 54,035 1,068,670 514,782
Cash and cash equivalents at beginning of year....... 37,376 247,896 63,242 63,242 117,277
--------- --------- --------- ---------- ---------
Cash and cash equivalents at end of year............. $ 247,896 $ 63,242 $ 117,277 $1,131,912 $ 632,059
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Supplemental noncash investing activities:
Acquisition of furniture, fixtures and equipment
under capital lease.............................. $ 730,720 $ -- $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-39
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND 1996 AND SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Princeton Orthopaedic Associates, P.A. (the Company) is an orthopaedic
physician practice which services the surrounding communities of Princeton, New
Jersey and effective January 1, 1996, operates an outpatient surgery center. The
Company is organized as a professional corporation under the laws of the state
of New Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity, and contractual adjustments. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives are as follows:
Furniture, fixtures and equipment............................... 5-7 years
Leasehold improvements.......................................... 15 years
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated occurrence-based commercial insurance policy.
Income Taxes
Deferred tax liabilities or assets (net of a valuation allowance) are
provided in the financial statements by applying the provisions of applicable
tax laws to measure the deferred tax consequences of temporary differences that
will result in net taxable or deductible amounts in future years as a result of
events recognized in the financial statements in the current or preceding years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-40
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and long-term debt. The carrying amounts
reported in the balance sheets for these items approximate fair value.
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995
--------- ----------
<S> <C> <C>
Gross patient accounts receivable..................................... $3,168,395 $4,011,580
Less allowances for contractual adjustments and uncollectibles........ 1,341,966 2,057,200
---------- ----------
$1,826,429 $1,954,380
---------- ----------
---------- ----------
</TABLE>
Net revenue consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Gross patient revenue................................ $12,836,084 $15,954,516 $15,643,395
Less contractual adjustments and uncollectibles...... 1,283,608 2,393,177 2,345,231
----------- ----------- -----------
$11,552,476 $13,561,339 $13,298,164
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Concentration of credit risk related to accounts receivable is limited by
the diversity and number of providers, patients and payors.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Purchased and leased furniture, fixtures and equipment................ $2,046,840 $2,046,959
Leasehold improvements................................................ 516,268 516,268
---------- ----------
2,563,108 2,563,227
Less accumulated depreciation and amortization........................ 1,161,556 1,420,053
---------- ----------
$1,401,552 $1,143,174
---------- ----------
---------- ----------
</TABLE>
F-41
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTE PAYABLE
Note payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
-------- --------
<S> <C> <C>
Note payable, due in monthly installments of $5,833 plus interest at 8.5%,
collateralized by certain equipment..................................... $531,928 $461,928
Less current portion...................................................... 70,000 70,000
-------- --------
$461,928 $391,928
-------- --------
-------- --------
</TABLE>
At December 31, 1995, the aggregate maturities of the note payable are as
follows: 1996-- $70,000; 1997--$70,000; 1998--$70,000; 1999--$251,928.
Interest expense approximates interest paid.
6. BENEFIT PLANS
The Company has a 401(k) plan and a defined contribution pension plan
covering all full-time employees with one year or more of service. Prior to
1994, the Company maintained a profit sharing plan. Effective in 1994, the
Company terminated the profit sharing plan and adopted the 401(k) plan.
Contributions under the 401(k) plan are determined annually by the Board of
Directors. The pension plan contribution is mandatory and is based upon a fixed
percentage of an employee's annual salary. The retirement plan expenses were
$423,500, $549,592 and $444,992 for the years ended December 31, 1993, 1994 and
1995, respectively.
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Capitalized lease............................................... $ -- $ 12,052
Cash-to-accrual adjustment...................................... 485,423 469,967
-------- --------
Total deferred tax liabilities............................... 485,423 482,019
-------- --------
Deferred tax assets:
Capitalized leases.............................................. 12,395 --
Net operating loss carryforward................................. 15,837 99,507
Depreciation and amortization................................... 96,021 139,584
-------- --------
Total deferred tax assets.................................... 124,253 239,091
Valuation allowance for deferred tax assets....................... -- --
-------- --------
Net deferred tax assets........................................... 124,253 239,091
-------- --------
Net deferred tax liabilities...................................... $361,170 $242,928
-------- --------
-------- --------
</TABLE>
The (provision for) benefit from income taxes is comprised of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current.............................................. $ -- $ -- $ --
Deferred............................................. 194,660 (35,385) 118,242
-------- -------- --------
Total................................................ $194,660 $(35,385) $118,242
-------- -------- --------
-------- -------- --------
</TABLE>
F-42
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES -- (CONTINUED)
At December 31, 1995, the Company has aggregate net operating loss
carryforwards of $284,308 for federal tax reporting purposes, which expire
through 2010, if not utilized.
The difference between the actual income tax provision and the tax
provision computed by applying the statutory Federal income tax rate to earnings
before taxes is attributable to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1995
------- ---------
<S> <C> <C>
Expected provision for (benefit from) federal income taxes at
statutory rate of 35%........................................... $33,380 $(117,125)
Other, net........................................................ 2,005 (1,117)
------- ---------
Income tax (benefit) expense...................................... $35,385 $(118,242)
------- ---------
------- ---------
</TABLE>
8. LEASES
The Company leases certain equipment under capitalized leases. The cost of
such equipment at both December 31, 1994 and 1995 was $985,158. Accumulated
amortization was $238,714 and $345,349 at December 31, 1994 and 1995,
respectively.
The Company also leases office and clinic space under noncancelable lease
arrangements. Future minimum payments under capital and noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
1996........................................................ $ 187,200 $ 1,203,430
1997........................................................ 187,200 1,203,430
1998........................................................ 187,200 1,203,430
1999........................................................ 187,200 1,203,430
2000........................................................ 187,200 1,203,430
Thereafter.................................................. 374,400 9,589,883
---------- -----------
Total minimum lease payments................................ 1,310,400 $15,607,033
-----------
-----------
Less amount representing interest........................... (359,665)
----------
Present value of net minimum lease payments................. 950,735
Less current portion........................................ 100,038
----------
Long-term portion........................................... $ 850,697
----------
----------
</TABLE>
The Company leases office space from various partnerships whose partners
are officers and shareholders of the Company. Rent expense, substantially all to
related parties, for the years ended December 31, 1993, 1994 and 1995 totaled
$978,873, $1,055,884 and $1,295,037, respectively.
9. SUBSEQUENT EVENTS
In January 1996, the Company entered into additional equipment leases. The
aggregate payments on these leases are as follows: 1996--$55,643; 1997--$63,758;
1998--$73,522; 1999--$90,166; 2000--$76,635; thereafter--$235,299.
Effective November 12, 1996, the stockholders of the Company entered into a
tax-free exchange (the Exchange) with Specialty Care Network Inc. (SCN) in a
reorganization, whereby the stockholders of the Company agreed to exchange their
outstanding common stock for 1,196,793 shares of common stock of SCN. In
connection with the Exchange, SCN will provide administrative services and
manage the non-medical operations of the Company and enter into a long-term
service agreement with the
F-43
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS -- (CONTINUED)
physician stockholders of the Company, pursuant to which the physicians will
continue to provide medical services through a new entity. In addition, certain
of the Company's physician stockholders have purchased $310,000 of convertible
debentures of SCN that are convertible into common stock of SCN at $1 a share.
Before this exchange net assets of the outpatient surgery center of
approximately $577,000 were distributed to the shareholders.
The 401(k) and defined contribution pension plans were frozen as of the
date of the exchange transaction with all participants being fully vested in the
contributions that had been made to the plans.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the statements of operations,
stockholders' equity and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Tallahassee Orthopedic Clinic, Inc.
We have audited the accompanying balance sheets of Tallahassee Orthopedic
Clinic, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, l995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tallahassee Orthopedic Clinic,
Inc. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
------------------------------------
Ernst & Young LLP
Denver, Colorado
October 15, 1996
F-45
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
---------------------- ------------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 133,122 $ 74,803 $ 647,863
Accounts receivable, net.......................................... 2,391,173 2,248,046 2,611,574
Inventories....................................................... 22,210 55,720 68,224
Prepaid expenses and other current assets......................... 62,858 93,902 180,677
Due from related parties.......................................... 354,254 952,862 815,341
---------- ---------- ----------
Total current assets................................................ 2,963,617 3,425,333 4,323,679
Furniture, fixtures and equipment, net.............................. 142,042 2,044,174 1,744,788
Other assets........................................................ 138,595 12,110 9,540
---------- ---------- ----------
Total assets........................................................ $3,244,254 $5,481,617 $6,078,007
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable...................................................... $ -- $ 400,000 $ 400,000
Current portion of long-term debt................................. -- 389,218 409,708
Current portion of capital lease obligations...................... -- 52,797 49,976
Accounts payable.................................................. 142,006 261,030 113,613
Accrued compensation and benefits................................. 237,851 228,954 211,551
Accrued profit sharing contribution............................... 338,354 415,444 427,072
Accrued interest expense.......................................... -- 13,915 7,304
Due to related parties............................................ 207,851 27,718 201,173
---------- ---------- ----------
Total current liabilities........................................... 926,062 1,789,076 1,820,397
Long-term debt, less current portion................................ -- 1,211,857 896,077
Capital lease obligations, less current portion..................... -- 223,008 189,119
---------- ---------- ----------
Total liabilities................................................... 926,062 3,223,941 2,905,593
Commitments
Stockholders' equity:
Common stock, $1 par value:
Authorized 5,000 shares, issued and outstanding shares --
900 in 1994 and 1,100 in 1995............................ 900 1,100 1,100
Additional paid-in capital.................................. 157,221 202,473 213,786
Retained earnings........................................... 2,160,071 2,263,880 3,167,305
Treasury stock.............................................. -- (209,777) (209,777)
---------- ---------- ----------
Total stockholders' equity........................................ 2,318,192 2,257,676 3,172,414
---------- ---------- ----------
Total liabilities and stockholders' equity........................ $3,244,254 $5,481,617 $6,078,007
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-46
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............................ $8,040,293 $9,455,216 $10,420,265 $7,470,881 $10,053,710
Operating expenses:
Physician compensation............... 2,910,131 3,562,535 3,473,978 2,597,561 3,052,624
Salaries and benefits................ 2,700,058 3,194,994 4,028,185 2,993,544 3,453,082
Supplies, general and administrative
expenses.......................... 2,146,522 2,308,263 2,471,876 1,847,229 2,133,338
Depreciation and amortization........ 22,459 38,063 224,054 168,041 394,337
---------- ---------- ----------- ---------- -----------
Total operating expenses............... 7,779,170 9,103,855 10,198,093 7,606,375 9,033,381
---------- ---------- ----------- ---------- -----------
Income (loss) from operations.......... 261,123 351,361 222,172 (135,494) 1,020,329
Interest expense....................... -- -- (118,363) (32,116) (116,904)
---------- ---------- ----------- ---------- -----------
Net income (loss)...................... $ 261,123 $ 351,361 $ 103,809 $ (167,610) $ 903,425
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
</TABLE>
See accompanying notes.
F-47
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER ADDITIONAL
OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
------- ------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992................. 600 $ 600 $ 89,343 $1,547,587 $ -- $1,637,530
Net income............................... -- -- -- 261,123 -- 261,123
Stock issued............................. 200 200 -- -- -- 200
------- -------- ---------- ---------- --------- ----------
Balance, December 31, 1993................. 800 800 89,343 1,808,710 -- 1,898,853
Net income............................... -- -- -- 351,361 -- 351,361
Stock issued............................. 100 100 -- -- -- 100
Additional contributed capital........... -- -- 67,878 -- -- 67,878
------- -------- ---------- ---------- --------- ----------
Balance, December 31, 1994................. 900 900 157,221 2,160,071 -- 2,318,192
Net income............................... -- -- 103,809 -- 103,809
Stock issued............................. 200 200 -- -- -- 200
Additional contributed capital........... -- -- 45,252 -- -- 45,252
Treasury stock purchased................. -- -- -- -- (209,777) (209,777)
------- -------- ---------- ---------- --------- ----------
Balance, December 31, 1995................. 1,100 1,100 202,473 2,263,880 (209,777) 2,257,676
Net income (unaudited)................... -- -- -- 903,425 -- 903,425
Additional contributed capital
(unaudited)............................ -- -- 11,313 -- -- 11,313
------- -------- ---------- ---------- --------- ----------
Balance, September 30, 1996 (unaudited).... 1,100 $1,100 $213,786 $3,167,305 $(209,777) $3,172,414
------- -------- ---------- ---------- --------- ----------
------- -------- ---------- ---------- --------- ----------
</TABLE>
See accompanying notes.
F-48
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
--------------------------------- ---------------------
1993 1994 1995 1995 1996
---------- --------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 261,123 $ 351,361 $ 103,809 $ (167,610) $ 903,425
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 22,459 38,063 224,054 168,041 394,337
Changes in assets and liabilities:
Accounts receivable, net.............................. (48,024) (321,378) 143,127 136,811 (363,528)
Inventories........................................... (4,487) (6,385) (33,510) (25,133) (12,504)
Prepaid expenses and other current assets............. 57,040 (34,948) (31,044) (30,109) (86,775)
Due from related parties.............................. (294,163) (22,366) (598,608) (419,070) 137,521
Other assets.......................................... -- (138,595) 126,485 125,295 2,570
Accounts payable...................................... 29,125 58,441 119,024 49,525 (147,417)
Accrued compensation and benefits..................... 7,914 79,692 (8,897) 99,735 (17,403)
Accrued profit sharing contribution................... (83,103) 56,151 77,090 (12,095) 11,628
Accrued interest expense.............................. -- -- 13,915 -- (6,611)
Due to related parties................................ (48,000) 103,101 (180,133) (175,231) 173,455
---------- --------- ---------- ---------- ---------
Net cash provided by (used in) operating activities....... (100,116) 163,137 (44,688) (249,841) 988,698
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment............ (34,420) (118,730) (1,830,466) (1,759,209) (94,951)
---------- --------- ---------- ---------- ---------
Net cash used in investing activities..................... (34,420) (118,730) (1,830,466) (1,759,209) (94,951)
FINANCING ACTIVITIES
Proceeds from long-term debt.............................. -- -- 1,500,000 1,500,000 --
Proceeds from note payable................................ -- -- 400,000 400,000 --
Principal payments on long-term debt and capital lease
obligations............................................. -- -- (128,617) (14,311) (332,000)
Additional stock and contributed capital.................. 200 67,978 45,452 45,452 11,313
---------- --------- ---------- ---------- ---------
Net cash provided by (used in) financing activities....... 200 67,978 1,816,835 1,931,141 (320,687)
---------- --------- ---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents...... (134,336) 112,385 (58,319) (77,909) 573,060
Cash and cash equivalents at beginning of year............ 155,073 20,737 133,122 133,122 74,803
---------- --------- ---------- ---------- ---------
Cash and cash equivalents at end of year.................. $ 20,737 $ 133,122 $ 74,803 $ 55,213 $ 647,863
---------- --------- ---------- ---------- ---------
---------- --------- ---------- ---------- ---------
Supplemental noncash investing and financing activities:
Acquisition of furniture, fixtures and equipment under
capital lease obligations............................. $ -- $ -- $ 295,720 $ 150,059 $ --
Purchase of treasury stock for long-term debt........... $ -- $ -- $ 209,777 $ 209,777 $ --
</TABLE>
See accompanying notes.
F-49
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND
SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Tallahassee Orthopedic Clinic, Inc. is an orthopedic physician practice
which services the surrounding communities in northern Florida, southern Georgia
and southern Alabama. The Company is organized as a professional corporation
under the laws of the state of Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity, and contractual adjustments. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and long-term debt. The carrying amounts
reported in the balance sheets for these items approximate fair value.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated claims-made commercial insurance policy.
Income Taxes
The Company is a Subchapter S corporation under the Internal Revenue Code,
and, accordingly, is not taxed as a separate entity. The Company's taxable
income or loss is allocated to each stockholder and recognized as taxable income
on their individual tax returns.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-50
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Gross patient accounts receivable............................. $4,899,975 $4,893,690
Less allowances for contractual adjustments and
uncollectibles.............................................. 2,508,802 2,645,644
---------- ----------
$2,391,173 $2,248,046
---------- ----------
---------- ----------
</TABLE>
Net revenue consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Gross patient revenue................................ $12,909,244 $16,252,825 $18,394,960
Less contractual adjustments and uncollectibles...... 4,868,951 6,797,609 7,974,695
----------- ----------- -----------
$ 8,040,293 $ 9,455,216 $10,420,265
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Concentration of credit risk related to accounts receivable is limited by
the diversity and number of providers, patients and payors.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
-------- ----------
<S> <C> <C>
Furniture and fixtures.......................................... $ 79,417 $ 149,728
Equipment....................................................... 337,250 2,340,706
Computer software............................................... 48,003 100,522
-------- ----------
464,670 2,590,956
Less accumulated depreciation and amortization.................. 322,628 546,782
-------- ----------
$142,042 $2,044,174
-------- ----------
-------- ----------
</TABLE>
F-51
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTE PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
----------- ----------
<S> <C> <C>
Note payable to a bank, due in monthly installments of $38,768
including interest at .5% plus the First Union National Bank's
prime rate, maturing in May 1999.............................. $ -- $1,391,298
Note payable to former shareholder, due in monthly installments
of $6,250 including interest at 8.5%, maturing in June 1999... -- 209,777
----------- ----------
-- 1,601,075
Less current portion............................................ -- 389,218
----------- ----------
$ -- $1,211,857
----------- ----------
----------- ----------
</TABLE>
At December 31, 1995, the aggregate maturities of long-term debt are as
follows: 1996-$389,218; 1997-$445,573; 1998-$489,111; 1999-$277,173.
The proceeds from the First Union National Bank note, along with additional
contributed capital in 1995 and 1994 from all physician shareholders, was used
to purchase a Magnetic Resonance Imaging unit.
In September 1995, the Company borrowed $400,000 in the form of a note from
Barnett Bank of Tallahassee. Principal was due in one payment when the note
matured on September 8, 1996. This payment was not made by the Company. Barnett
Bank extended the note to December 8, 1996. Interest is payable quarterly
beginning December 1995 at an interest rate equal to .25% plus the bank's prime
rate. Borrowings are collateralized by the assets of the Company.
Interest paid for the year ended December 31, 1995 was $104,448.
6. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that covers all employees that have
completed a year of service and have attained the age of 21. The Company
contributes a discretionary amount which is allocated proportionately based upon
the salaries of participating employees. The profit sharing plan expense was
$312,248, $344,456 and $429,682 for the years ended December 31, 1993, 1994 and
1995, respectively.
7. RELATED PARTY TRANSACTIONS
Due from related parties consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995
-------- --------
<S> <C> <C>
Officer salary advances........................................... $ 89,046 $203,160
Due from Tallahassee Orthopedic Center, L.C....................... 195,208 688,702
Due from Haney, Henderson et al Rental Partnership................ 70,000 61,000
-------- --------
$354,254 $952,862
-------- --------
-------- --------
</TABLE>
F-52
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS -- (CONTINUED)
Due to related parties consisted of the following:
DECEMBER 31
-----------------
1994 1995
-------- -------
Due to TOC Imaging, Inc................................$ 57,122 $18,968
Consulting fees payable................................ 60,750 8,750
Advances from officers................................. 89,979 --
-------- -------
$207,851 $27,718
-------- -------
-------- -------
The Company leases its primary facility from Tallahassee Orthopedic Center,
L.C. which is controlled by the shareholders. Rent expense resulting from this
lease for the years ended December 1, 1993, 1994 and 1995 was $451,831, $520,626
and $579,765, respectively.
8. LEASES
The Company leases certain equipment under capitalized leases. The cost and
net book value of such equipment at December 31, 1995 was $295,720.
The Company also leases office and clinic space under noncancelable lease
arrangements. Future minimum payments under capital and noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1996............................................................ $ 75,779 $ 322,253
1997............................................................ 69,972 590,394
1998............................................................ 69,972 590,394
1999............................................................ 69,972 590,394
2000............................................................ 55,333 567,844
Thereafter...................................................... -- 5,360,883
-------- ----------
Total minimum lease payments.................................... 341,028 $8,022,162
----------
----------
Less amount representing interest............................... (65,223)
--------
Present value of net minimum lease payments..................... 275,805
Less current portion............................................ 52,797
--------
Long-term portion............................................... $223,008
--------
--------
</TABLE>
The Company leases its office facilities on an annual basis. Rent expense,
substantially all to related parties, for the years ended December 31, 1993,
1994 and 1995 totaled $560,779, $521,894 and $630,715, respectively.
9. SUBSEQUENT EVENT
Effective November 12, 1996, the Company entered into a tax-free merger
(the Merger) with Specialty Care Network, Inc. (SCN) in a reorganization,
whereby the stockholders of the Company agreed to exchange their outstanding
common stock for 1,072,414 shares of common stock of SCN. In connection with the
Merger, SCN will provide administrative services and manage the non-medical
operations of the Company and enter into a long-term service agreement with the
physician stockholders of the Company, pursuant to which the physicians will
continue to provide medical services through a new entity. In addition, certain
of the Company's physician stockholders have purchased $300,000 of convertible
debentures of SCN at $3 a share.
F-53
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the statements of income,
stockholders' equity and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
11. PRO FORMA TAX INFORMATION (UNAUDITED)
As discussed elsewhere in these footnotes, the Company operates under
Subchapter S of the Internal Revenue Code and is not subject to corporate
federal or state income taxes. In connection with the merger with Specialty Care
Network, Inc. (see Note 9), the Subchapter S election was terminated. As a
result, the Company will be subject to federal and state corporate income taxes
subsequent to the termination of the Subchapter S status. The Company had net
operating income for income tax purposes of $270,890, $370,548 and $139,549 for
the years ended December 31, 1993, 1994 and 1995, respectively. The
corresponding net operating income (loss) for income tax purposes for the nine
months ended September 30, 1995 and 1996 was $(140,805) and $924,198,
respectively. Had the Company filed federal and state income tax returns as a
regular Subchapter C corporation, the income tax expense (benefit) under the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, would have been as follows:
Year ended December 31, 1993............................. $104,645
Year ended December 31, 1994............................. 143,143
Year ended December 31, 1995............................. 53,908
Nine months ended September 30, 1995..................... (54,393)
Nine months ended September 30, 1996..................... 357,018
At the date of termination of the Subchapter S corporation status, the
Company will be required to provide deferred taxes for the cumulative temporary
differences between financial reporting and tax reporting bases of assets and
liabilities. Such deferred taxes will be based on the cumulative temporary
differences at the date of termination of the Subchapter S corporation status.
The effect of recognizing the deferred taxes will be included in income
from continuing operations. If the termination of the Subchapter S corporation
status had occurred at September 30, 1996, the net deferred tax liability would
have been approximately $1,045,422.
F-54
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Greater Chesapeake Orthopaedic Associates, LLC
We have audited the accompanying balance sheets of Greater Chesapeake
Orthopaedic Associates, LLC as of December 31, 1994 and 1995, and the related
statements of operations, members' equity, and cash flows for the period October
17, 1994 (inception) through December 31, 1994 and the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Greater Chesapeake Orthopaedic
Associates, LLC as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period October 17, 1994 (inception)
through December 31, 1994 and the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------------------------
Ernst & Young LLP
Denver, Colorado
October 11, 1996
F-55
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 12,025 $ 150,217 $ 448,196
Accounts receivable, net............................... 1,056,949 1,257,081 1,136,958
Prepaid expenses....................................... 45,920 229,424 49,892
---------- ---------- ----------
Total current assets 1,114,894 1,636,722 1,635,046
Furniture, fixtures and equipment, net................... -- 20,187 18,992
Intangibles, net......................................... 35,578 28,153 22,584
---------- ---------- ----------
Total assets............................................. $1,150,472 $1,685,062 $1,676,622
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 20,224 $ 19,340 $ 30,287
Accrued compensation and benefits...................... 982,391 1,313,971 1,431,935
Due to related parties................................. 66,359 72,682 122,932
---------- ---------- ----------
Total current liabilities................................ 1,068,974 1,405,993 1,585,154
Commitments
Members' equity.......................................... 81,498 279,069 91,468
---------- ---------- ----------
Total liabilities and members' equity.................... $1,150,472 $1,685,062 $1,676,622
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-56
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 17,
1994
(INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30
DECEMBER 31, DECEMBER 31, ------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue........................................ $1,542,250 $8,207,951 $5,855,525 $6,208,360
Operating expenses:
Physician compensation........................... 1,387,789 6,432,601 4,567,310 4,580,750
Salaries and benefits............................ 200,941 1,113,570 838,811 948,270
Supplies, general and administrative expenses.... 238,485 1,003,915 773,756 965,778
Depreciation and amortization.................... 1,547 12,338 8,127 12,205
---------- ---------- ---------- ----------
Total operating expenses........................... 1,828,762 8,562,424 6,188,004 6,507,003
Loss from operations............................... (286,512) (354,473) (332,479) (298,643)
Interest income (expense), net..................... 205 5,294 18,183 26,575
---------- ---------- ---------- ----------
Net loss........................................... $ (286,717) $ (349,179) $ (314,296) $ (272,068)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-57
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
MEMBER EARNINGS MEMBERS'
CONTRIBUTIONS (DEFICIT) EQUITY
------------- ---------- ----------
<S> <C> <C> <C>
Balance, October 17, 1994................................. $ -- $ -- $ --
Contributions from members.............................. 368,215 -- 368,215
Net loss................................................ -- (286,717) (286,717)
-------- --------- ---------
Balance, December 31, 1994................................ 368,215 (286,717) 81,498
Contributions from members.............................. 546,750 -- 546,750
Net loss................................................ -- (349,179) (349,179)
-------- --------- ---------
Balance, December 31, 1995................................ 914,965 (635,896) 279,069
Contributions from members
(unaudited).......................................... 84,467 -- 84,467
Net loss (unaudited).................................... -- (272,068) (272,068)
-------- --------- ---------
Balance, September 30, 1996
(unaudited)............................................. $999,432 $(907,964) $ 91,468
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
F-58
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 17,
1994
(INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30
DECEMBER 31, DECEMBER 31, -------------------------
1994 1995 1995 1996
------------- ------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $ (286,717) $(349,179) $(314,296) $(272,068)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................ 1,547 12,338 8,127 12,205
Changes in assets and liabilities:
Accounts receivable, net.................. (1,056,949) (200,132) (150,247) 120,123
Other assets.............................. (83,045) (183,504) 672 179,532
Accounts payable.......................... 20,224 (884) (4,195) 10,947
Due to related parties.................... 66,359 6,323 14,906 50,250
Accrued compensation and benefits......... 982,391 331,580 263,346 117,964
----------- --------- --------- ---------
Net cash used in operating activities............. (356,190) (383,458) (181,687) 218,953
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment.... -- (25,100) (17,590) (5,441)
----------- --------- --------- ---------
Net cash used in investing activities............. -- (25,100) (17,590) (5,441)
FINANCING ACTIVITIES
Contributions from members........................ 368,215 546,750 356,560 84,467
----------- --------- --------- ---------
Net cash provided by financing activities......... 368,215 546,750 356,560 84,467
----------- --------- --------- ---------
Net increase in cash and cash equivalents......... 12,025 138,192 157,283 297,979
Cash and cash equivalents at beginning of year.... -- 12,025 12,025 150,217
----------- --------- --------- ---------
Cash and cash equivalents at end of year.......... $ 12,025 $ 150,217 $ 169,308 $ 448,196
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-59
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND 1996 AND SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Greater Chesapeake Orthopaedic Associates, LLC (the Company) is an
orthopaedic physician practice which services the surrounding communities of
Baltimore, Maryland. The Company was formed on October 17, 1994, by a group of
eight physicians (the founding members) who desired to form a limited liability
company under the laws of the state of Maryland.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Limited Liability Company (LLC)
An LLC is an unincorporated association of two or more persons, whose
members have limited personal liability for the obligations or debts of the
entity. For federal income tax purposes, the entity is classified as a
partnership.
Under the Company's operating agreement, the Company is dissolved upon the
death, insanity, withdrawal, bankruptcy or expulsion of a member, or the
occurrence of any other event which terminates the continued membership of a
member in the Company (a Dissolution Event), unless a majority of the remaining
members, including in any event, all of the remaining founding members, consent
to the continuation of the business of the Company within 90 days of the
Dissolution Event. Notwithstanding the above, the Company will terminate on
October 17, 2044.
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity, and contractual adjustments. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
F-60
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Intangible Assets
Intangible assets consist of organization costs, and are amortized using
the straight-line method over five years.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated claims-made commercial insurance policy.
Physician Compensation
As the Company's Operating Agreement does not separate amounts to be paid
to the member physician owners between member distributions and physician
compensation, all payments to physicians have been classified as physician
compensation.
Income Taxes
No provision for income taxes has been provided since the members report
their distributive shares of income and deductions of the LLC in their personal
capacities, pursuant to election under Subchapter K of the Internal Revenue
Code.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
F-61
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
---------- ----------
<S> <C> <C>
Gross patient accounts receivable............................. $2,264,890 $3,833,238
Less allowances for contractual adjustments and
uncollectibles.............................................. 1,207,941 2,576,157
---------- ----------
$1,056,949 $1,257,081
---------- ----------
---------- ----------
</TABLE>
Net revenue consists of the following:
<TABLE>
<CAPTION>
OCTOBER 17,
1994
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Gross patient revenue....................................... $3,408,509 $19,735,533
Less contractual adjustments and uncollectibles............. 1,866,259 11,527,582
---------- -----------
$1,542,250 $ 8,207,951
---------- -----------
---------- -----------
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
--------- -------
<S> <C> <C>
Furniture, fixtures and equipment.................................... $ -- $25,100
Less accumulated depreciation and amortization....................... $ -- 4,913
--------- -------
$ -- $20,187
--------- -------
--------- -------
</TABLE>
5. LINE OF CREDIT
In November 1995, the Company entered into a $250,000 line of credit with
NationsBank, N.A., all of which was available at December 31, 1995. Any amounts
outstanding under the line of credit mature December 21, 1996. Borrowings under
the line of credit bear an interest rate equal to .75% plus the NationsBank,
N.A. prime rate, published periodically; and borrowings are collateralized by
the assets of the Company.
6. RELATED PARTY TRANSACTIONS
The Company rents the clinic facility and certain equipment from University
Property Management and Associates, LLC (UPM&A). Seven of the eight physician
owners of the Company are the owners of UPM&A. Facility and equipment rent
expense owed to UPM&A was $89,031 and $427,150 for the period October 17, 1994
(inception) through December 31, 1994 and the year ended December 31, 1995,
respectively.
F-62
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LEASES
The Company leases its clinic facility from UPM&A under a noncancelable
operating lease arrangement. Future minimum payments under noncancelable
operating leases are as follows:
OPERATING
LEASES
----------
1996........................................................... $ 382,959
1997........................................................... 382,959
1998........................................................... 422,260
1999........................................................... 417,431
2000 and thereafter............................................ 3,741,730
----------
Total minimum lease payments................................... $5,347,339
----------
----------
8. SUBSEQUENT EVENT
Effective November 12, 1996, the Company entered into an Asset Exchange
Agreement (the Agreement) with Specialty Care Network Inc. (SCN), whereby the
Company agreed to exchange certain of its assets and liabilities, in exchange
for 1,568,922 shares of common stock of SCN. In connection with the Agreement,
SCN will provide administrative services and manage the non-medical operations
of the Company and enter into a long-term service agreement with the physician
members of the Company, pursuant to which the physicians will continue to
provide medical services.
9. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the statements of operations,
member's equity and cash flows for the nine months ended September 30, 1995 and
1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
10. PRO FORMA TAX INFORMATION (UNAUDITED)
As discussed elsewhere in these footnotes, the Company is classified as a
partnership for federal income tax purposes and is not subject to corporate
federal or state income taxes. In connection with the Agreement with Specialty
Care Network, Inc. (see Note 8) the Company will be subject to federal and state
corporate income taxes. The Company had net operating loss for income tax
purposes of $286,717 and $347,826 for the period October 17, 1994 (inception)
through December 31, 1994 and the year ended December 31, 1995, respectively.
The corresponding net operating loss for income tax purposes for the nine months
ended September 30, 1995 and 1996 was $314,296 and $533,839, respectively. Had
the Company filed federal and state income tax returns as a regular Subchapter C
corporation, the income tax benefit under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, would have
been as follows:
F-63
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. PRO FORMA TAX INFORMATION (UNAUDITED)--(CONTINUED)
<TABLE>
<S> <C>
Period October 17, 1994 (inception) through December 31, 1994...................... $109,669
Year ended December 31, 1995....................................................... 133,043
Nine months ended September 30, 1995............................................... 120,218
Nine months ended September 30, 1996............................................... 204,193
</TABLE>
The effect of recognizing the deferred taxes will be included in income
from continuing operations. If the Agreement had been entered into at September
30, 1996, the net deferred tax liability would have been approximately $438,133.
F-64
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Vero Orthopaedics, P.A.
We have audited the accompanying balance sheets of Vero Orthopaedics, P.A. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, l995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vero Orthopaedics, P.A. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------------------------
Ernst & Young LLP
Denver, Colorado
August 20, 1996
F-65
<PAGE>
VERO ORTHOPAEDICS, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
-------------------- ------------
1994 1995 1996
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 65,907 $ 11,464 $ 135,228
Accounts receivable, net............................................ 435,065 592,157 564,425
Due from related parties............................................ 56,108 67,432 40,692
Prepaid expenses.................................................... -- -- 32,367
---------- --------- ---------
Total current assets.................................................. 557,080 671,053 772,712
Furniture, fixtures and equipment, net................................ 161,106 116,053 72,671
Net assets of discontinued operations................................. 743,395 -- --
Other assets.......................................................... 964 1,070 1,070
---------- --------- ---------
Total assets.......................................................... $1,462,545 $ 788,176 $ 846,453
---------- --------- ---------
---------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term notes payable.......................... $ 172,879 $ 203,514 $ 82,000
Current portion of capital lease obligations........................ 62,388 62,388 32,808
Accounts payable.................................................... -- -- 13,245
Income tax payable.................................................. -- -- 107,994
Accrued compensation and benefits................................... 155,860 62,210 40,676
---------- --------- ---------
Total current liabilities............................................. 391,127 328,112 276,723
Deferred tax liability................................................ 71 100,745 124,776
Notes payable, less current portion................................... 265,412 81,899 --
Capital lease obligations, less current portion....................... 74,342 20,076 9,747
---------- --------- ---------
Total liabilities..................................................... 730,952 530,832 411,246
Commitments
Stockholders' equity:
Common stock, $1 par value:
Authorized, issued and outstanding shares -- 100.................... 100 100 100
Additional paid-in capital.......................................... 683,950 683,950 683,950
Retained earnings (deficit)......................................... 65,664 (417,268) (242,939)
Less note receivable from stockholder............................... (18,121) (9,438) (5,904)
---------- --------- ---------
Total stockholders' equity.......................................... 731,593 257,344 435,207
---------- --------- ---------
Total liabilities and stockholders' equity............................ $1,462,545 $ 788,176 $ 846,453
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
F-66
<PAGE>
VERO ORTHOPAEDICS, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue...................... $2,545,263 $3,204,224 $4,208,470 $3,179,034 $2,953,351
Operating expenses:
Physician compensation......... 1,429,179 1,667,786 2,865,311 1,775,977 1,186,879
Salaries and benefits.......... 515,148 930,246 1,023,481 705,928 828,882
Supplies, general and
administrative expenses..... 683,231 740,494 786,036 603,183 571,716
Depreciation and
amortization................ 34,539 44,184 61,361 29,891 43,382
---------- ---------- ---------- ---------- ----------
Total operating expenses......... 2,662,097 3,382,710 4,736,189 3,114,979 2,630,859
---------- ---------- ---------- ---------- ----------
(116,834) (178,486) (527,719) 64,055 322,492
Interest expense, net............ (24,932) (23,779) (20,391) (15,738) (21,460)
Other income (expense), net...... -- (229) 6,460 843 5,322
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income
taxes.......................... (141,766) (202,494) (541,650) 49,160 306,354
Income tax benefit (expense)..... 49,618 69,646 (64,300) (5,021) (132,025)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations..................... (92,148) (132,848) (605,950) 44,139 174,329
Discontinued operations:
Income from operations (net of
income tax expense of
$10,500 and $30,874 for the
years ended December 31,
1994 and 1995, respectively
and $27,590 for the nine
months ended September 30,
1995)....................... -- 20,289 111,724 97,821 --
Gain on sale of investment in
discontinued operations (net
of income tax expense of
$5,500)..................... -- -- 11,294 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ (92,148) $ (112,559) $ (482,932) $ 141,960 $ 174,329
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-67
<PAGE>
VERO ORTHOPAEDICS, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE
NUMBER OF COMMON PAID-IN RETAINED FROM
SHARES STOCK CAPITAL EARNINGS STOCKHOLDER TOTAL
------ ------ ---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992............ 100 $100 $ -- $ 270,371 $ -- $ 270,471
Additional contributed capital...... -- -- 30,000 -- -- 30,000
Net loss............................ -- -- -- (92,148) -- (92,148)
----- ------ -------- --------- -------- ---------
Balance, December 31, 1993............ 100 100 30,000 178,223 -- 208,323
Additional contributed capital...... -- -- 653,950 -- (18,121) 635,829
Net loss............................ -- -- -- (112,559) -- (112,559)
----- ------ -------- --------- -------- ---------
Balance, December 31, 1994............ 100 100 683,950 65,664 (18,121) 731,593
Note payments....................... -- -- -- -- 8,683 8,683
Net loss............................ -- -- -- (482,932) -- (482,932)
----- ------ -------- --------- -------- ---------
Balance, December 31, 1995............ 100 100 683,950 (417,268) (9,438) 257,344
Note payments (unaudited)........... -- -- -- -- 3,534 3,534
Net income (unaudited).............. -- -- -- 174,329 -- 174,329
----- ------ -------- --------- -------- ---------
Balance, September 30, 1996
(unaudited)......................... 100 $100 $683,950 $(242,939) $ (5,904) $ 435,207
----- ------ -------- --------- -------- ---------
----- ------ -------- --------- -------- ---------
</TABLE>
See accompanying notes.
F-68
<PAGE>
VERO ORTHOPAEDICS, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ $ (92,148) $ (112,559) $ (482,932) $ 141,960 $ 174,329
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on sale of investment in discontinued
operations.................................... -- -- (16,794) -- --
Depreciation and amortization................... 34,539 44,184 61,361 29,891 43,382
Deferred income tax provision................... (49,618) (59,146) 100,674 100,140 24,031
Changes in assets and liabilities:
Accounts receivable, net...................... 242,170 193,258 (157,092) (54,059) 27,732
Due from related parties...................... 2,308 16,272 (11,324) 1,083 26,740
Prepaid expenses.............................. -- -- -- -- (32,367)
Other assets.................................. (4,549) 3,584 (106) (106) --
Accounts payable.............................. -- -- -- -- 13,245
Accrued compensation and benefits............. (33,110) 83,057 (93,650) (166) (21,534)
Income taxes payable.......................... -- -- -- -- 107,994
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities........................................ 99,592 168,650 (599,863) 218,743 363,552
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment...... (13,672) -- -- -- --
Net change in investment in discontinued operations
prior to sale..................................... -- -- (6,219) 5,391 --
Proceeds from sale of investment in discontinued
operations........................................ -- -- 750,100 -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities........................................ (13,672) -- 743,881 5,391 --
FINANCING ACTIVITIES
Principal payments on long-term debt and capital
lease obligations................................. (103,671) (143,019) (207,144) (164,599) (243,321)
Additional contributed capital...................... 30,000 -- 8,683 -- 3,533
---------- ---------- ---------- ---------- ----------
Net cash used in financing activities............... (73,671) (143,019) (198,461) (164,599) (239,788)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... 12,249 25,631 (54,443) 59,535 123,764
Cash and cash equivalents at beginning of year...... 28,027 40,276 65,907 65,907 11,464
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year............ $ 40,276 $ 65,907 $ 11,464 $ 125,442 $ 135,228
---------- ---------- ---------- ---------- ----------
Supplemental noncash investing and financing
activities:
Acquisition of furniture, fixtures and equipment
under capital lease........................... $ 237,339 $ -- $ -- $ -- $ --
Purchase of ownership interest for notes
payable....................................... $ -- $ 319,235 $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-69
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND
SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Vero Orthopaedics, P.A. (the Company) is an orthopaedic physician practice
which services the surrounding communities of Vero Beach and Sebastian, Florida.
The Company is organized as a professional corporation under the laws of the
state of Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity, and contractual adjustments. During the
years ended December 31, 1993, 1994 and 1995, the Company received approximately
75% of its net revenue from Medicare and Medicaid reimbursement programs which
reimburse orthopaedic services on a prospective payment system. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated claims-made commercial insurance policy.
Income Taxes
Deferred tax liabilities or assets (net of a valuation allowance) are
provided in the financial statements by applying the provisions of applicable
tax laws to measure the deferred tax consequences of temporary differences that
will result in net taxable or deductible amounts in future years as a result of
events recognized in the financial statements in the current or preceding years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-70
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and long-term notes payable. The
carrying amounts reported in the balance sheets for these items approximate fair
value.
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
-------- --------
<S> <C> <C>
Gross patient accounts receivable................................. $714,155 $877,346
Less allowances for contractual adjustments and uncollectibles.... 279,090 285,189
-------- --------
$435,065 $592,157
-------- --------
-------- --------
</TABLE>
Net revenue consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Gross patient revenue.................................... $3,249,198 $3,884,516 $5,146,178
Less contractual adjustments and
uncollectibles......................................... 703,935 680,292 937,708
---------- ---------- ----------
$2,545,263 $3,204,224 $4,208,470
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment................................. $332,533 $332,533
Less accumulated depreciation and amortization.................... 171,427 216,480
-------- --------
$161,106 $116,053
-------- --------
-------- --------
</TABLE>
F-71
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
-------- --------
<S> <C> <C>
Notes payable to a bank, due in monthly installments of $6,208
plus interest at .5% plus the Barnett Banks, Inc. prime rate,
maturing in 1997................................................ $161,403 $ 86,910
Notes payable to individual, due in monthly installments of $5,700
including interest at 6%, maturing in 1997...................... 143,628 82,174
Notes payable to individual, due in monthly installments of
$4,000, including interest at 6%, maturing in 1997.............. 133,260 96,329
Line of credit.................................................... -- 20,000
-------- --------
438,291 285,413
Less current portion.............................................. 172,879 203,514
-------- --------
$265,412 $ 81,899
-------- --------
-------- --------
</TABLE>
At December 31, 1995, the aggregate maturities of long-term debt are as
follows: 1996 -- $203,514; 1997 -- $81,899.
The Company has a $100,000 line of credit with Barnett Banks, Inc., of
which $80,000 was available at December 31, 1995, that matures December 21,
1996. Borrowings under the line of credit bear an interest rate equal to .5%
plus the Barnett Banks, Inc. prime rate, published periodically, and borrowings
are collateralized by the assets of the Company. Accounts receivable
collateralize the notes payable to the bank.
Interest expense approximates interest paid.
6. BENEFIT PLANS
The Company has a profit sharing plan for its employees. Employees are
eligible to participate if they have completed more than one thousand hours of
service with the Company in a given year and are over the age of eighteen. The
Company contributes a discretionary amount which is allocated proportionally
based upon the salaries of participating employees. The retirement plan expense
was approximately $179,000, $165,000 and $127,000 for the years ended December
31, 1993, 1994 and 1995, respectively.
F-72
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1994 1995
------- --------
<S> <C> <C>
Deferred tax liabilities:
Capitalized lease................................................ $30,622 $ 46,770
Cash-to-accrual adjustment....................................... 11,813 105,112
------- --------
Total deferred tax liabilities................................ 42,435 151,882
------- --------
Deferred tax assets:
Net operating loss carryforward.................................. 10,018 4,779
Depreciation and amortization.................................... 32,346 46,358
------- --------
Total deferred tax assets..................................... 42,364 51,137
Valuation allowance for deferred tax assets........................ -- --
------- --------
Net deferred tax assets............................................ 42,364 51,137
------- --------
Net deferred tax liabilities....................................... $ 71 $100,745
------- --------
------- --------
</TABLE>
The (provision for) benefit from income taxes is comprised of the
following:
YEAR ENDED DECEMBER 31
---------------------------
1993 1994 1995
------- ------- ---------
Current..................................... $ -- $ -- $ --
Deferred.................................... 49,618 59,146 (100,674)
------- ------- ---------
Total....................................... $49,618 $59,146 $(100,674)
------- ------- ---------
------- ------- ---------
At December 31, 1995, the Company has aggregate net operating loss
carryforwards of $13,653 for federal tax reporting purposes, which expire
beginning 2007 through 2008, if not utilized.
The difference between the actual income tax provision and the tax
provision computed by applying the statutory Federal income tax rate to earnings
before taxes is attributable to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995
-------- ----------
<S> <C> <C>
Expected benefit from federal income taxes at statutory rate of
35%............................................................ $(70,873) $(189,578)
Divestitures..................................................... -- 227,330
Other, net....................................................... 1,227 26,548
-------- ---------
Income tax (benefit) expense..................................... $(69,646) $ 64,300
-------- ---------
-------- ---------
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company rents the clinic office space and certain equipment from 1260
Associates, L.C. (1260 Corp.). The shareholders of the Company are stockholders
of 1260 Corp. Facility and equipment rent paid to 1260 Corp. was $141,098,
$150,168 and $150,168 for the years ended December 31, 1993, 1994 and 1995,
respectively.
The Company advances money to certain affiliates (1260 Corp. and the
individual stockholders) in exchange for notes receivable. As of December 31,
1993, 1994 and 1995, the amounts receivable are $66,317, $53,495, and $60,753,
respectively, from 1260 Corp. and $6,063, $2,613 and $5,996, respectively, from
the individual stockholders.
On October 1, 1994, the Company financed for a new physician stockholder
the purchase of one-fourth of the issued shares of the Company's stock from
existing stockholders for a note totaling
F-73
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS -- (CONTINUED)
$18,121. Principal and interest payments are due monthly until maturity at
October 20, 1996. The note bears 6% interest. The purchase of these issued
shares from existing stockholders has been reflected as an increase in
additional paid-in capital and the note receivable has been classified as a
reduction of stockholders' equity.
9. LEASES
The Company leases certain equipment under capitalized leases. The cost of
such equipment at both December 31, 1994 and 1995 was $237,339. Accumulated
amortization was $90,673 and $124,578 at December 31, 1994 and 1995,
respectively.
The Company also leases its clinic facility from 1260 Corp. under a
noncancelable operating lease arrangement. Future minimum payments under capital
and noncancelable operating leases are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1996..................................................... $62,388 $ 95,040
1997..................................................... 16,448 7,920
1998..................................................... 7,260 --
1999..................................................... 1,815 --
------- --------
Total minimum lease payments............................. 87,911 $102,960
--------
--------
Less amount representing interest........................ 5,447
-------
Present value of net minimum lease payments.............. 82,464
Less current portion..................................... 62,388
-------
Long-term portion........................................ $20,076
-------
-------
Rent expense for the years ended December 31, 1993, 1994 and 1995 totaled
$92,880, $95,040 and $95,040, respectively.
10. DISCONTINUED OPERATIONS
On December 27, 1995, the Company completed the sale of the net assets and
operations of Vero Physical Therapy (PT) to HealthSouth of Treasure Coast, Inc.
for $750,100. This sale was accounted for as discontinued operations and,
accordingly, the operations and assets sold related to this discontinued
business have been segregated in the accompanying financial statements. Revenues
from the PT operations, originally acquired by the Company in 1994, were
approximately $229,000 and $900,000 for the years ended December 31, 1994 and
1995, respectively. Net assets of discontinued operations are composed primarily
of accounts receivable and goodwill.
11. SUBSEQUENT EVENT
Effective November 12, 1996, the Company entered into a tax-free merger
(the Merger) with Specialty Care Network, Inc. (SCN) in a reorganization,
whereby the stockholders of the Company agreed to exchange their outstanding
common stock for approximately 651,607 shares of common stock of SCN. In
connection with the Merger, SCN will provide administrative services and manage
the non-medical operations of the Company and enter into a long-term service
agreement with the physician stockholders of the Company, pursuant to which the
physicians will continue to provide medical services through a new entity. In
addition, certain of the Company's physician stockholders have purchased
$115,000 of convertible debentures of SCN that are convertible into common stock
of SCN of $1 a share.
F-74
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the statements of operations,
stockholders' equity and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
On January 8, 1997, SCN was sued by Michael A. Feiertag, M.D. (a former
physician at the Company) for alleged breach of his employment agreement. Dr.
Feiertag is seeking damages in excess of $500,000. SCN intends to file an answer
to the complaint denying liability and intends to vigorously contest the action.
SCN and the Company believe that the ultimate resolution of the case will not
have a material adverse effect on the Company's accompanying financial
statements. On February 3, 1997, SCN initiated proceedings to have the case
removed to the United States District Court for the Southern District of
Florida.
F-75
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 15
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 17
Selected Unaudited Financial Data.............. 18
Management's Discussion and
Analysis of Financial Condition and
Results of Operations........................ 22
Business....................................... 26
Management..................................... 42
Certain Transactions........................... 49
Principal and Selling Stockholders............. 51
Description of Capital Stock................... 53
Shares Eligible for Future Sale................ 54
Underwriting................................... 55
Notice to Canadian Residents................... 56
Legal Matters.................................. 57
Experts........................................ 57
Additional Information......................... 57
Index to Financial Statements.................. F-1
------------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
Specialty Care Network, Inc.
3,198,062 Shares
Common Stock
($.001 par value)
P R O S P E C T U S
Credit Suisse First Boston
Equitable Securities
Corporation
Lehman Brothers
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table set forth fees payable to the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and The Nasdaq
Stock Market and other expenses expected to be incurred in connection with the
issuance and distribution of the securities being registered. All the fees and
expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee..................................... $ 13,063
National Association of Securities Dealers, Inc. Filing Fee............................. 4,604
The Nasdaq Stock Market Listing Fee..................................................... 50,000
Printing Expenses....................................................................... 150,000
Legal Fees and Expenses................................................................. 400,000
Accounting Fees and Expenses............................................................ 400,000
Blue Sky Qualification Fees and Expenses (including counsel fees)....................... 7,500
Transfer Agent Fees and Expenses........................................................ 2,500
Miscellaneous Expenses.................................................................. 82,333
----------
Total.............................................................................. $1,110,000
----------
----------
</TABLE>
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law (the 'DGCL')
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of directors
to the corporation or its stockholders for monetary damages for breaches of
fiduciary duty, except for liability (a) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the DGCL, or (d) for any transaction from which
the director derived an improper personal benefit. Article 7 of the registrant's
Certificate of Incorporation provides that the personal liability of directors
of the registrant is eliminated to the fullest extent permitted by Section
102(b)(7) of the DGCL.
Under Section 145 of the DGCL, a corporation has the power to indemnify
directors and officers under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorney's
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of being a director or officer of the
corporation if it is determined that the director or officer acted in accordance
with the applicable standard of conduct set forth in such statutory provision.
Article 6 of the registrant's Bylaws provides that the registrant will indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reasons of the
fact that he is or was a director, officer, employee or agent of the registrant,
or is or was serving at the request of the registrant as a director, officer,
employee or agent of another entity, against certain liabilities, costs and
expenses. Article 6 further permits the agent of the registrant, or is or was
serving at the request of the registrant as a director, officer, employee or
agent of another entity, against any liability asserted against such person and
incurred by such person in any such capacity or arising out of his status as
such, whether or not the registrant would have the power to indemnify such
person against such liability under the DGCL.
The Company has purchased directors and officers liability insurance.
II-1
<PAGE>
15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 22, 1995, the date the Company was incorporated, the Company
has issued and sold the following unregistered securities:
1. On December 25, 1995, the Company issued 1,265,000 shares of Common
Stock to private investors for an aggregate price of $1,265 or $.001 per share.
In addition, on December 22, 1995, 500,000 Shares of Common Stock were issued to
an employee of the Company of which 425,000 shares were returned to the Company
in connection with the termination of such employee's employment with the
Company.
2. From January 15, 1996 through July 1, 1996, the Company issued
$1,869,999 of convertible debentures to private investors for an aggregate price
of $1,870,000. The convertible debentures bore interest at 5% per annum and were
converted at a rate of one share of Common Stock for each $1.00 of indebtedness
into 1,920,222 shares of Common Stock on November 12, 1996.
3. On October 1, 1996, the Company issued Debentures to a private investor
for an aggregate price of $300,000. The convertible debentures bore interest a
5% per annum and were converted at a rate of one share of common stock for each
$3.00 of indebtedness, into 100,569 shares of Common Stock on November 12, 1996.
4. On November 4, 1996, the Company issued 100,000 shares of Common Stock
to a private investor for an aggregate price of $300,000.
5. On November 12, 1996, in connection with the Initial Affiliation
Transactions, the Company entered into agreements with the Predecessor Practices
and issued an aggregate of 7,659,115 shares of Common Stock to the physician
owners of the Predecessor Practices. See 'Certain Transactions' for a more
detailed description of the Initial Affiliation Transactions.
The Company believes that the transactions described above were exempt from
registration under Section 4(2) of the Act because the subject securities were
sold to a limited group of persons, each of whom was believed to have been a
sophisticated investor or had a pre-existing business or personal relationship
with the Company or its management and was purchasing for investment without a
view to further distribution. Restrictive legends were placed on stock
certificates evidencing the shares and/or agreements relating to the right to
purchase such shares described above.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed as part of this registration
statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1 Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Amended and Restated Bylaws
5 Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered
10.1+ Specialty Care Network, Inc. 1996 Equity Compensation Plan
10.2+ Specialty Care Network, Inc. 1996 Incentive and Non-Qualified Stock Option Plan
10.3+ Employment Agreement dated as of April 1, 1996 by and between Specialty Care Network, Inc. and Kerry
R. Hicks
10.4+ Employment Agreement dated as of April 1, 1996 by and between Specialty Care Network, Inc. and
Patrick M. Jaeckle
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.5+ Employment Agreement dated as of March 11, 1996 by and between Specialty Care Network, Inc. and
William Behrens
10.6+ Employment Agreement dated as of February 22, 1996 by and between Specialty Care Network, Inc. and
Paul Davis
10.7+ Employment Agreement dated as of March 1, 1996 by and between Specialty Care Network, Inc. and Peter
A. Fatianow
10.8+ Employment Agreement dated as of March 1, 1996 by and between Specialty Care Network, Inc. and David
Hicks
10.9+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and Reconstructive
Orthopaedic Assocs., Inc.
10.10** Service Agreement dated as of November 12, 1996 by and between Specialty Care Network, Inc.,
Reconstructive Orthopaedic Associates II, P.C. and Richard H. Rothman, M.D., Robert E. Booth, Jr.,
M.D., Richard Balderston, M.D., Arthur R. Bartolozzi, M.D., William J. Hozack, M.D., Michael G.
Ciccotti, M.D., Todd J. Albert, M.D., Alexander R. Vaccaro, M.D. and Peter F. Sharkey, M.D.
10.11+ Letter agreement dated October 29, 1996 by and between Arthur R. Bartolozzi, M.D. and Specialty Care
Network, Inc.
10.12+ Letter agreement dated October 29, 1996 by and between Robert E. Booth, Jr., M.D. and Specialty Care
Network, Inc.
10.13+ Letter agreement dated November 11, 1996 by and between Richard H. Rothman, M.D. and Specialty Care
Network, Inc.
10.14+ Stock Exchange Agreement dated October 21, 1996 by and among Specialty Care Network, Inc. and Michael
N. Jolley, M.D., Harvey E. Smires, M.D., Robert N. Dunn, M.D., Jeffrey S. Abrams, M.D., Richard E.
Fleming, Jr., M.D., W. Thomas Gutowski, M.D., Steven R. Gecha, M.D., C. Alexander Moskwa, Jr., M.D.
and David M. Smith, M.D.
10.15** Service Agreement dated as of November 1, 1996, by and between Specialty Care Network, Inc., SCN of
Princeton, Inc., Princeton Orthopedic Associates II, P.A. and Michael N. Jolley, M.D., Harvey E.
Smires, M.D., Robert N. Dunn, M.D., Jeffrey S. Abrams, M.D., Richard E. Fleming, Jr., M.D., W. Thomas
Gutowski, M.D., Steven R. Gecha, M.D., C. Alexander Moskwa, Jr., M.D. and David M. Smith, M.D.
10.16+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and TOC Services,
Inc.
10.17** Service Agreement dated as of November 12, 1996 by and between TOC Specialists, P.L., (d/b/a
Tallahassee Orthopedic Clinic) TOC Services, Inc. (f/k/a Tallahassee Orthopedic Clinic, P.A.) and
Greg A. Alexander, M.D., David C. Berg, M.D., Richard E. Blackburn, M.D., Donald Dewey, M.D., Mark E.
Fahey, M.D., Tom C. Haney, M.D., William D. Henderson, Jr., M.D., Steve E. Jordan, M.D., J. Rick
Lyon, M.D., Kris D. Stowers, M.D., Robert L. Thornberry, M.D., Billy C. Weinstein, M.D. and Charles
H. Wingo, M.D.
10.18+ Asset Exchange Agreement dated as of November 12, 1996 by and among Specialty Care Network, Inc.,
Greater Chesapeake Orthopaedic Associates, L.L.C., Stuart D. Miller, M.D., Leslie S. Matthews, M.D.,
Paul L. Asdourian, M.D., Frank R. Ebert, M.D., Mark S. Myerson, M.D., John B. O'Donnell, M.D. and Lew
C. Schon, M.D.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.19** Service Agreement dated as of November 12, 1996 by and between Speciality Care Network, Inc., Greater
Chesapeake Orthopaedic Associates, L.L.C., Stuart D. Miller, M.D., Leslie S. Matthews, M.D., Paul L.
Asdourian, M.D., Frank R. Ebert, M.D., Mark S. Myerson, M.D., John B. O'Donnell, M.D. and Lew C.
Schon, M.D.
10.20+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and Vero
Orthopaedic, Inc.
10.21** Service Agreement dated as of November 12, 1996 by and between Specialty Care Network, Inc., Vero
Orthopaedics II, P.A. and James L. Cain, M.D., David W. Griffin, M.D., George K. Nichols, M.D., Peter
G. Wernicki, M.D. and Charlene Wilson, M.D.
10.22 Revolving Loan and Security Agreement dated as of November 1, 1996 among Specialty Care Network,
Inc., SCN of Princeton, Inc., NationsBank of Tennessee N.A. and NationsBank of Tennessee, N.A. as
Agent.
10.23+ Merger Agreement dated December 6, 1996 by and among Specialty Care Network, Inc., Riyaz H. Jinnah,
M.D., P.A. and Riyaz H. Hinnah, M.D.
10.24+ Merger Agreement dated December 6, 1996 by and among Specialty Care Network, Inc., Floyd Jaeggers,
M.D., P.C. and Floyd Jaggers, M.D.
10.25+ Merger Agreement dated December 6, 1996 by and among Specialty Care Nettwork, Inc., Medical
Rehabilitation Specialists, P.A. and Kirk J. Mauro, M.D.
10.26**,+ Term Sheet by and among Reconstructive Orthopaedic Associates II, P.C., Specialty Care Network, Inc.,
Robert E. Booth, Jr., M.D. and Arthur R. Bartolozzi, M.D.
10.27 Amendment to the Specialty Care Network, Inc. 1996 Incentive and Non-Qualified Stock Option Plan
11+ Statement re: computation of per share earnings
21 Subsidiary of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto)
24+ Powers of Attorney (included as part of the signature page hereof)
27+ Financial Data Schedule
</TABLE>
- ------------------
* To be filed by amendment.
** Portions of this exhibit were omitted and filed separately with the Secretary
of the Commission pursuant to an application for confidential treatment filed
with the Commission pursuant to Rule 406 under the Securities Act.
+ Previously filed.
(b) Financial Statement Schedules
None.
17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the registrant's Articles of Incorporation, its Bylaws,
the Underwriting Agreement, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for
II-4
<PAGE>
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in Lakewood, Colorado, on February 3, 1997.
SPECIALTY CARE NETWORK, INC.
By: /s/ Patrick M. Jaeckle
---------------------------------
Patrick M. Jaeckle
Executive Vice President of
Financial Development
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of
- ------------------------------------- Directors
Richard H. Rothman, M.D., Ph.D.
* Principal Executive Officer
- ------------------------------------- and Director
Kerry R. Hicks
/s/ Patrick M. Jaeckle Principal Financial Officer February 3, 1997
- ------------------------------------- and Director
Patrick M. Jaeckle
* Principal Accounting Officer
- ------------------------------------- Officer
D. Paul Davis
* Director
- -------------------------------------
Robert E. Booth, Jr., M.D.
* Director
- -------------------------------------
James L. Cain, M.D.
* Director
- -------------------------------------
Peter H. Cheesbrough
* Director
- -------------------------------------
Richard E. Fleming, Jr., M.D.
* Director
- -------------------------------------
Thomas C. Haney, M.D.
* Director
- -------------------------------------
Leslie S. Matthews, M.D.
* Director
- -------------------------------------
Wiliam C. Behrens
*By: /s/ Patrick M. Jaeckle February 3, 1997
--------------------------------
As Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1 Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Amended and Restated Bylaws
5 Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered
10.1+ Specialty Care Network, Inc. 1996 Equity Compensation Plan
10.2+ Specialty Care Network, Inc. 1996 Incentive and Non-Qualified Stock Option Plan
10.3+ Employment Agreement dated as of April 1, 1996 by and between Specialty Care Network, Inc. and Kerry
R. Hicks
10.4+ Employment Agreement dated as of April 1, 1996 by and between Specialty Care Network, Inc. and
Patrick M. Jaeckle
10.5+ Employment Agreement dated as of March 11, 1996 by and between Specialty Care Network, Inc. and
William Behrens
10.6+ Employment Agreement dated as of February 22, 1996 by and between Specialty Care Network, Inc. and
Paul Davis
10.7+ Employment Agreement dated as of March 1, 1996 by and between Specialty Care Network, Inc. and Peter
A. Fatianow
10.8+ Employment Agreement dated as of March 1, 1996 by and between Specialty Care Network, Inc. and David
Hicks
10.9+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and Reconstructive
Orthopaedic Assocs., Inc.
10.10** Service Agreement dated as of November 12, 1996 by and between Specialty Care Network, Inc.,
Reconstructive Orthopaedic Associates II, P.C. and Richard H. Rothman, M.D., Robert E. Booth, Jr.,
M.D., Richard Balderston, M.D., Arthur R. Bartolozzi, M.D., William J. Hozack, M.D., Michael G.
Ciccotti, M.D., Todd J. Albert, M.D., Alexander R. Vaccaro, M.D. and Peter F. Sharkey, M.D.
10.11+ Letter agreement dated October 29, 1996 by and between Arthur R. Bartolozzi, M.D. and Specialty Care
Network, Inc.
10.12+ Letter agreement dated October 29, 1996 by and between Robert E. Booth, Jr., M.D. and Specialty Care
Network, Inc.
10.13+ Letter agreement dated November 11, 1996 by and between Richard H. Rothman, M.D. and Specialty Care
Network, Inc.
10.14+ Stock Exchange Agreement dated October 21, 1996 by and among Specialty Care Network, Inc. and Michael
N. Jolley, M.D., Harvey E. Smires, M.D., Robert N. Dunn, M.D., Jeffrey S. Abrams, M.D., Richard E.
Fleming, Jr., M.D., W. Thomas Gutowski, M.D., Steven R. Gecha, M.D., C. Alexander Moskwa, Jr., M.D.
and David M. Smith, M.D.
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.15** Service Agreement dated as of November 1, 1996, by and between Specialty Care Network, Inc., SCN of
Princeton, Inc., Princeton Orthopedic Associates II, P.A. and Michael N. Jolley, M.D., Harvey E.
Smires, M.D., Robert N. Dunn, M.D., Jeffrey S. Abrams, M.D., Richard E. Fleming, Jr., M.D., W. Thomas
Gutowski, M.D., Steven R. Gecha, M.D., C. Alexander Moskwa, Jr., M.D. and David M. Smith, M.D.
10.16+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and TOC Services,
Inc.
10.17** Service Agreement dated as of November 12, 1996 by and between TOC Specialists, P.L., (d/b/a
Tallahassee Orthopedic Clinic) TOC Services, Inc. (f/k/a Tallahassee Orthopedic Clinic, P.A.) and
Greg A. Alexander, M.D., David C. Berg, M.D., Richard E. Blackburn, M.D., Donald Dewey, M.D., Mark E.
Fahey, M.D., Tom C. Haney, M.D., William D. Henderson, Jr., M.D., Steve E. Jordan, M.D., J. Rick
Lyon, M.D., Kris D. Stowers, M.D., Robert L. Thornberry, M.D., Billy C. Weinstein, M.D. and Charles
H. Wingo, M.D.
10.18+ Asset Exchange Agreement dated as of November 12, 1996 by and among Specialty Care Network, Inc.,
Greater Chesapeake Orthopaedic Associates, L.L.C., Stuart D. Miller, M.D., Leslie S. Matthews, M.D.,
Paul L. Asdourian, M.D., Frank R. Ebert, M.D., Mark S. Myerson, M.D., John B. O'Donnell, M.D. and Lew
C. Schon, M.D.
10.19** Service Agreement dated as of November 12, 1996 by and between Speciality Care Network, Inc., Greater
Chesapeake Orthopaedic Associates, L.L.C., Stuart D. Miller, M.D., Leslie S. Matthews, M.D., Paul L.
Asdourian, M.D., Frank R. Ebert, M.D., Mark S. Myerson, M.D., John B. O'Donnell, M.D. and Lew C.
Schon, M.D.
10.20+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and Vero
Orthopaedic, Inc.
10.21** Service Agreement dated as of November 12, 1996 by and between Specialty Care Network, Inc., Vero
Orthopaedics II, P.A. and James L. Cain, M.D., David W. Griffin, M.D., George K. Nichols, M.D., Peter
G. Wernicki, M.D. and Charlene Wilson, M.D.
10.22 Revolving Loan and Security Agreement dated as of November 1, 1996 among Specialty Care Network,
Inc., SCN of Princeton, Inc., Nations Bank of Tennessee, N.A. and Nations Bank of Tennessee, N.A., as
Agent.
10.23+ Merger Agreement dated December 6, 1996 by and among Specialty Care Network, Inc., Riyaz H. Jinnah,
M.D., P.A. and Riyaz H. Hinnah, M.D.
10.24+ Merger Agreement dated December 6, 1996 by and among Specialty Care Network, Inc., Floyd Jaeggers,
M.D., P.C. and Floyd Jaggers, M.D.
10.25+ Merger Agreement dated December 6, 1996 by and among Specialty Care Nettwork, Inc., Medical
Rehabilitation Specialists, P.A. and Kirk J. Mauro, M.D.
10.26**,+ Term Sheet by and among Reconstructive Orthopaedic Associates II, P.C., Specialty Care Network, Inc.,
Robert E. Booth, Jr., M.D. and Arthur R. Bartolozzi, M.D.
10.27 Amendment to the Specialty Care Network, Inc. 1996 Incentive and Non-Qualified Stock Option Plan
11+ Statement re: computation of per share earnings
21 Subsidiary of the Company
23.1 Consent of Ernst & Young LLP
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
<S> <C>
23.2 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto)
24+ Powers of Attorney (included as part of the signature page hereof)
27+ Financial Data Schedule
</TABLE>
- ------------------
* To be filed by amendment.
** Portions of this exhibit were omitted and filed separately with the Secretary
of the Commission pursuant to an application for confidential treatment filed
with the Commission pursuant to Rule 406 under the Securities Act.
+ Previously filed.
(iii)
3,198,062 Shares
SPECIALTY CARE NETWORK, INC.
Common Stock, par value $.001 per share
UNDERWRITING AGREEMENT
----------------------
February 6, 1997
CREDIT SUISSE FIRST BOSTON CORPORATION
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010
Dear Sirs:
1. Introductory. Specialty Care Network, Inc., a Delaware corporation
("Company"), proposes to issue and sell 3,000,000 shares of its Common Stock,
par value $.001 per share ("Securities") and the stockholders listed in Schedule
A hereto ("Selling Stockholders") propose severally to sell an aggregate of
198,062 outstanding shares of the Securities (such 3,198,062 shares of
Securities being hereinafter referred to as the "Firm Securities"). The Company
also proposes to issue and sell to the Underwriters, at the option of the
Underwriters, an aggregate of not more than 450,000 additional shares ("Optional
Securities") of its Securities as set forth below. The Firm Securities and the
Optional Securities are herein collectively called the "Offered Securities". The
Company and the Selling Stockholders hereby agree with the several Underwriters
named in Schedule B hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333-17627) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (A) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (B) is proposed to be amended by amendment or
post-effective amendment. If such registration statement ("initial
registration statement") has been declared effective, either (A) an
additional registration statement ("additional registration statement")
relating to the Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and,
<PAGE>
2
if so filed, has become effective upon filing pursuant to such Rule and the
Offered Securities all have been duly registered under the Act pursuant to
the initial registration statement and, if applicable, the additional
registration statement or (B) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (A) if the
Company has advised the Representatives that it does not propose to amend
such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the
Representatives that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect
to such additional registration statement means the date and time as of
which such registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the date
of the Effective Time thereof. The initial registration statement, as
amended at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of the
initial registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form on
which it is filed and including all
<PAGE>
3
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as amended
at its Effective Time, including the contents of the initial registration
statement incorporated by reference therein and including all information
(if any) deemed to be a part of the additional registration statement as of
its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as
the "Additional Registration Statement". The Initial Registration Statement
and the Additional Registration Statement are herein referred to
collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such
filing is required) as included in a Registration Statement, is hereinafter
referred to as the "Prospectus". No document has been or will be prepared
or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all material respects to the requirements of the Act
and the rules and regulations of the Commission ("Rules and Regulations")
and did not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all material respects to the requirements of
the Act and the Rules and Regulations and did not include, or will not
include, any untrue statement of a material fact and did not omit, or will
not omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) on the date
of this Agreement, the Initial Registration Statement and, if the Effective
Time of the Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue statement
of a material fact or omits, or will omit, to state any material fact
required to be stated therein or
<PAGE>
4
necessary to make the statements therein not misleading. If the Effective
Time of the Initial Registration Statement is subsequent to the execution
and delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the
Prospectus will conform in all material respects to the requirements of the
Act and the Rules and Regulations, neither of such documents will include
any untrue statement of a material fact or will omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has been
or will be filed. The two preceding sentences do not apply to statements in
or omissions from a Registration Statement or the Prospectus based upon
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information is that described as such in Section
7(c).
(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to so qualify would not have a material adverse effect upon the
Company and its subsidiaries taken as a whole.
(iv) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus;
each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires
such qualification, except where the failure to so qualify would not have a
material adverse effect upon the Company and its subsidiaries taken as a
whole; all of the issued and outstanding capital stock of each subsidiary
of the Company has been duly authorized and validly issued and is fully
paid and nonassessable; and the capital stock of each subsidiary owned by
the Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects, other than liens under the Credit Facility (as
defined in the Prospectus).
(v) Each physician practice with which the Company is affiliated
through a service agreement is listed on Schedule C hereto. Such physician
practices are referred to herein
<PAGE>
5
individually as an "Affiliated Practice" and collectively as the
"Affiliated Practices", and such service agreements are referred to herein
individually as a "Service Agreement". To the knowledge of the Company,
each of the Affiliated Practices has been duly incorporated or formed, as
the case may be, and is existing in good standing, with power and authority
(corporate (if applicable) and other) to own its properties and conduct its
business as presently conducted. Subject to such qualifications as are set
forth in the Registration Statements and the Prospectus, each Service
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to
the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing. Each Service Agreement has been duly
authorized, executed and delivered by the parties thereto, other than the
Company, and, subject to such qualifications as are set forth in the
Registration Statements and the Prospectus, constitutes a valid and legally
binding agreement of such other parties thereto, enforceable against such
parties in accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing.
(vi) The Offered Securities and all other outstanding shares of capital
stock of the Company have been duly authorized; all outstanding shares of
capital stock of the Company are, and, when the Offered Securities to be
issued and sold by the Company hereunder have been delivered and paid for
in accordance with this Agreement on each Closing Date (as defined below),
such Offered Securities will have been, validly issued, fully paid and
nonassessable, and the Offered Securities conform or will conform to the
description thereof contained in the Prospectus; and the stockholders of
the Company have no preemptive rights with respect to the Securities.
(vii) Except for this Agreement, there are no contracts, agreements or
understandings between the Company and any person that would give rise to a
valid claim against the Company or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with the
transactions contemplated hereby.
<PAGE>
6
(viii) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to a Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(ix) The Offered Securities have been approved for listing on the
Nasdaq Stock Market's National Market, subject to notice of issuance.
(x) No consent, approval, authorization or order of, or filing with,
any governmental agency or body or any court is required for the
consummation by the Company of the transactions contemplated by this
Agreement in connection with the issuance and sale of the Offered
Securities, except such as have been obtained and made under the Act and
such as may be required under state or foreign securities laws.
(xi) The execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby, will not result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any statute, any rule, regulation or order of any
governmental agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any subsidiary of the Company or any of
their properties, or any agreement or instrument to which the Company or
any such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company or any
such subsidiary is subject, except for such breaches or violations that
would not, individually or in the aggregate, have a material adverse effect
upon the Company and its subsidiaries taken as a whole, or the charter or
by-laws of the Company or any such subsidiary.
(xii) This Agreement has been duly authorized, executed and delivered
by the Company.
(xiii) Except as disclosed in the Prospectus, the Company, its
subsidiaries and, to the knowledge of the Company, the Affiliated Practices
have good and marketable title to all real properties and all other
properties and assets owned by them, in each case free from liens,
encumbrances and defects that would, individually or in the aggregate, have
a material adverse effect upon the Company and its subsidiaries taken as a
whole; and except as disclosed in the Prospectus, the Company, its
subsidiaries and, to the knowledge of the Company, the Affiliated
<PAGE>
7
Practices hold any leased real or personal property under valid and
enforceable leases with no exceptions that would, individually or in the
aggregate, have a material adverse effect upon the Company and its
subsidiaries taken as a whole.
(xiv) The Company, its subsidiaries and, to the knowledge of the
Company, the Affiliated Practices possess adequate certificates (including
certificates of need), authorities, licenses or permits issued by
appropriate governmental agencies or bodies necessary to conduct the
businesses now operated by them (including, without limitation, such as are
required (x) under such federal and state healthcare laws, statutes and
regulations as are applicable to the Company, its subsidiaries and the
Affiliated Practices, (y) in the case of the Affiliated Practices, to
receive reimbursement under Medicare/Medicaid and (z) under such insurance
laws and regulations as are applicable to the Company, its subsidiaries and
the Affiliated Practices) and have not received any notice of proceedings
relating to the revocation or modification of any such certificate,
authority, license or permit that, if determined adversely to the Company,
any of its subsidiaries or any of the Affiliated Practices, as the case may
be, would individually or in the aggregate have a material adverse effect
on the Company and its subsidiaries taken as a whole.
(xv) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that is
reasonably likely to have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(xvi) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property rights")
necessary to conduct the business now operated by them, or presently
employed by them, and have not received any notice of infringement of or
conflict with asserted rights of others with respect to any intellectual
property rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the Company and its subsidiaries taken as a whole.
(xvii) To the knowledge of the Company, neither the Company, any of its
subsidiaries nor any of the Affiliated Practices (a) is in violation of any
statute, any rule, regulation, decision or order of any governmental agency
or body or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or
<PAGE>
8
relating to the protection or restoration of the environment or human
exposure to hazardous or toxic substances (collectively, "environmental
laws"), (b) owns or operates any real property contaminated with any
substance that is subject to any environmental laws, (c) is liable for any
off-site disposal or contamination pursuant to any environmental laws, or
(d) is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in the
aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole; and the Company is not aware of any pending
investigation which might lead to such a claim.
(xviii) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries, or, to the Company's knowledge, any of the Affiliated
Practices or any of their respective properties that, if determined
adversely to the Company, any of its subsidiaries or any of the Affiliated
Practices, as the case may be, would individually or in the aggregate have
a material adverse effect on the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole, or would materially and adversely affect the ability of
the Company to perform its obligations under this Agreement, or which are
otherwise material in the context of the sale of the Offered Securities;
and no such actions, suits or proceedings against the Company, any of its
subsidiaries or, to the Company's knowledge, any of the Affiliated
Practices, are threatened or, to the Company's knowledge, contemplated.
(xix) The historical financial statements of the Company included in
each Registration Statement and the Prospectus present fairly the financial
position of the Company and its results of operations and cash flows for
the periods shown, and such financial statements have been prepared in
conformity with the generally accepted accounting principles in the United
States applied on a consistent basis; to the knowledge of the Company, the
historical financial statements of the predecessors to the Affiliated
Practices included in each Registration Statement and the Prospectus
present fairly the financial position of such predecessors and their
results of operations and cash flows for the periods shown, and such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis; the assumptions used in preparing the pro forma financial statements
included in each Registration Statement and the Prospectus provide a
reasonable basis for presenting the significant effects directly
attributable to the transactions or events reflected therein, the pro forma
financial statements included in each Registration Statement
<PAGE>
9
and the Prospectus comply as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X of the
Rules and Regulations, and the pro forma adjustments have been properly
applied to the historical amounts in the compilation of those statements.
(xx) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements of the Company included in the
Prospectus there has been no material adverse change, nor any development
or event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries, taken as a whole, and, except as disclosed in
or contemplated by the Prospectus, there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class
of its capital stock; and, except as disclosed in the Prospectus, there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Affiliated Practices,
taken as a whole, since the date of the latest audited financial statements
of such Affiliated Practices or the predecessor to such Affiliated
Practices, as the case may be, included in the Prospectus.
(xxi) There are no pending material actions by any governmental agency
or authority or any third party payor to recoup any amount reimbursed under
Medicare, Medicaid, any managed care or other third party payor program
being sought, threatened, requested or claimed against the Company, any of
its subsidiaries, or, to the knowledge of the Company, any of the
Affiliated Practices or any physician-owner or physician-employee of any of
the Affiliated Practices.
(xxii) Subject to such qualifications as are set forth in the
Registration Statements and the Prospectus, neither the Company, any of its
subsidiaries nor any of the Affiliated Practices, is in, or operates in a
manner that would constitute a violation, in any material respect, of any
healthcare law, ordinance, administrative or governmental rule or
regulation including, without limitation, those relating to reimbursement
by government agencies, fraudulent or wrongful billings, and legislation
commonly referred to as the "Stark" legislation, and those prohibiting
fee-splitting or fees for the referral of patients.
(xxiii) Neither the Company nor any of its subsidiaries (x) employs any
of the physician-owners or physician-employees of any of the Affiliated
Practices, (y) exercises any influence or control over the practice of
<PAGE>
10
medicine by any such physicians or (z) represents to the public that it
offers medical services.
(xxiv) The Company and each of the Affiliated Practices maintains
medical professional liability insurance. Such insurance maintained by the
Company is outstanding and duly in force, and such insurance maintained by
the Affiliated Practices is, to the knowledge of the Company, outstanding
and duly in force and maintained in amounts as required by the Service
Agreements.
(xxv) Neither the payment of the acquisition price for all operating
assets of the predecessors to each Affiliated Practice nor any loan made by
the Company in connection with the Initial Affiliation Transactions (as
defined in the Prospectus) to a physician affiliated with any Affiliated
Practice was in any way intended to induce the referral of patients from
any Affiliated Practice to the Company or any other Affiliated Practice.
(xxvi) The Company does not provide any service to any person,
including any Affiliated Practice, other than as set forth in the Service
Agreement. The Company has no right to participate in or exercise any
independent medical judgment with respect to, nor does it in fact
participate in or exercise any judgment with respect to, the provision of
health care services (including ancillary healthcare services) to the
patients of any medical practice, except that certain employees of the
Company may from time to time assist a physician or other employee of an
Affiliated Practice in the care of a patient, provided that at all times
such assistance is under the supervision of, and subject to, the final
judgment of the physician employed by the Affiliated Practice.
(xxvii) The Initial Affiliation Transactions and the terms of the
Service Agreements, including the percentage portion of the service fee,
were negotiated (a) in good faith by the Company and, to the Company's
knowledge, the other parties thereto and (b) on an arms' length basis. The
percentage portion of the service fee set forth in each Service Agreement
represents fair compensation for the management and administrative services
to be rendered by the Company pursuant thereto.
(xxviii) The Common Stock of the Company issued in connection with the
Initial Affiliation Transactions was not required to be registered under
the Act in connection with such transactions, and each of the persons
receiving Common Stock of the Company in connection with the Initial
Affiliation Transactions was an "accredited investor" within the meaning
Regulation D under the Act.
<PAGE>
11
(xxix) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(b) Each Selling Stockholder severally represents and warrants to, and
agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on the First Closing Date (as
defined herein) will have valid and unencumbered title to the Offered
Securities to be delivered by such Selling Stockholder on such Closing Date
and full right, power and authority to enter into this Agreement and to
sell, assign, transfer and deliver the Offered Securities to be delivered
by such Selling Stockholder on such Closing Date hereunder; and upon the
delivery of and payment for the Offered Securities on such Closing Date
hereunder the several Underwriters will acquire valid and unencumbered
title to the Offered Securities to be delivered by such Selling Stockholder
on such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all material respects to the requirements of the Act
and the Rules and Regulations and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (B) on
the Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all material respects
to the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact and
did not omit, or will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,
and (C) on the date of this Agreement, the Initial Registration Statement
and, if the Effective Time of the Additional Registration Statement is
prior to the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required) at
the Effective Date of the Additional Registration Statement in which the
Prospectus is included, each Registration Statement and the Prospectus will
conform, in all material respects to the requirements of the Act and the
Rules and Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading. If the Effective Time of the Initial
Registration Statement is
<PAGE>
12
subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all material
respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a material
fact or will omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The two
preceding sentences apply only to the extent that any statements in or
omissions from a Registration Statement or the Prospectus are based upon
written information furnished to the Company by such Selling Stockholder
specifically for use therein, it being agreed and understood that the only
such information is that described as such in Section 7(b).
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and each Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and each Selling Stockholder, at a purchase price of $ per share, that
number of Firm Securities (rounded up or down, as determined by Credit Suisse
First Boston Corporation ("Credit Suisse First Boston") in its discretion, in
order to avoid fractions) obtained by multiplying 3,000,000 Firm Securities in
the case of the Company and the number of Firm Securities set forth opposite the
name of such Selling Stockholder in Schedule A hereto, in the case of a Selling
Stockholder, in each case by a fraction the numerator of which is the number of
Firm Securities set forth opposite the name of such Underwriter in Schedule B
hereto and the denominator of which is the total number of Firm Securities.
Certificates in negotiable form for the Offered Securities to be sold
by the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under custody agreements (each, a "Custody Agreement" and
collectively, the "Custody Agreements") made with Cozen and O'Connor, as
custodian ("Custodian"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders shall not be terminated by operation of law, whether by the death
of any individual Selling Stockholder or the occurrence of any other event, or
in the case of a trust, by the death of any trustee or trustees or the
termination of such trust. If any individual Selling Stockholder or any such
trustee or trustees should die, or if any other such event should occur, or if
any of such trusts should terminate, before the delivery of the Offered
Securities hereunder, certificates for such Offered
<PAGE>
13
Securities shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death or other event or termination had
not occurred, regardless of whether or not the Custodian shall have received
notice of such death or other event or termination.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of the
purchase price in immediately available funds by wire transfer to the account of
the Company in the case of 3,000,000 shares of Firm Securities and Cozen and
O'Connor in the case of 198,062 shares of Firm Securities, in each case at a
bank acceptable to Credit Suisse First Boston located in the United States and
designated by the Company, with respect to the payment to be made to the
Company, and by the Custodian, with respect to the payment to be made to the
Selling Stockholders, or by official Federal Reserve Bank check or checks drawn
to the order of the Company in the case of 3,000,000 shares of Firm Securities
and Cozen and O'Connor in the case of 198,062 shares of Firm Securities at the
office of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York
at 9:00 A.M., New York time, on , or at such other time not
later than seven full business days thereafter as Credit Suisse First Boston and
the Company determine, such time being herein referred to as the "First Closing
Date". The certificates for the Firm Securities so to be delivered will be in
such form, in such denominations and registered in such names as Credit Suisse
First Boston requests and will be made available for checking and packaging at
the above office of Simpson Thacher & Bartlett at least 24 hours prior to the
First Closing Date.
In addition, upon written notice from Credit Suisse First Boston given
to the Company from time to time not more than 30 days subsequent to the date of
the Prospectus, the Underwriters may purchase all or less than all of the
Optional Securities at the purchase price per Security to be paid for the Firm
Securities. The Company agrees to sell to the Underwriters the number of shares
of Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional
Securities shall be purchased for the account of each Underwriter in the same
proportion as the number of shares of Firm Securities set forth opposite such
Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by Credit Suisse First Boston to eliminate fractions) and
may be purchased by the Underwriters only for the purpose of covering
over-allotments made in connection with the sale of the Firm Securities. No
Optional Securities shall be sold or delivered unless the Firm Securities
previously have been, or simultaneously are, sold and delivered. The right to
purchase the Optional Securities or any portion thereof may be exercised from
time to time and to the extent not previously exercised may be surrendered and
terminated
<PAGE>
14
at any time upon notice by Credit Suisse First Boston to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by Credit
Suisse First Boston but shall be a reasonable time following, but not earlier
than three nor later than five full business days after, written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price in immediately available funds by wire transfer to the
account of the Company at a bank acceptable to Credit Suisse First Boston
located in the United States and designated by the Company or by official
Federal Reserve Bank check or checks drawn to the order of the Company, at the
above office of Simpson Thacher & Bartlett. The certificates for the Optional
Securities being purchased on each Optional Closing Date will be in such form,
in such denominations and registered in such names as Credit Suisse First Boston
requests upon reasonable notice prior to such Optional Closing Date and will be
made available for checking and packaging at the above office of Simpson Thacher
& Bartlett at a reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders. The
Company agrees with the several Underwriters and the Selling Stockholders that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by Credit Suisse
First Boston, subparagraph (4)) of Rule 424(b) not later than the earlier
of (A) the second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of the
Initial Registration Statement. The Company will advise Credit Suisse First
Boston promptly of any such filing pursuant to Rule 424(b). If the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement and an additional registration
statement is necessary to register a portion of the Offered Securities
under the Act but the Effective Time thereof has not occurred as of such
execution and delivery, the Company will file the additional registration
statement or, if
<PAGE>
15
filed, will file a post-effective amendment thereto with the Commission
pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M.,
New York time, on the date of this Agreement or, if earlier, on or prior to
the time the Prospectus is printed and distributed to any Underwriter, or
will make such filing at such later date as shall have been consented to by
Credit Suisse First Boston.
(b) The Company will advise Credit Suisse First Boston promptly of any
proposal to amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial Registration
Statement, the Additional Registration Statement (if any) or the Prospectus
and will not effect such amendment or supplementation without Credit Suisse
First Boston's consent; and the Company will also advise Credit Suisse
First Boston promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of any
stop order proceedings in respect of a Registration Statement and will use
its best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify Credit Suisse First Boston of such event and will promptly prepare
and file with the Commission, at its own expense, an amendment or
supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither Credit Suisse First Boston's
consent to, nor the Underwriters' delivery of, any such amendment or
supplement shall constitute a waiver of any of the conditions set forth in
Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
security holders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th
<PAGE>
16
day after the end of the fourth fiscal quarter following the fiscal quarter
that includes such Effective Date, except that, if such fourth fiscal
quarter is the last quarter of the Company's fiscal year, "Availability
Date" means the 90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (four of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as delivery of
a prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as Credit Suisse First Boston reasonably requests.
The Prospectus shall be so furnished on or prior to 3:00 P.M., New York
time, on the business day following the later of the execution and delivery
of this Agreement or the Effective Time of the Initial Registration
Statement. All other documents shall be so furnished as soon as available.
The Company will pay the expenses of printing and distributing to the
Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as Credit Suisse
First Boston designates and will continue such qualifications in effect so
long as required for the distribution.
(g) During the period of five years hereafter, the Company will furnish
to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Securities Exchange Act of 1934 or mailed to
stockholders, and (ii) from time to time, such other information concerning
the Company as Credit Suisse First Boston may reasonably request.
(h) The Company agrees with the several Underwriters that the Company
will pay all expenses incident to the performance of the obligations of the
Company and the Selling Stockholders under this Agreement (other than the
fees and expenses of counsel for the Selling Stockholders and transfer
taxes on the sale by the Selling Stockholders of the Selling Stockholders'
Offered Securities to the Underwriters) and will reimburse the Underwriters
(if and to the extent incurred by them) for any filing fees and other
expenses (including fees and disbursements of counsel) incurred by them in
connection with qualification of the Offered Securities for sale and
determination of the
<PAGE>
17
eligibility of the Offered Securities for investment under the laws of such
jurisdictions as Credit Suisse First Boston designates and the printing of
memoranda relating thereto, for the filing fee of the National Association
of Securities Dealers, Inc. relating to the Offered Securities, for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters, and for any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the Offered
Securities. The Selling Stockholders agree that they shall be responsible
for the fees and expenses of counsel for the Selling Stockholders, and each
Selling Stockholder agrees to pay for any transfer taxes on the sale by
such Selling Stockholder of such Selling Stockholder's Offered Securities
to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities (the "Lock-Up Period"), the Company will
not offer, sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of its Securities or securities
convertible into or exchangeable or exercisable for any shares of its
Securities, or publicly disclose the intention to make any such offer,
sale, pledge, disposal or filing, without the prior written consent of
Credit Suisse First Boston, except (i) issuances of unregistered Securities
(including options exercisable into unregistered Securities) by the Company
in connection with affiliations with physicians and physician practices,
(ii) issuances of Securities by the Company pursuant to the exercise of
employee stock options outstanding on the date of the initial public
offering of the Offered Securities and (iii) issuances of stock options
under benefit plans existing on the date hereof, provided that options
issued pursuant to this clause (iii) do not become exercisable prior to the
end of such 180-day period. Prior to the execution of this Agreement, the
Company will obtain written agreements substantially in the form of Exhibit
B hereto from the directors and officers of the Company and from those
persons identified in Schedule D hereto.
(j) Each Selling Stockholder agrees, during the LockUp Period, not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any additional shares of the Securities or securities
convertible into or exchangeable or exercisable for any shares of
Securities, or publicly disclose the intention to make any such offer,
sale, pledge or disposal, without the prior written consent
<PAGE>
18
of Credit Suisse First Boston; provided, however, that the Selling
Stockholders may transfer shares of the Securities or securities
convertible into or exchangeable or exercisable for any shares of
Securities, without the consent of Credit Suisse First Boston, to (i)
trusts primarily for the benefit of such Selling Stockholder or members of
the such Selling Stockholder's immediate family or (ii) pursuant to a bona
fide gift to any other person, so long as in each case, any such transferee
executes and delivers an agreement to Credit Suisse First Boston to the
effect that such transferee will be bound by the provisions of this clause
(i) during the Lock-Up Period.
(k) Each Selling Stockholder agrees to deliver to Credit
Suisse First Boston, attention: Transactions Advisory Group on or prior
to the First Closing Date a properly completed and executed United
States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu
thereof).
6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance in all material respects by the Company
and the Selling Stockholders of their obligations hereunder and to the following
additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date of
delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall
be on or prior to the date of this Agreement or, if the Effective Time of
the Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, shall be prior to the filing of the amendment
or post-effective amendment to the registration statement to be filed
shortly prior to such Effective Time), of Ernst & Young LLP confirming that
they are independent public accountants within the meaning of the Act and
the applicable published Rules and Regulations thereunder and stating to
the effect that:
(i) in their opinion the financial statements examined by them and
included in the Registration Statements comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations;
<PAGE>
19
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii) above,
a reading of the latest available interim financial statements of the
Company and the Predecessor Practices, inquiries of officials of the
Company and the Affiliated Practices who have responsibility for
financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:
(A) the unaudited financial statements included in the Registration
Statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
Rules and Regulations or any material modifications should be made to
such unaudited financial statements for them to be in conformity with
generally accepted accounting principles;
(B) at the date of the latest available balance sheet of the
Company read by such accountants, and at a subsequent specified date
not more than five days prior to the date of this Agreement, there was
any change in the capital stock of the Company, increase in short-term
indebtedness or long-term debt of the Company and its consolidated
subsidiaries or decrease in consolidated net current assets or net
assets of the Company, as compared with amounts shown on the latest
balance sheet of the Company included in the Prospectus; or
(C) for the period from the closing date of the latest statement of
operations or income, as the case may be, of the Predecessor Practices
included in the Prospectus to the closing date of the latest available
statement of operations of the Affiliated Practices read by such
accountants, and for the period from the closing date of the latest
statement of operations or income, as the case may be, of the
Predecessor Practices included in the Prospectus to a specified date
not more than three business days prior to the date of this Agreement,
there were any decreases in the net practice revenue or income from
continuing operations of the combined Affiliated Practices as compared
with the net practice revenue and income from continuing operations of
the combined Predecessor
<PAGE>
20
Practices in the corresponding period of the previous year.
Except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter;
(iv) they have reviewed the unaudited pro forma financial data
included in the Registration Statements, and on the basis of such
review, inquiries of officials of the Company who have responsibility
for financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that the
unaudited pro forma financial data included in the Registration
Statements do not comply as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X
under the Act (including Commission Staff Accounting Bulletin No. 48)
and that the pro forma adjustments have not been properly applied to
the historical amounts; and
(v) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries or the Predecessor Practices subject to the internal
controls of the Company's or the Predecessor Practices' accounting
system, as the case may be, or are derived directly from such records
by analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and
the additional registration statement as proposed to be filed or as
proposed to be
<PAGE>
21
amended by the post-effective amendment to be filed shortly prior to its
Effective Time, and (iii) "Prospectus" shall mean the prospectus included
in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by
Credit Suisse First Boston. If the Effective Time of the Additional
Registration Statement (if any) is not prior to the execution and delivery
of this Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or, if earlier,
the time the Prospectus is printed and distributed to any Underwriter, or
shall have occurred at such later date as shall have been consented to by
Credit Suisse First Boston. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be contemplated by
the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company or its
subsidiaries which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and
makes it impractical or inadvisable to proceed with completion of the
public offering or the sale of and payment for the Offered Securities; (ii)
any downgrading in the rating of any debt securities of the Company by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Act), or any public announcement that any
such organization has under surveillance or review its rating of any debt
securities of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any suspension or limitation of trading
in securities generally on the New York Stock Exchange, or any setting of
minimum prices for trading on such exchange, or any suspension of trading
of any securities of the Company on any exchange or in the over-the-counter
market; (iv) any banking moratorium declared by U.S. Federal or New York
authorities; or (v) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by
<PAGE>
22
Congress or any other substantial national or international calamity or
emergency if, in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment
for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Morgan, Lewis & Bockius LLP, counsel for the Company, to
the effect that:
(i) the Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
Colorado, Florida, Georgia, Maryland, New Jersey and Pennsylvania;
(ii) the Offered Securities delivered on such Closing Date and all
other outstanding shares of capital stock of the Company have been duly
authorized and validly issued, are fully paid and nonassessable and
conform to the description thereof contained in the Prospectus; and the
stockholders of the Company have no statutory or, to the knowledge of
such counsel, other preemptive rights with respect to the Securities;
(iii) except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with respect
to any securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the securities
registered pursuant to a Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Act;
(iv) the Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(v) no consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required for the
consummation by the Company of the transactions contemplated by this
Agreement in connection with the issuance or sale of
<PAGE>
23
the Offered Securities, except such as have been obtained and made
under the Act and such as may be required under state securities laws
(it being understood that such counsel need express no opinion with
respect to health care or insurance law or regulation);
(vi) the execution, delivery and performance of this Agreement by
the Company, and the issuance and sale of the Offered Securities, will
not result in a breach or violation of any of the terms and provisions
of, or constitute a default under, any statute, any rule, regulation
or, to such counsel's knowledge, order of any governmental agency or
body or any court having jurisdiction over the Company or any
subsidiary of the Company or any of their properties, or any material
agreement or instrument known to such counsel to which the Company or
any such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company or
any such subsidiary is subject, or the charter or by-laws of the
Company or any such subsidiary (it being understood that such counsel
need express no opinion with respect to health care or insurance law or
regulation);
(vii) the Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration Statement
(as the case may be), and, to the knowledge of such counsel, no stop
order suspending the effectiveness of a Registration Statement or any
part thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Act, and each
Registration Statement and the Prospectus, and each amendment or
supplement thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the requirements of
the Act and the Rules and Regulations; the descriptions in the
Registration Statements and Prospectus of contracts and other documents
are accurate in all material respects and fairly present the
information required to be shown; and such counsel do not know of any
legal or governmental proceedings required to be described in a
Registration Statement or the Prospectus which are not described as
required or of any contracts or documents of a character required to be
described in a
<PAGE>
24
Registration Statement or the Prospectus or to be filed as exhibits to
a Registration Statement which are not described and filed as required;
it being understood that such counsel need express no opinion as to the
financial statements or other financial and statistical data contained
in the Registration Statements or the Prospectus and matters relating
to health care and insurance law and regulation;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company; and
(ix) The information set forth in the Prospectus under the captions
"Risk Factors - Shares Eligible for Future Sale" and "Shares Eligible
for Future Sale," to the extent they constitute descriptions of
statutes and regulations, are accurate in all material respects and
fairly present the information required to be shown.
In addition, such counsel shall state that such counsel has
participated in conferences with representatives of the Underwriters,
officers and other representatives of the Company and representatives
of the independent public accountants of the Company, at which
conferences the contents of the Registration Statements and the
Prospectus and related matters were discussed, and although such
counsel does not pass upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in
the Registration Statements and the Prospectus, on the basis of the
foregoing, no facts have come to the attention of such counsel that
causes such counsel to believe that a Registration Statement or any
amendment thereto, as of its effective date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of such
Closing Date, contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need
express no comment with respect to the financial statements and other
financial and statistical data contained in the Registration Statements
and the Prospectus and matters relating to health care and insurance
law and regulation). In addition, counsel may state that it has made no
special inquiry or investigation in respect of opinions that are
rendered to the knowledge of such counsel.
<PAGE>
25
The foregoing opinion may be limited to the federal laws of the
United States of America, the laws of the Commonwealth of Pennsylvania
and the General Corporation Law of the State of Delaware, and counsel
rendering the foregoing opinion may rely as to questions of fact upon
the representations of the Company set forth in this Agreement and upon
certificates of officers of the Company and of government officials.
(e) The Representatives shall have received the opinion
contemplated in the Power of Attorney executed and delivered by each
Selling Stockholder and an opinion, dated such Closing Date, of Cozen
and O'Connor, to the effect that:
(i) each Selling Stockholder had valid title to the Offered
Securities delivered by such Selling Stockholder on such Closing
Date free and clear of any perfected security interests and, to
such counsel's knowledge, free and clear of any claims, liens or
other encumbrances; and each Selling Stockholder had full right,
power and authority to sell, assign, transfer and deliver the
Offered Securities delivered by such Selling Stockholder on such
Closing Date hereunder; and good and valid title to the Offered
Securities delivered by such Selling Stockholder on the Closing
Date, free and clear of all claims, liens and other encumbrances,
has been transferred to the several Underwriters who have purchased
such shares in good faith and without notice of any such claims,
liens or encumbrances or any other adverse claims within the
meaning of the New York Uniform Commercial Code (it being
understood by such counsel that the Underwriters have no knowledge
of any security interests, claims, liens, or other encumbrances on
such Offered Securities);
(ii) no consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to
be obtained or made by any Selling Stockholder for the consummation
of the transactions by the Selling Stockholders contemplated by the
Custody Agreement or this Agreement in connection with the sale of
the Offered Securities sold by the Selling Stockholders, except
such as have been obtained and made under the Act and such as may
be required under state securities laws (it being understood that
such counsel need express no opinion with respect to health care or
insurance law or regulation);
(iii) the execution, delivery and performance of the Custody
Agreement and this Agreement by the Selling
<PAGE>
26
Stockholders and the consummation of the transactions therein and
herein contemplated will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any
statute, any rule, regulation or, to such counsel's knowledge,
order of any governmental agency or body or any court having
jurisdiction over any Selling Stockholder or any of their
properties or any material agreement or instrument known to such
counsel to which any Selling Stockholder is a party or by which any
Selling Stockholder is bound or to which any of the properties of
any Selling Stockholder is subject (it being understood that such
counsel need express no opinion with respect to health care or
insurance law or regulation);
(iv) the Power of Attorney and related Custody Agreement with
respect to each Selling Stockholder has been duly authorized,
executed and delivered by such Selling Stockholder and constitute
valid and legally binding obligations of each Selling Stockholder
enforceable in accordance with their terms, subject to the effects
of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied
covenant of good faith and fair dealing; and
(v) this Agreement has been duly executed and delivered by each
Selling Stockholder.
The foregoing opinion may be limited to the federal laws of
the United States of America and the Commonwealth of Pennsylvania,
and counsel rendering the foregoing opinion may rely as to
questions of fact upon the representations of the Selling
Stockholders set forth in this Agreement and in the Custody
Agreement. In addition, counsel may state that it has made no
special inquiry or investigation in respect of opinions that are
rendered to the knowledge of such counsel.
(f) The Representatives shall have received an opinion, dated such
Closing Date, of Baker, Donelson, Bearman & Caldwell, special healthcare
counsel for the Company, to the effect set forth in Exhibit A hereto.
(g) The Representatives shall have received from Simpson Thacher &
Bartlett, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the
<PAGE>
27
Company shall have furnished to such counsel such documents as they request
for the purpose of enabling them to pass upon such matters.
(h) The Representatives shall have received a certificate, dated such
Closing Date, of the Company, signed by the President or any Vice President
and a principal financial or accounting officer of the Company in which
such officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of the
Company in this Agreement are true and correct; the Company has in all
material respects complied with all agreements and satisfied all conditions
on its part to be performed or satisfied hereunder at or prior to such
Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b),
including payment of the applicable filing fee in accordance with Rule
111(a) or (b) under the Act, prior to the time the Prospectus was printed
and distributed to any Underwriter; and, subsequent to the date of the most
recent financial statements of the Company in the Prospectus, there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole except as set forth in or contemplated by the
Prospectus or as described in such certificate.
(i) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three business days prior
to such Closing Date for the purposes of this subsection.
The Company and the Selling Stockholders will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. Credit Suisse First Boston may in its
sole discretion waive on behalf of the Underwriters compliance with any
conditions to the obligations of the Underwriters hereunder, whether in respect
of an Optional Closing Date or otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
<PAGE>
28
any untrue statement or alleged untrue statement of any material fact contained
in any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; and provided further,
that with respect to any untrue statement or alleged untrue statement in or
omission or alleged omission from any preliminary prospectus the indemnity
agreement contained in this subsection (a) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased the Offered Securities concerned, to the extent that a
prospectus relating to such Offered Securities was required to be delivered by
such Underwriter under the Act in connection with such purchase, and any such
loss, claim, damage or liability of such Underwriter results from the fact that
there was not sent or given to such person, at or prior to the written
confirmation of the sale of such Offered Securities to such person, a copy of
the Prospectus if the Company had previously furnished copies thereof to the
Underwriter.
(b) Each Selling Stockholder, severally and not jointly, will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that each Selling Stockholder will indemnify or otherwise be
liable in any such case to the extent, but only to the extent, that any such
loss, claim,
<PAGE>
29
damage, liability, or action arises out of or is based upon an untrue statement
or alleged untrue statement in or omission or alleged omission from any
Registration Statement or the Prospectus in reliance upon and in conformity with
written information furnished to the Company by such Selling Stockholder
specifically for use therein, and only to the extent of the total net proceeds
of the Offered Securities sold to the Underwriters by such Selling Stockholder,
it being understood and agreed that the only such information furnished by each
Selling Stockholder consists of the following information in the Prospectus
furnished on behalf of such Selling Stockholder: the information under the
caption "Principal and Selling Stockholders", but only to the extent the
information relates to such Selling Stockholders; and provided further, that
with respect to any untrue statement or alleged untrue statement in or omission
or alleged omission from any preliminary prospectus the indemnity agreement
contained in this subsection (b) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased the Offered Securities concerned, to the extent that a
prospectus relating to such Offered Securities was required to be delivered by
such Underwriter under the Act in connection with such purchase, and any such
loss, claim, damage or liability of such Underwriter results from the fact that
there was not sent or given to such person, at or prior to the written
confirmation of the sale of such Offered Securities to such person, a copy of
the Prospectus if the Company had previously furnished copies thereof to the
Underwriter.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company and each Selling Stockholder against any losses, claims,
damages or liabilities to which the Company or such Selling Stockholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company and each Selling Stockholder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the last
<PAGE>
30
paragraph at the bottom of the cover page concerning the terms of the
offering by the Underwriters, the legend concerning over-allotments, stabilizing
and possible transactions pursuant to exemptions from Rules 10b-6 and 10b-7
under the Securities and Exchange Act of 1934 on the inside front cover page,
the concession and reallowance figures appearing in the fifth paragraph under
the caption "Underwriting" and the information contained in the sixth paragraph
under the caption "Underwriting".
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party; it being
understood, however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel, excluding local counsel,
representing all indemnified parties in connection with one action or separate
but similar and related actions), and after notice from the indemnifying party
to such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject matter
of such action.
(e) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims, damages
or liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other
<PAGE>
31
from the offering of the Securities or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Stockholders bear to the total underwriting discounts
and commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (d).
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and no Selling
Stockholder shall be required to contribute any amount in excess of the total
net proceeds of the Offered Securities sold by such Selling Stockholder. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and the Selling
Stockholders under this Section shall be in addition to any liability which the
Company and the Selling Stockholders may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of
<PAGE>
32
the Company who has signed a Registration Statement and to each person, if any,
who controls the Company or any Selling Stockholder within the meaning of the
Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, Credit
Suisse First Boston may make arrangements satisfactory to the Company and the
Selling Stockholders for the purchase of such Offered Securities by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date, the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Offered Securities that such defaulting Underwriters agreed but failed to
purchase on such Closing Date. If any Underwriter or Underwriters so default and
the aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to Credit Suisse First Boston, the Company and the
Selling Stockholders for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Stockholders, except as provided in Section 9 (provided
that if such default occurs with respect to Optional Securities after the First
Closing Date, this Agreement will not terminate as to the Firm Securities or any
Optional Securities purchased prior to such termination). As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
<PAGE>
33
Stockholders and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010, Attention: Investment Banking Department
- -- Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at 44 Union Blvd., Suite 600,
Lakewood, CO 80228, Attention: Kerry R. Hicks, or, if sent to the Selling
Stockholders or any of them, will be mailed, delivered or telegraphed and
confirmed to the Selling Stockholders' attorneys-in-fact as follows: (i) William
G. Hyncik, Jr. at Princeton Orthopedic Associates, 325 Princeton Avenue,
Princeton, NJ 08540, (ii) Larry Lehman at Tallahassee Orthopedic Clinic, 3334
Capital Medical Boulevard, Tallahassee, FL 32303 and (iii) Dino Solomos at The
Rothman Institute, 800 Spruce Street, Philadelphia, PA 19017; provided, however,
that any notice to an Underwriter pursuant to Section 7 will be mailed,
delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
12. Representation of Underwriters. The Representatives will act for
the several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by Credit Suisse First
Boston will be binding upon all the Underwriters. _______________ will act for
the Selling Stockholders in connection with such transactions, and any action
under or in respect of this Agreement taken by _______________ will be binding
upon all the Selling Stockholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
<PAGE>
34
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
<PAGE>
35
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
SPECIALTY CARE NETWORK, INC.
By.........................
Title:
ABRAMS FAMILY HOLDING COMPANY,
L.L.C.
TODD J. ALBERT and LAUREN
ALBERT, JTWROS
MICHAEL G. and PATRICIA A.
CICCOTTI, JTWROS
GECHA FAMILY HOLDING COMPANY,
L.L.C.
W. THOMAS GUTOWSKI
WILLIAM J. HOZACK and ANN D.
HOZACK, JTWROS
MICHAEL N. JOLLEY
PETER F. SHARKEY and SALLY
SHARKEY, JTWROS
ALEXANDER R. VACCARO and
MARJORIE L. VACCARO, JTWROS
By.........................
Title: Attorney-in-Fact
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON
CORPORATION
EQUITABLE SECURITIES
CORPORATION
LEHMAN BROTHERS INC.
By CREDIT SUISSE FIRST
BOSTON CORPORATION
By..........................
Title:
<PAGE>
SCHEDULE A
Number of
Firm Securities
Selling Stockholder to be Sold
- ------------------- ---------------
Abrams Family Holding Company, L.L.C. 20,518
Todd J. Albert and Lauren Albert, JTWROS 22,000
Michael G. and Patricia A. Ciccotti, JTWROS 22,964
Gecha Family Holding Company, L.L.C. 20,518
W. Thomas Gutowski 20,518
William J. Hozack and Ann D. Hozack, JTWROS 24,062
Michael N. Jolley 20,518
Peter F. Sharkey and Sally Sharkey, JTWROS 22,964
Alexander R. Vaccaro and Marjorie L. Vaccaro, JTWROS 24,000
<PAGE>
SCHEDULE B
Number of
Underwriter Firm Securities
----------- ---------------
CREDIT SUISSE FIRST BOSTON CORPORATION .......................
EQUITABLE SECURITIES CORPORATION...............................
LEHMAN BROTHERS INC............................................
----------------
Total............................... ================
<PAGE>
SCHEDULE C
Greater Chesapeake Orthopaedic Associates, L.L.C.
Princeton Orthopaedic Associates II, P.A.
Reconstructive Orthopaedic Associates II, P.C.
TOC Specialists, P.L.
Vero Orthopaedics II, P.A.
<PAGE>
SCHEDULE D
Richard A. and Claudia F. Balderston, JTWROS
Thomas Meade
Carlos Ferrer
Patrick J. Neal
William and Louise Keane, JTWROS
Harvey E. Smires, M.D.
<PAGE>
EXHIBIT A
Credit Suisse First Boston Corporation, et al.
February ___, 1997
Page 1
February ___, 1997
Credit Suisse First Boston Corporation
Equitable Securities Corporation
Lehman Brothers Inc.
As Representatives of the Several Underwriters
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, NY 10010
Re: Sale of 3,198,062 shares of Common Stock, $.001 par value,
of Specialty Care Network, Inc.
Ladies and Gentlemen:
We have acted as counsel to Specialty Care Network, Inc. (the "Company") in
connection with the public offering on February ___, 1997 (the "Offering") of
3,198,062 shares (the "Securities") of the Company's Common Stock, $.001 par
value (the "Common Stock"). We have been requested pursuant to Section 6(f) of
that certain Underwriting Agreement dated February ___, 1997 (the "Agreement")
among the Company and certain selling stockholders, on the one hand, and Credit
Suisse First Boston Corporation, Equitable Securities Corporation and Lehman
Brothers Inc., as representatives of the several underwriters, on the other hand
(the "Underwriters") to render our opinion with respect to certain legal matters
affecting the Offering and the Agreement. For purposes of this letter, all
capitalized terms not otherwise defined herein shall have the meanings ascribed
to such terms in the Agreement.
Factual Matters; Documents Relied Upon
In rendering our opinion, we have relied, with respect to factual matters, upon
written statements by executive officers of the Company, including the Officers'
Certificate referred to below. In addition thereto, with respect to factual
matters, we have reviewed and relied upon such documents and instruments
identified to our satisfaction as we have deemed necessary for purposes of
rendering our opinions, including, without limitation, the following:
1. Registration Statement on Form S-1 filed on December 11, 1996 with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933 (the
<PAGE>
Credit Suisse First Boston Corporation, et al.
February ___, 1997
Page 2
"1933 Act") under file number 333-17627, as amended by Amendment No. 1
filed with the Commission on December 13, 1996, Amendment No. 2 filed with the
Commission on January 21, 1997, and Amendment No. 3 filed with the Commission on
February ___, 1997 (collectively, the "Registration Statement");
2. The Company's Preliminary Prospectus dated January 21, 1997, as filed
with the Commission as part of Amendment No. 2 to the Registration Statement;
3. The Prospectus filed with the Commission on February ___, 1997 pursuant
to Rule 424(b) and Rule 430A under the Securities Act of 1933, as amended;
4. Certificate of the Company dated February ___, 1997 signed by the
President and Chief Financial Officer with respect to the accuracy of
representations and warranties in the Agreement (the "Officers' Certificate");
and
5. The Agreement.
We have assumed that the foregoing documents and all other documents we have
reviewed are authentic, if submitted to us as originals, or in absolute
conformity with originals, if submitted to us as copies, and that all signatures
thereupon are genuine in all respects.
Opinion
Subject to the assumptions, exceptions and limitations hereinabove and
hereinafter stated, it is our opinion that:
(i) The business of the Company as disclosed in the Prospectus (including
the consummation of the Initial Affiliation Transactions) and the terms of each
Service Agreement and the transactions contemplated thereby do not violate in
any material respect any federal health care statute, administrative or
governmental rule or regulation applicable to the Company, any of its
subsidiaries or any of the Affiliated Practices, including, but not limited to,
42 U.S.C. (section)1395nn, 42 U.S.C. (section)1396b(s) or 42 U.S.C.
(section)1320a-7b(b).
(ii) Based solely on our review of generally published compilations of
state health care statutes and regulations for the states in which the
Affiliated Practices are located (the "Affiliated Practice States"), we have no
reason to believe that the business of the Company as disclosed in the
Prospectus (including consummation of the Initial Affiliation Transactions) and
the terms of each Service Agreement and the transactions contemplated thereby
violate in any material respect any health care statute, administrative or
governmental rule or regulation applicable to the Company in the Affiliated
Practice States. Moreover, we are not aware of any reported judicial decision in
any Affiliated Practice State whose holding when applied to the
<PAGE>
Credit Suisse First Boston Corporation, et al.
February ___, 1997
Page 3
specific facts (of which we have knowledge) of the Company's relationship
between the Company and the Affiliated Practices would be reasonably likely to
result in a holding that such relationship is illegal or otherwise void as a
matter of public policy; provided, however, that we have not conducted an
independent legal inquiry into the foregoing matter.
(iii) We have no reason to believe that the disclosure in the Registration
Statement under the captions "Risk Factors - Government Regulation" or "Business
- - Government Regulation and Supervision" as of the effective date of the
Registration Statement or as of the Closing Date contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or that the
disclosure in the Prospectus under the captions "Risk Factors - Government
Regulation" or "Business - Government Regulation and Supervision" as of its
issue date or as of the Closing Date contained any untrue statement of a
material fact or omitted to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(iv) The statements made in the Registration Statement and Prospectus under
the captions "Risk Factors - Government Regulation" and "Business - Government
Regulation and Supervision," insofar as they purport to constitute summaries of
the terms of statutes, rules and regulations and legal and governmental
proceedings and other documents, constitute accurate summaries of the terms of
such statutes, rules and regulations and legal and governmental proceedings and
other documents in all material respects.
Assumptions and Qualifications
The foregoing opinions are based upon and subject to the assumptions,
qualifications, limitations and exceptions set forth below.
1. We have made no independent investigation or inquiry as to the accuracy
or completeness of any representation, warranty, data, certificate or other
information, written or oral, including, without limitation, those made or
furnished to us in connection with the transaction contemplated by the Agreement
and those contained in the Officers' Certificate.
2. Any reference herein to our "knowledge" or words of similar import
refers only to the actual knowledge of those shareholders and associates of our
firm who have performed legal services in the course of our representation of
the Company in connection with the Offering, the Agreement, any material
litigation affecting the Company and its successors or the Initial Affiliation
Transactions. Any reference herein to our knowledge shall not imply that we have
or assume any obligation to exercise, or have in fact exercised, any inquiry
into the matters with respect to which we have provided an opinion based on such
knowledge or lack thereof.
<PAGE>
Credit Suisse First Boston Corporation, et al.
February ___, 1997
Page 4
3. The subject of health care regulation is rapidly changing, both at the
legislative and regulatory levels, and there is little, if any, interpretative
guidance in respect of most health care statutes and rules and regulations.
Accordingly, the opinions stated above are based upon statutes, rules,
regulations and other authorities existing and effective as of the date of this
letter and are reliable only to the extent such authorities remain materially
the same, and we undertake no responsibility to update or supplement any such
opinion in the event of or in response to any subsequent changes in or other
development of the law or said authorities, or upon the occurrence after the
date hereof of events or circumstances that, if occurring prior to the date
hereof, might have resulted in different opinions from those stated above.
4. We are licensed to practice law only in the State of Tennessee, and,
without limiting our statements in paragraph (ii) above, we express no opinion
with respect to the effect of any laws other than the laws of Tennessee and the
United States of America.
5. This opinion letter has been delivered solely for the benefit of the
Underwriters, and no other person or entity shall be entitled to rely hereon
without the express written consent of this firm.
6. The opinions expressed above are limited to the legal matters
specifically addressed, and no opinion is to be implied or inferred beyond the
legal matters expressly so addressed.
Yours very truly,
BAKER, DONELSON, BEARMAN &
CALDWELL, a professional corporation
By:
----------------------------------
John A. Good, a member of the firm
<PAGE>
EXHIBIT B
As of February 1, 1997
SPECIALTY CARE NETWORK, INC.
44 Union Boulevard
Suite 600
Lakewood, Colorado 80228
CREDIT SUISSE FIRST BOSTON CORPORATION
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue
New York, New York 10010
Dear Sirs:
As an inducement to the Underwriters to execute the Underwriting
Agreement, relating to an offering of the Common Stock (the "Securities") of
Specialty Care Network, Inc. (the "Company") pursuant to a Registration
Statement on Form S-1 (File No. 333-17627), the undersigned hereby agrees that,
for a period of 180 days after the initial public offering of the Securities
pursuant to the Underwriting Agreement to which you are or expect to become
parties, neither the undersigned nor any trusts holding Securities over which
the undersigned has sole or shared investment power will offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, any shares of
the Securities or securities convertible into or exchangeable or exercisable for
any shares of Securities, or publicly disclose the intention to make any such
offer, sale, pledge or disposal without the prior written consent of Credit
Suisse First Boston Corporation, except subsequent sales of the Securities
purchased in the initial public offering of the Securities or otherwise
purchased in the public market following the initial public offering of the
Securities; provided, however, that the undersigned may transfer Securities or
options to purchase Securities, without the consent of Credit Suisse First
Boston Corporation, to (i) trusts primarily for the benefit of the undersigned
or members of the undersigned's immediate family or (ii) pursuant to a bona fide
gift to any other person, so long as in each case any such transferee executes
and delivers an agreement in substantially the same form and content as this
agreement.
In furtherance of the foregoing, the Company and its transfer agent and
registrar are hereby authorized to decline to
<PAGE>
make any transfer of shares of Securities if such transfer would constitute a
violation or breach of this Agreement.
This Agreement shall be binding on the undersigned and the respective
successors, heirs, personal representatives and assigns of the undersigned. This
agreement shall lapse and become null and void if the public offering
contemplated by the Underwriting Agreement is terminated prior to the First
Closing Date (as defined in said agreement) or if the initial public offering of
the Securities shall not have occurred on or before March 31, 1997.
Very truly yours,
.............................................
Name:
<PAGE>
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103-6993
(215) 963-5000 (telephone)
(215) 963-5299 (facsimile)
February 5, 1997
Specialty Care Network, Inc.
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
Re: Specialty Care Network, Inc.
Registration Statement on Form S-1 (No. 333-17627)
--------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Specialty Care Network, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of the above-referenced
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offering of up to 3,733,462 shares of the Company's common stock, par value
$0.001 per share (the "Common Stock"), of which 3,450,000 shares of Common Stock
(the "Company Shares"), including 450,000 shares purchasable by the underwriters
upon exercise of their overallotment option, are to be newly issued and sold by
the Company, and 283,462 shares of Common Stock (the "Selling Stockholder
Shares") are to be sold by the selling stockholders (the "Selling Stockholders")
listed in the Registration Statement under "Principal and Selling Stockholders."
In rendering the opinion set forth below, we have reviewed (a) the Registration
Statement and the exhibits thereto; (b) the Company's Amended and Restated
Certificate of Incorporation, as amended; (c) the Company's Bylaws; (d) certain
records of the Company's corporate proceedings as reflected in its minute and
stock books; (e) a draft of the Underwriting Agreement pertaining to the
proposed offering subject to the Registration Statement; and (f) such other
documents as we have deemed relevant. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity with the original of all documents submitted to
us as copies thereof.
Based upon the foregoing, we are of the opinion that, (i) when issued by the
Company in the manner contemplated in the Registration Statement, the Company
Shares will be validly issued, fully paid and nonassessable and (ii) the Selling
Stockholder Shares are validly issued, fully paid and nonassessable.
Our opinion set forth above is limited to the General Corporation Law of the
State of Delaware, as amended.
We hereby consent to the use of this opinion as Exhibit 5 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters."
In giving such opinion, we do not thereby admit that we are acting within the
category of persons whose consent is required under Section 7 of the Act or the
rules or regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
<PAGE>
SERVICE AGREEMENT
BY AND BETWEEN
SPECIALTY CARE NETWORK, INC.,
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES II, P.C.
AND
RICHARD H. ROTHMAN, M.D.
ROBERT E. BOOTH, JR., M.D.
RICHARD A. BALDERSTON, M.D.
ARTHUR R. BARTOLOZZI, M.D.
WILLIAM J. HOZACK, M.D.
MICHAEL G. CICCOTTI, M.D.
TODD J. ALBERT, M.D.
ALEXANDER R. VACCARO, M.D.
PETER F. SHARKEY, M.D.
Dated as of November 12, 1996
<PAGE>
TABLE OF CONTENTS Page
----
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship..................................... - 1 -
1.2. Responsibilities of the Parties.............................. - 2 -
1.3. ROAII Matters................................................ - 2 -
1.4. Patient Referrals............................................ - 2 -
1.5. Professional Judgment........................................ - 2 -
ARTICLE II.
DEFINITIONS
2.1. Definitions.................................................. - 2 -
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY COMPANY
3.1. Practice Offices............................................. - 7 -
3.2. Use of Practice Offices...................................... - 7 -
ARTICLE IV.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board.................. - 8 -
4.2. Duties and Responsibilities of the Policy Board.............. - 8 -
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions.......................... - 9 -
5.2. Financial Planning and Goals................................. - 9 -
5.3. Audits and Financial Statements............................. - 10 -
5.4. Inventory and Supplies...................................... - 10 -
5.5. Management Services and Administration...................... - 10 -
5.6. Personnel................................................... - 12 -
5.7. Events Excusing Performance................................. - 13 -
5.8. Compliance with Law and Business Standards.................. - 13 -
5.9. Quality Assurance........................................... - 13 -
5.10. New Medical Services and Additional Practice Offices........ - 13 -
5.11. Collection of Certain Patient Receipts and Payment of
Clinic Expenses .......................................... - 14 -
5.12. Other ROAII Accounts........................................ - 14 -
ARTICLE VI.
i
<PAGE>
Page
----
OBLIGATIONS OF ROAII AND PHYSICIAN OWNERS
6.1. Professional Services....................................... - 14 -
6.2. Medical Practice............................................ - 15 -
6.3. Employment of Physician Employees........................... - 15 -
6.4. Professional Dues and Education Expenses.................... - 15 -
6.5. Professional Insurance Eligibility.......................... - 15 -
6.6. Events Excusing Performance................................. - 15 -
6.7. Fees for Professional Services.............................. - 15 -
6.8. Peer Review................................................. - 15 -
6.9. ROAII Employee Benefit Plans................................ - 16 -
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
7.1. Exclusive Arrangement....................................... - 18 -
7.2. Restrictive Covenants....................................... - 18 -
7.3. Restrictive Covenants By Future Physician Employees......... - 19 -
7.4. Rights of Company........................................... - 19 -
7.5. Enforcement................................................. - 20 -
7.6. Modification of Restrictive Covenants....................... - 20 -
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees................................................ - 20 -
8.2. Payment of Service Fee...................................... - 24 -
8.3. Purchase of Accounts Receivable............................. - 24 -
8.4. Payment of Clinic Expenses.................................. - 25 -
ARTICLE IX.
RECORDS
9.1. Patient Records............................................. - 26 -
9.2. Records Owned by Company.................................... - 26 -
9.3. Access to Records........................................... - 26 -
9.4. Government Access to Records................................ - 26 -
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by ROAII........................ - 27 -
10.2. Insurance to be Maintained by Company...................... - 27 -
10.3. Additional Insureds........................................ - 27 -
ii
<PAGE>
Page
----
10.4. Indemnification............................................ - 27 -
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement.......................................... - 28 -
11.2. Extended Term.............................................. - 28 -
11.3. Termination by ROAII for Cause............................. - 28 -
11.4. Termination by Company for Cause........................... - 29 -
11.5. Early Termination by ROAII or Company Without Cause Upon
Third (3rd) Anniversary of Agreement..................... - 30 -
11.6. Consequences of ROAII Termination.......................... - 31 -
11.7. Closing of Purchase by ROAII and Effective Date of
Termination ............................................. - 31 -
11.8. Tail Policy................................................ - 32 -
11.9. Restrictions Applicable to Physician Owners................ - 32 -
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds.................................. - 36 -
12.2. Temporary Space............................................ - 36 -
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF ROAII AND PHYSICIAN OWNERS
13.1. Validity................................................... - 36 -
13.2. Litigation................................................. - 36 -
13.3. Permits.................................................... - 36 -
13.4. Authority.................................................. - 37 -
13.5. Compliance with Applicable Law............................. - 37 -
13.6. Health Care Compliance..................................... - 37 -
13.7. Fraud and Abuse............................................ - 37 -
13.8. ROAII Compliance........................................... - 38 -
13.9. Rates and Reimbursement Policies........................... - 38 -
13.10. Accounts Receivable........................................ - 38 -
13.11. Full Disclosure............................................ - 41 -
13.12. Exhibits................................................... - 41 -
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
14.1. Organization............................................... - 41 -
14.2. Authority.................................................. - 41 -
14.3. Absence of Litigation...................................... - 41 -
iii
<PAGE>
Page
14.4. Transactions with Affiliates............................... - 41 -
ARTICLE XV.
COVENANTS OF ROAII AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements................ - 42 -
15.2. Necessary Authorizations/Assignment of Licenses and Permit.. - 42 -
15.3. Transaction with Affiliates................................. - 42 -
15.4. Compliance with All Laws.................................... - 42 -
15.5. Third-Party Payor Programs.................................. - 42 -
15.6. Change in Business or Credit and Collection Policy.......... - 42 -
15.7. Treatment of Accounts Receivable............................ - 43 -
15.8. Security Interest........................................... - 43 -
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment.................................................. - 44 -
16.2. Whole Agreement; Modification............................... - 44 -
16.3. Notices..................................................... - 45 -
16.4. Binding on Successors....................................... - 45 -
16.5. Waiver of Provisions........................................ - 45 -
16.6. Governing Law............................................... - 45 -
16.7. No Practice of Medicine..................................... - 46 -
16.8. Severability................................................ - 46 -
16.9. Additional Documents........................................ - 46 -
16.10. Attorneys' Fees............................................ - 46 -
16.11. Time is of the Essence..................................... - 46 -
16.12. Confidentiality............................................ - 46 -
16.13. Contract Modifications for Prospective Legal Events........ - 46 -
16.14. Remedies Cumulative........................................ - 47 -
16.15. Language Construction...................................... - 47 -
16.16. No Obligation to Third Parties............................. - 47 -
16.17. Communications............................................. - 48 -
EXHIBIT 3.1 LEASE AGREEMENT.....................................3.1-1
EXHIBIT 4.1 POLICY BOARD GOVERNANCE RULES.......................4.1-1
EXHIBIT 6.9.1 ROAII PLAN........................................6.9.1-1
EXHIBIT 8.1.8(d) EXCLUDED EXPENSES.............................8.1.8.(d)-1
EXHIBIT 8.3.6 ACCOUNTS RECEIVABLE COLLECTION....................8.3.6-1
EXHIBIT 11 NON-COMPETITION......................................11-1
iv
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") dated as of November 12, 1996, by and
between SPECIALTY CARE NETWORK, INC., a Delaware corporation ("Company"),
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES II, P.C., a Pennsylvania professional
corporation, ("ROAII") and RICHARD H. ROTHMAN, M.D., ROBERT E. BOOTH, JR., M.D.,
RICHARD A. BALDERSTON, M.D., ARTHUR R. BARTOLOZZI, M.D., WILLIAM J. HOZACK,
M.D., MICHAEL G. CICCOTTI, M.D., TODD J. ALBERT, M.D., ALEXANDER R. VACCARO,
M.D., and PETER F. SHARKEY, M.D. ("Physician Owner[s]"), citizens and residents
of Pennsylvania.
W I T N E S S E T H:
WHEREAS, Company is in the business of managing medical clinics and
providing support services to and furnishing orthopedic care medical practices
with the necessary equipment, personnel, supplies and support staff; and
WHEREAS, ROAII and Physician Owners desire to obtain the services of
Company in performing such management functions so as to permit ROAII and
Physician Owners to devote ROAII's and Physician Owners' efforts on a
concentrated and continuous basis to the rendering of medical services to
patients.
NOW THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements herein set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is agreed by the parties as follows:
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship. ROAII, Physician Owners and Company intend
to act and perform as independent contractors, and the provisions hereof are not
intended to create any partnership, joint venture, agency or employment
relationship between the parties. Notwithstanding the authority granted to
Company herein, Company, ROAII, and Physician Owners agree that ROAII and
Physician Owners shall retain all authority to direct the medical, professional,
and ethical aspects of ROAII's and Physician Owners' medical practice including
but not limited to the admission of new patients and providing care to indigent
patients. Each party shall be solely responsible for and shall comply with all
state and federal laws pertaining to employment taxes, income withholding,
unemployment compensation contributions and other employment related statutes
applicable to that party.
1.2. Responsibilities of the Parties. As more specifically set forth
herein, Company shall provide ROAII with offices and facilities, equipment,
supplies, certain support personnel, management and financial advisory services.
As more specifically set forth herein, ROAII shall be responsible for the
recruitment and hiring of physicians and all issues related to the professional
practice of medicine, medical practice patterns and documentation thereof.
Notwithstanding anything herein to the contrary, no "designated health service,"
as defined in 42 U.S.C. ss. 1395nn, including any amendments or successors
thereto, shall be provided by Company under this Agreement.
1.3. ROAII Matters. Matters involving the internal agreements and finances
of ROAII, including the disposition of professional fee income, tax planning,
and investment planning (and expenses relating solely to these internal business
matters) shall remain the sole responsibility of ROAII.
1.4. Patient Referrals. The parties agree that the benefits to ROAII and
Physician Owners hereunder do not require, are not payment for, and are not in
any way contingent upon the admission, referral or any other arrangement for the
provision of any item or service offered by Company to any of ROAII's patients
in any facility operated by Company.
<PAGE>
1.5. Professional Judgment. Each of the parties acknowledges and agrees
that the terms and conditions of this Agreement pertain to and control the
business and financial relationship between and among the parties but do not
pertain to and do not control the professional and clinical relationship between
and among ROAII, Physician Employees, ROAII Employees, and ROAII's patients.
Nothing in this Agreement shall be construed to alter or in any way affect the
legal, ethical, and professional relationship between and among ROAII, Physician
Owners, Physician Employees, and ROAII's patients, nor shall anything contained
in this Agreement abrogate any right, privilege, or obligation arising out of or
applicable to the physician-patient relationship.
ARTICLE II.
DEFINITIONS
2.1. Definitions. For the purpose of this Agreement, the following
definitions shall apply:
"Account Debtor" means an account debtor or any other Person obligated in
respect of an Account Receivable.
"Accounts Receivable" means, with respect to ROAII, all accounts and any
and all rights to payment of money or other forms of consideration of any kind
now owned or hereafter acquired (whether classified under the Uniform Commercial
Code as accounts, chattel paper, general intangibles or otherwise) for goods
sold or leased or for services rendered by ROAII, including, but not limited to,
accounts receivable, proceeds of any letters of credit naming ROAII as
beneficiary, chattel paper, insurance proceeds, contract rights, notes, drafts,
instruments, documents, acceptances and all other debts, obligations and
liabilities in whatever form from any other Person; provided that, cash, checks
and credit card purchases are not included in the definition of Accounts
Receivable.
"Affiliate" means, with respect to any Person, any entity which directly
or indirectly controls, is controlled by, or is under common control with, such
Person or any Subsidiary of such Person or any Person who is a director, officer
or partner of such Person or any Subsidiary of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to (a) vote ten percent (10%) or more of the securities having ordinary voting
power for the election of directors of such Person, or (b) direct or cause the
direction of management and policies of a business, whether through the
ownership of voting securities, by contract or otherwise and either alone or in
conjunction with others or any group.
"Applicable Law" means all applicable provisions of constitutions,
statutes, rules, regulations, ordinances and orders of all Governmental
Authorities and all orders and decrees of all courts, tribunals and arbitrators,
and shall include, without limitation, Health Care Law.
"Assigned Lease" shall have the meaning as defined in Section 3.1.
"Base Service Fee" shall
equal[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]per year,
payable in monthly payments of [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
"CHAMPUS" means the Civilian Health and Medical Program of the Uniformed
Services.
"Change in Control" shall mean any transaction pursuant to which Company
(a) consummates the sale of substantially all of the assets of Company to an
entity which is publicly traded in exchange for voting stock in such publicly
traded entity or (b) merges with a publicly traded corporation, entity or
corporation or entity controlled by a publicly traded corporation or entity in a
transaction where unrelated persons own at least fifty-one percent (51%) of the
issued and outstanding securities of the surviving entity or corporation
controlling the merged entity.
"Clinic Expenses" shall have the meaning as defined in Section 8.1.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
- 2 -
<PAGE>
"Company" shall mean Specialty Care Network, Inc., a Delaware corporation,
together with its successors and assigns.
"Company Expenses" shall have the meaning as defined in Section 8.1.7.
"Designated Leased Employees" shall have the meaning as defined in Section
6.9.1.
"Direct Lease" shall have the meaning as defined in Section 3.1.
"Disabled" or "Disability" shall mean that a Physician suffers from a
mental or physical condition resulting in such Physician Employee's inability to
perform the essential functions of his job as required by Section 6.1.1 (and as
may be described with greater specificity in written job descriptions prepared
and maintained by ROAII and approved by the Policy Board) without significant
risk to the health or safety of others, even with such reasonable accommodation
as may be available under the circumstances, and the Policy Board may reasonably
anticipate that such Physician Employee will remain disabled for at least two
years following the commencement of such disability.
"Excluded Expenses" shall have the meaning as defined in Section 8.1.8.
"Fair Market Value" with respect to Company common stock means (i) the
average closing price for the Company common stock as reported on a securities
exchange or quoted on a national quotation system, if any, upon which the
Company common stock is traded or quoted or (ii) in the event Company's common
stock is not traded on any exchange or quoted on a national quotation system,
the fair market value of the Company common stock shall be determined by an
independent appraiser or investment banker selected by two (2) independent
appraisers or investment bankers (one (1) such firm selected by Company and one
(1) such firm selected by the Physician Owner or the Physician Owners as a group
(as the case may be)). Such valuation may include the consideration of discounts
for marketability, minority ownership and other discounts usual and customary in
the valuation process. Unless otherwise specified herein, the cost of any
appraisal shall be borne equally by Company and the Physician Owner or the
Physician Owners as a group (as the case may be).
"GAAP" shall mean generally accepted accounting principles as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession. For purposes of
this Agreement, GAAP shall be applied in a manner consistent with the historic
practices used by Company or ROAII as applicable.
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, board, body, agency, bureau or entity or any arbitrator with
authority to bind a party at law.
"Governmental Receivables" means an Account Receivable of ROAII which (i)
arises in the ordinary course of business of ROAII, (ii) has as its Third-Party
Payor the United States of America or any state or any agency or instrumentality
of the United States of America or any state which makes any payments with
respect to Medicare or Medicaid or with respect to any other program (including
CHAMPUS) established by federal or state law, and (iii) is required by federal
or state law to be paid or to be made to ROAII as a healthcare provider.
Governmental Receivables shall not, however, refer to amounts payable by private
insurers under contract to provide benefits under the Federal Employee Health
Benefit Program.
"Governmental Rules and Regulations" shall have the meaning as defined in
Section 13.7.
"Health Care Law" means any Applicable Law regulating the acquisition,
construction, operation, maintenance or management of a health care practice,
facility, provider or payor, including without limitation, 42 U.S.C. ss.1395nn
and 42 U.S.C. ss. 1320a-7b.
- 3 -
<PAGE>
"Lease" shall mean the Assigned Lease, Direct Leases, and the New Leases,
including all amendments thereto, described in Section 3.1 hereof.
"Leased Premises" shall mean the real property described in the Lease.
"Lender" shall have the meaning as defined in Section 7.2.
"Main Office" shall mean the Leased Premises and all equipment and
facilities owned or operated by Company and utilized by ROAII or any of its
employees within said Leased Premises.
"Medicaid" means any state program pursuant to which health care providers
are paid or reimbursed for care given or goods afforded to indigent persons and
administered pursuant to a plan approved by the Health Care Financing
Administration under Title XIX of the Social Security Act.
"Medicare" means any medical program established under Title XVIII of the
Social Security Act and administered by the Health Care Financing
Administration.
"Merger" shall mean the acquisition of Reconstructive Orthopaedic Assocs.,
Inc. ("ROA") pursuant to the Merger Agreement.
"Merger Agreement" means that certain Merger Agreement, dated November 12,
1996 by and between Company, ROA and Physician Owners.
"Merger A/R" means the accounts receivable acquired from ROA by Company
pursuant to the Merger Agreement.
"Necessary Authorizations" means with respect to ROAII, all certificates
of need, authorization, certifications, consents, approvals, permits, licenses,
notices, accreditations and exemptions, filings and registrations, and reports
required by Applicable Law, including, without limitation, Health Care Law,
which are required, necessary or reasonably useful to the lawful ownership and
operation of ROAII's business.
"New Lease" shall have the meaning as defined in Section 3.1.
"Office Locations" shall have the meaning as defined in Section 3.1.
"Person" shall mean an individual, corporation, partnership, association,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof including, without limitation, Third-Party Payors.
"Physician Employees" shall mean the term as defined in Section 8.1.6.
"Physician Extender Employees" shall mean the term as defined in Section
8.1.5.
"Physician Owners" shall mean those Physician Employees who own an
interest, directly or indirectly, in the equity of ROAII.
"Plans" shall have the meaning as defined in Section 6.9.1.
"Policy Board" shall mean a board established pursuant to Section 4.1.
"Practice Net Revenue" shall mean the term as defined in Section 8.1.1.
"Practice Offices" shall mean (i) the Main Office and (ii) all of the
Satellite Offices.
- 4 -
<PAGE>
"Professional Services Revenues" shall mean the term as defined in Section
8.1.2.
"Purchase Price" shall mean the term as defined in Section 8.4.2.
"Purchased A/R" means, with respect to ROAII, the Accounts Receivable
purchased pursuant to Section 8.3 of this Agreement.
"ROAII Operating Account" shall mean that certain operating account
established by ROAII at a bank selected by ROAII in ROAII's sole discretion as
more fully described in Section 5.11.
"ROAII Plan" shall mean the term as defined in Section 6.9.1.
"Satellite Offices" shall mean each location at which one or more of
ROAII's employees provide services as described on Exhibit 2.1 and all equipment
and facilities owned or operated by Company and utilized by any of said persons
at such location.
"Settlement Date" shall mean the term as defined in Section 8.3.3.
"Service Agreement" means this Agreement.
"Subsidiary" means a Person of which an aggregate of 51% or more of the
voting stock of any class or classes or 51% or more of other voting or equity
interests is owned of record or beneficially by another Person, or by one or
more Subsidiaries of such Person.
"Substitute Physician(s)" shall mean the term as defined in Section
11.9.1(b).
"Technical Employees" shall mean the term as defined in Section 8.1.4.
"Third-Party Payors" means each Person which makes payment under a
Third-Party Payor Program, and each Person which administers a Third-Party Payor
Program.
"Third-Party Payor Programs" means Medicare, Medicaid, CHAMPUS, insurance
provided by Blue Cross and/or Blue Shield, managed care plans, and any other
private health care insurance programs and employee assistance programs as well
as any future similar programs.
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY COMPANY
3.1. Practice Offices. (a) Company has received a leasehold interest in
certain offices and locations which comprise the Practice location ("Main
Office") and/or satellite offices ("Satellite Offices") as identified on Exhibit
3.1 (collectively the "Office Locations") through (i) an assignment of any
existing leases on said Office Locations (the "Assigned Leases") or (ii)
entering into a new lease with respect to one or more of the Office Locations
(the "Direct Leases") with a copy of the Assigned Leases and Direct Leases
attached hereto as Exhibit 3.1.
(b) Company agrees to provide offices and facilities at the Office
Locations (or at comparable facilities on the termination of the Assigned Leases
or Direct Leases) to ROAII. Such facilities shall include all personal property
necessary to operate the facility. If any Assigned Leases or Direct Leases are
terminated by their terms, Company shall enter into a lease of a new facility
comparable to the Office Location whose lease is terminated (the "New Lease")
with the consent of the Policy Board. Company shall not enter into a lease for a
new Main Office or Satellite Office for ROAII without the approval of the Policy
Board.
- 5 -
<PAGE>
(c) ROAII agrees to comply with all terms and provisions of the Assigned
Leases, Direct Leases and New Leases.
3.2. Use of Practice Offices. ROAII shall not use or occupy the Main
Office or Satellite Offices for any purpose which is prohibited by the Assigned
Leases, Direct Leases or New Leases, by this Agreement or which is directly or
indirectly forbidden by law, ordinance, or governmental or municipal regulation
or order, or which may be dangerous to life, limb or property, or which would
increase the fire and extending coverage insurance rate in any Practice Office
or contents.
ARTICLE IV.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board. The parties shall
establish a Policy Board which shall be responsible for developing management
and administrative policies for the overall operation of any Practice Office.
The Policy Board shall consist of six (6) members. Company shall designate, in
its sole discretion, three (3) members of the Policy Board. ROAII shall
designate, in ROAII's sole discretion, three (3) members of the Policy Board.
Any matter decided by a majority of the members of the Policy Board shall
constitute the decision of the Policy Board with respect to the matter.
4.2. Duties and Responsibilities of the Policy Board. The Policy Board
shall have the following duties and obligations:
4.2.1. Capital Improvements and Expansion. The Policy Board shall review
all requests by ROAII for any renovations, capital improvements, expansions and
new equipment purchases or leases. The Policy Board shall determine whether such
expenditures are appropriate based upon economic feasibility, physician support,
productivity, market conditions, and the annual budget formulated pursuant to
this Agreement. If the Policy Board determines that the acquisition of
additional equipment or facilities is appropriate, then Company shall use its
best efforts to arrange for the financing and acquisition of the property.
Governance issues affecting the Policy Board shall be addressed in accordance
with the rules set forth in Exhibit 4.1.
4.2.2. Annual Budgets. All annual capital and operating budgets prepared
by Company in accordance with Section 5.2 of this Agreement, shall be subject to
the review of the Policy Board.
4.2.3. Marketing. All advertising and other marketing of the services
performed at any Practice Office shall be subject to the prior review and
approval of the Policy Board.
4.2.4. Patient Fees; Collection Policies. As a part of the annual
operating budget in consultation with ROAII and Company, to the extent allowed
by Applicable Law, the Policy Board shall review and advise ROAII as to an
appropriate fee schedule for all physician and ancillary services rendered by
ROAII, which fee schedule shall ultimately be determined by ROAII in ROAII's
sole discretion. In addition, the Policy Board shall approve the credit
collection policies of ROAII.
4.2.5. ROAII and Payor Relationships. Decisions regarding the
establishment or maintenance of relationships with institutional health care
providers and payors, or with parties under arrangements for setting up new
Satellite Offices of ROAII in the future, shall be made by the Policy Board in
consultation with ROAII.
4.2.6. Strategic Planning. The Policy Board shall develop long-term
strategic planning objectives.
4.2.7. Capital Expenditures. The Policy Board shall determine the priority
of major capital expenditures including the procurement of any new or additional
office space for Practice Offices.
4.2.8. Restrictive Covenants for Physician. The approval of the Policy
Board shall be required for any variations to the restrictive covenants
prescribed for any physician employment contract as set forth in Article VII or
Exhibit 11 of this Agreement.
- 6 -
<PAGE>
4.2.9. Grievance Referrals. The Policy Board shall consider and make final
decisions regarding grievances pertaining to matters not specifically addressed
in this Agreement as referred to it by the Physician Employees.
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions. Company shall use its best
efforts to manage the day-to-day operations of the Main Practice Office and any
Satellite Offices in a business-like manner. Company shall provide or arrange
for the services set forth in this Article V, the cost of all of which shall be
included in Clinic Expenses. Company is hereby expressly authorized to perform
its services hereunder in whatever manner it deems reasonably appropriate to
meet the day-to-day requirements of Practice Office operations in accordance
with the general standards approved by the Policy Board and to maintain the
lease agreements for each of the Practice Offices, including, without
limitation, performance of some of the business office functions at locations
other than the Main Practice Office. ROAII will not act in a manner which would
prevent Company from efficiently managing the day-to-day operations of the Main
Practice Office and maintaining the operations of the Satellite Offices in a
business-like manner.
5.2. Financial Planning and Goals. Subject to Section 4.2.2. of this
Agreement, Company shall prepare annual capital and operating budgets reflecting
in reasonable detail anticipated revenues and expenses, and sources and uses of
capital for growth in ROAII's practice and medical services rendered at the
Practice Office. Said budgets shall reflect amounts, if any, allocated for
capital purchases, improvements, expansion and any new leasing arrangements.
Thereafter, but no later than thirty (30) days prior to the end of the fiscal
year, the Policy Board and the Company shall agree upon a budget for the
upcoming fiscal year. The budget, as described in Section 4.2.2., shall be
binding upon Company and ROAII. Company shall consult with ROAII and the Policy
Board in the preparation of all budgets. Company and ROAII acknowledge and agree
that once a budget has been approved, neither Company nor ROAII shall make
expenditures or incur expenses in excess of budgeted amounts without the prior
approval of the Policy Board.
5.3. Audits and Financial Statements. Company shall prepare annual
financial statements for the operations of ROAII and, in its sole discretion,
may cause the financial statements to be audited by a certified public
accountant selected by Company. ROAII shall cooperate fully in such audit. The
cost of such audit shall be included in Clinic Expenses. If Company elects to
have the financial statements audited by a certified public accountant with a
big six accounting firm, the resulting audited financial statements shall be
binding on ROAII and Company. If Company elects not to have ROAII's financial
statements so audited, ROAII shall have the option to obtain such an audit, by a
certified public accountant with a mutually acceptable accounting firm. Company
shall fully cooperate in such audit. The cost of such audit shall be included in
Clinic Expenses. In such event, Company and ROAII shall be bound by the
resulting audited financial statements. All parties shall be entitled to copies
of any information provided to or by the auditors by or to any party.
Additionally, Company shall prepare monthly unaudited financial statements
containing a balance sheet and statements of income from Practice Office
operations, which shall be delivered to ROAII within thirty (30) business days
after the close of each calendar month.
5.4. Inventory and Supplies. Except as limited by Section 5.11, Company
shall order and purchase inventory and supplies and such other ordinary,
necessary or appropriate materials which Company shall deem to be necessary in
the operation of the Practice Offices and which are requested by ROAII and are
within the budget for the applicable fiscal period. Company shall not purchase
inventory, goods or supplies from any Affiliate of Company without approval of
the Policy Board and after full disclosure of all terms to the Policy Board.
5.5. Management Services and Administration.
5.5.1. ROAII hereby appoints Company as ROAII's sole and exclusive manager
and administrator of all day-to-day business functions. ROAII agrees that the
purpose and intent of this Agreement is to relieve ROAII and Physician Employees
to the maximum extent possible of the administrative, accounting, personnel and
business aspects of their practice, with Company assuming responsibility and
being given all necessary authority to perform these functions. Company agrees
that ROAII and only ROAII will perform the medical functions of ROAII's
practice. Company will have
- 7 -
<PAGE>
no authority, directly or indirectly, to perform, and will not perform, any
medical function. Company may, however, advise ROAII as to the relationship
between ROAII's performance of medical functions and the overall administrative
and business functioning of ROAII's practice. To the extent that a Company
employee assists Physician Employees in performing medical functions, such
employees shall be subject to the professional direction and supervision of
Physician Employees and in the performance of such medical functions shall not
be subject to any direction or control by, or liability to, Company, except as
may be specifically authorized by Company.
5.5.2. Company shall, on behalf of ROAII, bill patients and collect the
professional fees for medical services rendered by ROAII or any Physician
Employee, regardless of when or where such services are rendered. All billings
for Physician Employee's services shall be made in the name of and under the
provider number of ROAII. ROAII hereby appoints Company to be ROAII's true and
lawful attorney-in-fact, for the following purposes: (i) to bill patients in
ROAII's name and on ROAII's behalf; (ii) to collect Accounts Receivable
resulting from such billing in ROAII's name and on ROAII's behalf; (iii) to
receive payments from insurance companies, prepayments from health care plans,
and all other Third-Party Payors; (iv) to take possession of and endorse in the
name of ROAII (and/or in the name of an individual physician, such payment
intended for purpose of payment of a physician's bill) any notes, checks, money
orders, insurance payments and other instruments received in payment of Accounts
Receivable; and (v) to initiate legal proceedings in the name of ROAII to
collect any accounts and monies owed to ROAII or any Physician Employee, to
enforce the rights of ROAII as creditors under any contract or in connection
with the rendering of any service, and to contest adjustments and denials by any
Governmental Authority (or its fiscal intermediaries) as Third-Party Payors.
Except for cash proceeds from the collection of Accounts Receivable purchased
from ROAII by Company, Company shall deposit any cash receipts collected on
behalf of ROAII into the ROAII Operating Account described in Section 5.11.
5.5.3. Company shall design, supervise and maintain possession of all
files and records relating to the operation of ROAII, including but not limited
to accounting, billing, patient medical records, and collection records. While
the Company shall maintain custody, patient medical records shall at all times
be and remain the property of ROAII and shall be located at the Practice Offices
so that they are readily accessible for patient care. The Physician Employees
shall have the obligation to oversee the preparation and maintenance of patient
medical records, and to provide such medical information as shall be necessary
and appropriate to the records' clinical function and to sustain and ensure the
availability of Third-Party Payor reimbursement for services rendered. The
management of all files and records shall comply with applicable state and
federal statutes. Company shall use its best efforts to preserve the
confidentiality of patient medical records and use information contained in such
records only as permitted by law, to the extent necessary to perform the
services set forth herein.
5.5.4. Company shall supply to ROAII necessary clerical, accounting,
bookkeeping and computer services, printing, postage and duplication services,
medical transcribing services and any other ordinary, necessary or appropriate
service for the operation of the Practice Offices.
5.5.5. Subject to the overall guidance of the Policy Board, Company shall
design and implement an adequate and appropriate public relations program on
behalf of ROAII, with appropriate emphasis on public awareness of the
availability of services at the Practice Offices. The public relations program
shall be conducted in compliance with Applicable Law and regulations governing
advertising by the medical profession and applicable canons of principles of
professional ethics of ROAII and Physician Employees of ROAII.
5.5.6. Company shall provide the data necessary for ROAII to prepare
ROAII's annual income tax returns. Company shall have no responsibility for the
preparation of ROAII's federal or state income tax returns or the payment of
such income taxes. Company shall prepare or cause to be prepared on ROAII's
behalf, necessary employment tax returns. ROAII shall be obligated to pay any
taxes due on such employment tax returns with respect to the Physician Owners.
5.5.7. Company shall assist ROAII in recruiting additional physicians,
carrying out such administrative functions as may be appropriate, such as
advertising for and identifying potential candidates, obtaining credentials, and
arranging interviews; provided, however, ROAII shall interview and make the
ultimate decision as to the suitability of any physician
- 8 -
<PAGE>
to become associated with ROAII. All physicians recruited by Company and
accepted by ROAII shall be the sole employees of ROAII, to the extent such
physicians are hired as employees.
5.5.8. Company shall negotiate managed care contracts on behalf of ROAII
and shall administer all managed care contracts in which ROAII participates.
5.5.9. Company shall arrange for legal and accounting services related to
operations of the Practice Offices and Physician Employee's practice at the
Practice Offices incurred traditionally in the ordinary course of business,
including the cost of enforcing any contract with a Physician Employee
containing restrictive covenants, provided such services shall be approved in
advance by the Policy Board. Notwithstanding the foregoing, ROAII shall have the
authority to arrange for legal and accounting services relating to matters other
than day-to-day management of ROAII; such other matters including but not
limited to issues relating to ROAII governance issues, compensation of Physician
Owners, and issues which arise between ROAII and Company; provided, however,
such fees shall be considered Excluded Expenses.
5.5.10. Company shall provide for the proper cleanliness of the premises,
and maintenance and cleanliness of the equipment, furniture and furnishings
located upon such premises.
5.5.11. Upon receipt of dues, statements or license notices from the
Physician Employees, Company shall make payment for the cost of professional
licensure fees and board certification fees of physicians associated with ROAII.
5.5.12. Company shall negotiate for and cause premiums to be paid with
respect to the insurance provided for in Section 10.1.
5.6. Personnel. Company shall provide Physician Extender Employees and
other non-physician professional support (administrative personnel, clerical,
secretarial, bookkeeping and collection personnel) reasonably necessary for the
conduct of the operations at the Practice Offices. Company shall determine and
cause to be paid the salaries and fringe benefits of all such personnel. Such
personnel shall be employees of Company, with those personnel performing patient
care services subject to the professional direction and supervision of Physician
Employees. If ROAII is dissatisfied with the services of any person, ROAII shall
consult with Company. Company shall in good faith determine whether the
performance of that employee could be brought to acceptable levels through
counsel and assistance, or whether such employee should be terminated. All of
Company's obligations regarding staff shall be governed by the overriding
principle and goal of providing quality medical care. Employee assignments shall
be made to assure consistent and continued rendering of quality medical support
services and to ensure prompt availability and accessibility of individual
medical support staff to physicians in order to develop constant, familiar and
routine working relationships between individual physicians and individual
members of the medical support staff. If ROAII disagrees with an assignment,
ROAII may appeal such assignment to the Policy Board. Company shall maintain
established working relationships wherever possible and Company shall make every
effort consistent with sound business practices to honor the specific requests
of ROAII with regard to the assignment of Company's employees.
5.7. Events Excusing Performance. Company shall not be liable to ROAII or
Physician Owners for failure to perform any of the services required herein in
the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which Company has no control for so long as such
events continue, and for a reasonable period of time thereafter.
5.8. Compliance with Law and Business Standards. Company shall comply with
Applicable Law, including without limitation, Health Care Law, including without
limitation, federal, state, and local laws and regulations affecting billing and
reimbursement, referrals, patient privacy and confidentiality, and management of
hazardous materials and infectious waste. Company shall discharge its
obligations under this Agreement consistent with applicable business and
industry standards and practices.
5.9. Quality Assurance. Company shall assist ROAII in fulfilling ROAII's
obligations to patients to maintain professionally recognized quality of medical
and professional services.
- 9 -
<PAGE>
5.10. New Medical Services and Additional Practice Offices. If ROAII
desires to have a new medical service provided at any of the Practice Offices or
desires to establish a new clinic, a proposal of such service or the
establishment of such new clinic shall be submitted to the Policy Board. Should
the Policy Board approve the expansion of service or the establishment of such
new clinic, Company, at its option, shall have the exclusive right to provide
services necessary to support ROAII in ROAII's delivery of such new medical
services at the Practice Office or new clinic, as applicable; provided, however,
if the type of service is an ancillary service that would be improper under any
rules, regulations or laws for Company to offer to ROAII patients, then Company
shall not have the option to provide such service. Should Company decline to
provide the necessary support service for the new service or new clinic, ROAII
shall be entitled to perform such service at ROAII's own expense and the
revenues therefrom shall not be included in the calculation of Company's service
fees under Article VIII of this Agreement; provided, however, that Company shall
have the option to assume performance of the necessary support services for
providing such new service or new clinic by buying out ROAII's investment in the
service at ROAII's Book Value at anytime within eighteen (18) months of the date
such new service is first provided, which Book Value shall be based on the price
of the assets purchased by ROAII less depreciation accrued to the date of
acquisition of such service by Company, as determined under GAAP.
5.11. Collection of Certain Patient Receipts and Payment of Clinic
Expenses. ROAII agrees to establish and maintain a bank account, which shall be
referred to as the ROAII Operating Account, for the purpose of (a) depositing
proceeds from the sale of ROAII's Accounts Receivable pursuant to Section 8.3
and (b) paying (i) any Service Fees owed pursuant to Article VIII of this
Agreement, (ii) expenses which are solely the obligation of ROAII (Excluded
Expenses), and (iii) compensation or distributions to Physician Owners, and the
distributions shall be made in that order of payment. ROAII shall designate a
Company employee as a signatory on the ROAII Operating Account. After the
payment of any Service Fees owed pursuant to Article VIII of this Agreement, and
expenses which are solely the obligation of ROAII, ROAII may withdraw amounts
for distributions to Physician Owners.
5.12. Other ROAII Accounts. ROAII shall have the right to open or create
bank accounts in addition to the ROAII Operating Account described in Section
5.11 of this Agreement.
ARTICLE VI.
OBLIGATIONS OF ROAII AND PHYSICIAN OWNERS
6.1. Professional Services.
6.1.1. ROAII, its Physician Owners and Physician Employees shall provide
professional services to patients.
6.1.2. ROAII, its Physician Owners and Physician Employees shall provide
the professional services to patients described in Section 6.1.1 above in
compliance at all times with ethical standards, laws and regulations applying to
ROAII's professional practice. ROAII shall also make all reports and inquiries
to the National Practitioners Data Bank and/or any state data bank required by
Applicable Law. ROAII shall use its best efforts to determine that each
Physician Employee and Technical Employee associated with ROAII who provides
medical care to patients of ROAII is licensed by the state or states in which he
or she renders professional services. If any disciplinary or medical malpractice
action is initiated against any such individual, ROAII shall immediately provide
Company with copies of any third-party documents (not otherwise privileged)
served on ROAII or letters delivered to ROAII. Such information shall be deemed
confidential information and shall, notwithstanding such disclosure, remain
subject to all privileges and immunities provided by Applicable Law. Company
shall take all steps reasonably necessary to assure that such privileges and
immunities remain intact. ROAII shall carry out a program to monitor the quality
of medical care practiced at the Practice Offices to promote a high quality of
medical care.
6.2. Medical Practice. ROAII shall use and occupy the Practice Offices
exclusively for the practice of medicine and shall comply with all Applicable
Law and standards of medical care. It is expressly acknowledged by the parties
that the medical practice or practices conducted at the Main Office shall be
conducted solely by physicians or medical practitioner
- 10 -
<PAGE>
associated with ROAII, and no other physician or medical practitioner shall be
permitted to use or occupy the Main Office without the prior written consent of
Company.
6.3. Employment of Physician Employees. ROAII shall have complete control
of and responsibility for the hiring, compensation, supervision, evaluation and
termination of Physician Employees, although at the request of ROAII, Company
shall consult with ROAII respecting such matters. ROAII shall be responsible,
subject to Section 8.4, for the payment of such Physician Employees' salaries
and wages, payroll taxes, Physician Employee benefits and all other taxes and
charges now or hereafter applicable to them. With respect to physicians, ROAII
shall only employ and contract with licensed physicians meeting applicable
credentialing guidelines established by ROAII.
6.4. Professional Dues and Education Expenses. Except to the extent
provided in Section 8.1.3(k), Physician Owners shall be solely responsible for
the cost of membership in professional associations and the cost of continuing
professional education. ROAII shall ensure that each Physician Employee
participates in such continuing medical education as is necessary for such
physician to remain licensed.
6.5. Professional Insurance Eligibility. ROAII shall cooperate in the
obtaining and retaining of professional liability insurance by assuring that all
Physician Employees are insurable and participating in an on-going risk
management program.
6.6. Events Excusing Performance. ROAII and Physician Owners shall not be
liable to Company for failure to perform any of the services required herein in
the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which ROAII has no control for so long as such
events continue, and for a reasonable period of time thereafter.
6.7. Fees for Professional Services. ROAII shall be solely responsible for
legal, accounting and other professional services fees (Excluded Expenses)
incurred by ROAII, except as otherwise determined by the Policy Board.
6.8. Peer Review. ROAII agrees to cooperate with Company in establishing a
system of peer review within and among the provider practices as necessary to
obtain provider contracts. In connection therewith, ROAII agrees to assist in
the formulation of provider guidelines for each treatment or surgical modality,
and agrees to abide by said guidelines, and further agrees to submit to periodic
reviews by a third party to monitor compliance with said guidelines. ROAII
acknowledges that the establishment of provider guidelines may be necessary to
obtain PPO, HMO, IPA and other similar provider contracts, both private and
government funded. To the extent that said provider guidelines must be filed or
registered with any Third-Party Payor, ROAII agrees to cooperate with Company in
making such filings or registrations. It is agreed and acknowledged that all
such peer review guidelines shall be established and monitored by medical
personnel on the staff of ROAII and other practices that are part of the peer
review process, and shall not be promulgated, established or enforced
independently by Company. To the extent possible, all information obtained
through the peer review process shall remain confidential and the parties shall
take all steps reasonably necessary to assure that all privileges and immunities
provided by Applicable Law remain intact.
6.9. ROAII Employee Benefit Plans.
6.9.1. Effective as of the date of the closing under the Merger Agreement,
ROAII shall amend the tax-qualified retirement plan(s) described on Exhibit
6.9.1 (the "ROAII Plan") to provide that employees of Company who are classified
as "leased employees" (as defined in Code Section 414(n)) of ROAII shall be
treated as ROAII employees for purposes described in Code Section 414(n)(3). Not
less often than annually, ROAII and Company shall agree upon and identify in
writing those individuals to be classified as leased employees of ROAII (the
"Designated Leased Employees"). ROAII and Company shall establish mutually
agreeable procedures with respect to the participation of Designated Leased
Employees in the ROAII Plan. Such procedures shall be designed to avoid the tax
disqualification of the ROAII Plan, similar plans of practices similarly
situated, (collectively, the "Plans").
- 11 -
<PAGE>
6.9.2. If the Policy Board determines that the relationship between
Company and ROAII (and other practices similarly situated) constitutes an
"affiliated service group" (as defined in Code Section 414(m)), Company and
ROAII shall take such actions as may be necessary to avoid the tax
disqualification of the Plans. Such actions may include the amendment, freeze,
termination or merger of the ROAII Plan.
6.9.3. The Plans described on Exhibit 6.9.1 attached hereto are approved
by Company. ROAII shall not enter into any new "employee benefit plan" (as
defined in Section 3(3) of the Employment Retirement Income Security Act of
1974, as amended ("ERISA") without the consent of Company. In addition, ROAII
shall not offer any retirement benefits or make any material retirement payments
other than under the ROAII Plan to any stockholder of ROAII without the express
written consent of Company. Except as otherwise required by law, ROAII shall not
materially amend, freeze, terminate or merge the ROAII Plan without the express
written consent of Company. In the event of either of the foregoing, Company's
consent shall not be withheld if such action would not jeopardize the
qualification of any of the Plans. ROAII agrees to make such changes to the
ROAII Plan, including the amendment freeze, termination or merger of the ROAII
Plan, as may be approved by the Policy Board and Company but only if such
changes are necessary to prevent the disqualification of any of the Plans.
6.9.4. Expenses incurred in connection with the ROAII Plan or other ROAII
employee benefit plans, including, without limitation, the compensation of
counsel, accountants, corporate trustees, and other agents shall be included in
Clinic Expenses.
6.9.5. The contribution and administration expenses for the Designated
Leased Employees shall be included in ROAII's operating budget. ROAII and
Company shall not make employee benefit plan contributions or payments to ROAII
for their respective employees in excess of such budgeted amounts unless
required by law or the terms of the ROAII Plan. Company shall make contributions
or payments with respect to the ROAII Plan or other ROAII employee benefit
plans, as a Clinic Expense, on behalf of eligible Designated Leased Employees,
and other eligible ROAII employees. In the event a ROAII Plan or other ROAII
employee benefit plan is terminated, Company shall be responsible, as a Clinic
Expense, for any funding liabilities related to eligible Designated Leased
Employees; provided, however, Company shall only be responsible for the funding
of any liability accruing after the date of the Merger Agreement.
6.9.6. Company shall have the sole and exclusive authority to adopt, amend
or terminate any employee benefit plan for the benefit of its employees,
regardless of whether such employees are Designated Leased Employees, unless
such actions would require the amendment, freeze or termination of the ROAII
Plan to avoid disqualification of the ROAII Plan, in which case any such action
would be subject to the express prior written consent of the Policy Board.
Company shall have the sole and exclusive authority to appoint the trustee,
custodian and administrator of any such plan.
6.9.7. In the event that any "employee welfare benefit plan" (as defined
in ERISA Section 3(l)) maintained or sponsored by ROAII must be amended,
terminated, modified or changed as a result of ROAII or Company being deemed to
be a part of an affiliated service group, the Policy Board will replace such
plan or plans with a plan or plans that provides those benefits approved by the
Policy Board. It shall be the goal of the Policy Board in such event to provide
substantially similar or comparable benefits if the same can be provided at a
substantially similar cost to the replaced plan.
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
The parties recognize that the services to be provided by Company shall be
feasible only if ROAII operates an active medical practice to which both ROAII
and the physicians associated with ROAII devote their full time and attention.
To that end:
7.1. Exclusive Arrangement. During the term of this Agreement, Company
shall be ROAII's and Physician Owners' sole provider of the management services
described in this Agreement and neither ROAII, Physician Owners nor any of
ROAII's or Physician Owners' employees shall provide such management services
during the term of this Agreement.
- 12 -
<PAGE>
ROAII and the Physician Owners agree that during the term of this Agreement,
neither ROAII nor Physician Owners will enter into any similar agreements with
any physician practice management company or entity. ROAII and the Physician
Owners further agree that during the term of this Agreement, they will not
engage, directly or indirectly, as a principal owner, shareholder (other than a
holder of fewer than 5% of the outstanding shares of a publicly-traded company),
partner, joint venturer, agent, equity owner, or in any other capacity
whatsoever, in any corporation, partnership, joint venture, or other business
association or entity that operates ambulatory surgery centers or provides
management services of the nature provided by Company pursuant to this
Agreement, within Philadelphia County, Pennsylvania or contiguous counties or
any location within seventy-five (75) miles of the Main Clinic or any future
facility that replaces the Main Clinic (wherever located) or any Satellite
Office utilized by ROAII at any time during the term of this Agreement.
7.2. Restrictive Covenants.
7.2.1. By Current Physician Employees. ROAII shall obtain and enforce
formal agreements from current Physician Employees, other than Technical
Employees, pursuant to which the Physician Employees agree not to establish,
operate or provide physician services at any medical office, clinic or
outpatient and/or ambulatory treatment or diagnostic facility providing services
substantially similar to those provided by ROAII, except on ROAII's behalf,
within Philadelphia County, Pennsylvania or contiguous counties or any location
within seventy-five (75) miles during the first five (5) years of the term of
this Agreement or fifty (50) miles thereafter of the Main Office or any future
facility that replaces the Main Office (wherever located at such time) or any
Satellite Office at the time of termination of employment with ROAII and for a
period of twenty-four (24) months after any termination of employment with
ROAII. Such agreements shall be a condition to employment and shall be in a form
satisfactory to Company and shall provide that Company is a third-party
beneficiary to such agreements and that such third-party beneficiary rights may
be assigned to Company's lender ("Lender"). This Section 7.2 shall relate solely
to Physician Employees who are not also Physician Owners.
7.2.2. By Current and Future Physician Owners. On the earlier of one
hundred eighty (180) days from the effective date of this Agreement, or on
thirty (30) days after written request by Company, which written request
includes a reasonable explanation or basis for the request, ROAII shall obtain
and enforce formal restrictive covenants with current and future Physician
Owners, the terms of which shall be substantially similar to the provisions of
Exhibit 11. Such agreements shall provide that Company is a third-party
beneficiary to such agreements. ROAII agrees to enforce the restrictive
covenants. The cost and expense of such enforcement shall be a Clinic Expense,
and all damages and other amounts recovered thereby shall be included in
Professional Services Revenue. In the event that after a request by Company,
ROAII does not pursue any remedy that may be available to it by reason of a
breach or default of a restrictive covenant, upon the request of Company, ROAII
shall assign to Company such causes of action and/or other rights it has related
to such breach or default and shall cooperate with and provide reasonable
assistance to Company with respect thereto; in which case, all costs and
expenses incurred in connection therewith shall be borne by Company and shall be
included in Company Expenses, and Company shall be entitled to all damages and
other amounts recovered thereby. The above described restrictive covenants
between ROAII and Physician Owners shall be in addition to and not in place of
the restrictive covenants described in Exhibit 11 between Company and the
Physician Owners.
7.3. Restrictive Covenants By Future Physician Employees. ROAII shall
obtain and enforce formal agreements from each future Physician Employee other
than Technical Employees, hired or contracted, pursuant to which such physicians
agree not to establish, operate or provide physician services at any medical
office, clinic or outpatient and/or ambulatory treatment or diagnostic facility
providing services substantially similar to those provided by ROAII except on
ROAII's behalf, within Philadelphia County, Pennsylvania or contiguous counties
or any location within seventy-five (75) miles during the first five (5) years
of the term of this Agreement or fifty (50) miles thereafter of the Main Office
or any future facility that replaces the Main Office (wherever located at such
time) or any Satellite Office at the time of termination of said Physician
Employee's contract with ROAII and for a period of twenty-four (24) months
thereafter. Such agreements shall be a condition to employment and shall be in a
form satisfactory to Company and shall provide that Company is a third-party
beneficiary to such agreements and that such third-party beneficiary rights may
be assigned to any Lender. This Section 7.3 shall relate solely to Physician
Employees who are not also Physician Owners. The terms and conditions of Exhibit
11 shall govern restrictive covenants relating to Physician Owners.
- 13 -
<PAGE>
7.4. Rights of Company. Except as limited below, Company shall at all
times during the term of this Agreement and thereafter have the right to enter
into additional service agreements with other physicians and practices
regardless of where such physicians and/or practices are located providing for
management services and facilities to such physicians and/or practices.
Notwithstanding the foregoing, and except as set forth in Section 11.9.3, in the
event that Company desires to enter into a Service Agreement with another
practice located within seventy-five (75) miles during the first five (5) years
of the term of this Agreement or fifty (50) miles thereafter of ROAII's Main
Office or any Satellite Office, then the Policy Board must first approve Company
entering into such agreement. In the event that the individuals representing
Company on the Policy Board can reasonably demonstrate that entering into such
agreement will not have a material adverse effect on ROAII's practice
operations, earnings or cash flow, then the individuals representing ROAII shall
consent to Company entering into such agreement.
7.5. Enforcement. ROAII acknowledges and agrees that since a remedy at law
for any breach or attempted breach of the provisions of this Article VII shall
be inadequate, Company shall be entitled to specific performance and injunctive
or other equitable relief in case of any such breach or attempted breach in
addition to whatever other remedies may exist by law. All parties hereto also
waive any requirement for the securing or posting of any bond in connection with
the obtaining of any such injunctive or other equitable relief. If any provision
of Article VII relating to the restrictive period, scope of activity restricted
and/or the territory described therein shall be declared by a court of competent
jurisdiction to exceed the maximum time period, scope of activity restricted or
geographical area such court deems reasonable and enforceable under Applicable
Law, the time period, scope of activity restricted and/or area of restriction
held reasonable and enforceable by the court shall thereafter be the restrictive
period, scope of activity restricted and/or the territory applicable to the
restrictive covenant provisions in this Article VII. In addition, breach of the
provisions of this Article VII may trigger certain rights of Company to redeem a
Physician Owner's Company common stock pursuant to the terms of Article VIII of
that certain stockholders agreement between Company and its stockholders (the
"Stockholders Agreement").
7.6. Modification of Restrictive Covenants. Upon the termination of
employment of a Physician Owner or Physician Employee, the Policy Board shall
have the authority to release or reduce in whole or in part the terms of the
restrictive covenants, including but not limited to the mileage radius
limitations set forth above in Sections 7.2 and 7.3. In the event that the
individuals representing ROAII on the Policy Board can reasonably demonstrate
that a modification to the restrictive covenant will not have a material adverse
effect on Company's or ROAII's practice operations, earnings or cash flow, then
the individuals representing Company shall consent to the proposed
modifications.
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees. During the first thirty-six (36) months of the term of
this Agreement, Company shall receive a service fee equal to (a) the greater of
(i) [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]or (ii) the Base Service
Fee, plus (b) the amount of Clinic Expenses. Upon the expiration of the first
thirty-six (36) months of the term of this Agreement, Company shall receive a
service fee equal to [xxxxxxxxxxxxxxxxxxxxxxxxx]of Practice Net Revenue plus the
amount of Clinic Expenses. In the event that a Physician Owner ceases to
practice medicine during the first thirty-six (36) months of the term of this
Agreement, such Physician Owner shall be personally liable for any reduction in
ROAII's service fees payable as further described under Section 11.9.1 of this
Agreement. In the event that a Physician Owner either dies or becomes Disabled
during such thirty-six (36) month period, ROAII, or the applicable Physician
Owner, as the case may be, shall be entitled to satisfy the amount owed by
transferring to Company an amount of Company common stock having a Fair Market
Value equal to the amount owed or paying to Company cash in the amount owed (or
a combination thereof).
8.1.1. "Practice Net Revenue" shall mean Professional Services Revenues,
less Clinic Expenses.
8.1.2. "Professional Services Revenue" shall mean all fees actually
recorded each month (net of any amounts reimbursed to any patients or
Third-Party Payors during the applicable month and net of any adjustments for
contractual allowances, Medicaid, worker's compensation, employee/dependent
health care benefit programs, professional courtesies
- 14 -
<PAGE>
and other activities that do not generate a collectible fee) by or on behalf of
ROAII as a result of professional medical services personally furnished to
patients and other fees or income generated in their capacity as Physician
Employees and Technical Employees, and any revenue from the sale of any goods.
8.1.3. "Clinic Expenses" shall mean all operating and non-operating
expenses of ROAII arising hereunder unless expressly provided otherwise,
including, without limitation:
(a) salaries, benefits and other direct costs of all Clinic
employees including Company's employees and Physician Extender Employees
as defined in Section 8.1.5 working at the Practice Offices and salaries,
payroll taxes and employee benefits paid to Physician Employees (other
than Physician Owners) under Section 6.3 and to Technical Employees as
defined in Section 8.1.4,
(b) obligations of Company under Leases provided for herein under
Article III,
(c) the expenses and charges incurred for the Practice Offices,
including without limitation utilities, telephone, etc.,
(d) personal property and intangible taxes assessed against
Company's assets utilized by ROAII in the Practice Offices from and after
the date of this Agreement,
(e) interest expense on indebtedness incurred by Company to (i)
satisfy the obligations of ROAII, if any, assumed under the Merger
Agreement, (ii) provide working capital for Company's performance of any
of its obligations to ROAII hereunder, or (iii) purchase equipment,
(f) malpractice insurance premiums, disability insurance premiums to
cover accommodations to the Practice Offices under the definition of
"Disabled" or "Disability," and fire, workers compensation and general
liability insurance premiums, and life insurance premiums, during the
first three (3) years of this Agreement, for life insurance on the lives
of Physician Owners, with ROAII as the death beneficiary,
(g) the cost of any goods purchased for resale,
(h) the depreciation, as determined under GAAP, for any equipment or
depreciable property owned by Company and used in ROAII's Office Locations
by ROAII to be billed to ROAII on a monthly basis and paid to Company at
the same time Company pays for ROAII's Accounts Receivable pursuant to
Section 8.3,
(i) direct costs of all employees or consultants of Company engaged
to provide services at or in connection with ROAII or who actually provide
services at or in connection with the Clinic for improved performance,
such as quality assurance, reasonable expenses required for physician
accommodations under the definition of "Disabled" or "Disability,"
materials management, purchasing program, change in coding analysis,
physician recruitment; provided, however, only the portion of expenses
related to such employee or consultant, without mark-up, that is allocable
in a fair and reasonable manner to work approved by the Policy Board which
is performed at or for the benefit of ROAII shall be included in Clinic
Expenses,
(j) expenses related to professional meetings, seminars, dues,
medical books and professional licensing fees for Physician Employees
(other than Physician Owners) provided, however, that such amount shall
not exceed $10,000 during any calendar year for any Physician Employee
(other than Physician Owners). If the cost incurred for such professional
meetings, seminars, dues, medical books and professional licensing fees
exceeds $10,000 during any calendar year, then the Physician Employee
incurring such cost shall be solely liable for the overage;
(k) expenses related to professional meetings, seminars, dues,
medical books and professional licensing fees for Physician Owners;
provided, however, that such amount shall not exceed $10,000 during any
calendar year for any Physician Owner. If the cost incurred for such
professional meetings, seminars, dues, medical books and
- 15 -
<PAGE>
professional licensing fees exceeds $10,000 during any calendar year, then
the Physician Owner incurring such cost shall be solely liable for the
overage; and
(l) any and all other ordinary and necessary expenses incurred by
ROAII or approved by the Policy Board and reasonably incurred by the
Company for the direct benefit of ROAII in carrying out their respective
obligations under this Agreement.
Clinic Expenses shall not include Excluded Expenses or Company Expenses.
Excluded Expenses shall be the sole obligation of ROAII. Company Expenses shall
be the sole obligation of Company.
8.1.4. "Technical Employees" shall mean individuals who provide billable
services on behalf of ROAII and are employees of ROAII.
8.1.5. "Physician Extender Employees" shall mean Physician Assistants,
Nurse Practitioners, and other such persons who are employees of Company, but
excluding any Technical Employees.
8.1.6. "Physician Employees" shall mean only those individuals who are
doctors of medicine (including Physician Owners) and who are employed by ROAII
or are otherwise under contract with ROAII to provide professional services to
patients seen in the Main Office or Satellite Offices and are duly licensed to
provide professional medical services in the state or states in which he or she
renders professional services under this Agreement.
8.1.7. "Company Expenses" shall mean, pursuant to GAAP applied on a
consistent basis:
(a) Any corporate overhead charges of Company and other items
incurred by Company that are not incurred specifically for the purpose of
providing services to ROAII or are not directly attributable to ROAII, as
reasonably determined by Company, including, without limitation, salaries
and benefits of executive officers of Company, except as otherwise
provided for in the definition of Clinic Expenses;
(b) Any amortization of any intangible asset resulting from the
Merger;
(c) Any depreciation attributable to increases in the book value of
tangible depreciable assets resulting from the Merger;
(d) Any legal and accounting expenses incurred by Company in
connection with the Merger; and
(e) All taxes of Company, including, but not limited to, state and
federal income taxes and franchise taxes, but excluding state and federal
employee taxes related to employees who provide services for ROAII,
property taxes on assets used by ROAII and other taxes specifically
included in Clinic Expenses.
8.1.8. "Excluded Expenses" shall be the sole obligation of ROAII and shall
mean, pursuant to GAAP applied on a consistent basis:
(a) Any salaries or other distributions made to Physician Owners
whether for professional fee income or otherwise;
(b) Any federal, state or other taxes associated therewith;
(c) Except as provided in Section 8.1.3(k), expenses of Physician
Owner's to maintain licensure or meet continuing education requirements,
including related travel expense; and
(d) Any other items specifically designated as Excluded Expenses
elsewhere in this Agreement including but not limited to those items
listed on Exhibit 8.1.8(d).
- 16 -
<PAGE>
8.2. Payment of Service Fee. The amounts to be paid to Company under this
Article VIII shall be payable monthly, at the time that Company pays ROAII for
the Accounts Receivable previously purchased by Company as described in Section
8.3 below. The amount payable shall be estimated based upon the previous month's
operating results of ROAII. Adjustments to the estimated payments shall be made
to reconcile actual cumulative amounts due under this Article VIII, by the end
of the following month during each calendar year. Upon preparation of annual
financial statements as provided in Section 5.3, final adjustments to the
service fee for the preceding year shall be made and any additional payments
owing to Company or ROAII shall then be made to the party owed the additional
sum of money. The adjustment and any amount owed shall be calculated and paid
within ninety (90) days following the close of Company's fiscal year.
8.3. Purchase of Accounts Receivable.
8.3.1. ROAII hereby agrees to sell and assign to Company and Company
agrees to buy, all of ROAII's Accounts Receivable each month during which this
Agreement is in existence which are owing to ROAII arising out of the delivery
of medical, surgical, diagnostic or other professional medical goods or
services. Accounts Receivable shall not include, and Company shall not purchase,
any cash, checks or receivables created by credit cards. Company shall bear the
risk of collection and any overage or underage resulting from any purchased
Accounts Receivable.
8.3.2. The purchase price for each Accounts Receivable (the "Purchase
Price") will be equal to the face amount of the Accounts Receivable recorded
each month, less any non-allowed contractual adjustments and net of any reserve
for uncollectible Accounts Receivables based on the historical experience of the
practice as determined by the Company. It is the intent of the parties that the
Purchase Price reflect the actual net realizable value of the Accounts
Receivable.
8.3.3. ROAII will sell all Accounts Receivable to Company, such purchase
to be deemed to be made on the fifteenth (15th) day of the month following the
month in which such Accounts Receivable are created. Company shall pay for the
Accounts Receivable not later than the fifteenth (15th) day of each month
following the month in which the Accounts Receivable is created (the "Settlement
Date"). Company shall pay to ROAII for all Accounts Receivable purchased by
check, wire transfer or intrabank transfer to the ROAII Operating Account
described in Section 5.11. The purchase of Accounts Receivable shall be
evidenced by sending Company (i) a copy of each invoice with respect to each
Third-Party Payor on the Accounts Receivable then being purchased; and (ii) any
other information or documentation (including all required Uniform Commercial
Code releases or financing statements) Company may reasonably need to identify
the Accounts Receivable and obtain payment from the Account Debtors; provided
that such failure to send such documents shall not affect the obligation of
ROAII to sell such Accounts Receivable or Company to buy such Accounts
Receivable. As consideration for the purchase of Accounts Receivable by Company
pursuant to this Section 8.3, Company promises to pay and shall be obligated to
pay for such Accounts Receivable at the time and in the manner provided below.
To the extent permissible by Applicable Law, ROAII will be deemed to have sold
to Company all of ROAII's right, title and interest in such Accounts Receivable
and in any proceeds thereof, and Company will be the sole and absolute owner
thereof and will own all of ROAII's rights and remedies represented by such
Accounts Receivable (including, without limitation, rights to payment from the
respective Account Debtors on such Accounts Receivable), and Company will have
obtained all of ROAII's rights under all guarantees, assignments and securities
with respect to each such Accounts Receivable.
8.3.4. Upon expiration or termination of this Agreement for any reason,
(i) all Accounts Receivable purchased by Company shall remain the property of
Company and (ii) all Accounts Receivable purchased and not paid for at such
expiration or termination shall be paid for by the 10th of the following month
but effective as of the effective date of such expiration or termination date,
less the amount of any service fee earned by Company pursuant to Section 8.1 of
this Agreement.
8.3.5. In connection with the initial purchase of Accounts Receivable by
Company, ROAII will execute such financing statements or amendments under the
UCC (naming Company as secured party and Lender as assignee) as Company may
reasonably request with respect to any Accounts Receivable that may be purchased
pursuant to this Agreement.
8.3.6. ROAII agrees to cooperate with Company in the collection of the
Accounts Receivable sold by ROAII, transferred pursuant to Section 8.3. At the
option of and upon the request of Company, ROAII shall execute any and all
- 17 -
<PAGE>
documentation necessary for the transfer of amounts constituting Accounts
Receivables and/or the establishment of lockboxes in accordance with the
provisions of Exhibit 8.3.6 attached hereto.
8.3.7. All Accounts Receivable of ROAII purchased by Company ("Purchased
A/R") pursuant to this Section 8.3 hereof will, as such Purchased A/R are
purchased, be treated as Professional Service Revenues for accounting and
financial purposes.
8.4. Payment of Clinic Expenses. All Clinic Expenses shall be incurred in
the name of Company, unless ROAII is required by law to incur such expenses, in
which case Company shall indemnify ROAII against any such expenses. Company
shall pay all Clinic Expenses as they become due; provided, however, that
Company may, in the name and on behalf of ROAII, contest in good faith any
claimed Clinic Expense to which there is any dispute regarding the nature,
existence or validity of such claimed Clinic Expense. Upon receipt of ROAII's
service fee, Company shall be required to deposit into the ROAII Operating
Account described in Section 5.11 an amount of money necessary for ROAII to pay
the compensation and benefits associated with the Technical Employees and
Physician Employees (other than Physician Owners) employed by ROAII.
ARTICLE IX.
RECORDS
9.1. Patient Records. Upon termination of this Agreement and unless
otherwise provided herein, ROAII shall retain all patient medical records
maintained by ROAII or Company in the name of ROAII. ROAII shall, at ROAII's
option, be entitled to retain copies of financial and accounting records
relating to all services performed by ROAII. All parties agree to maintain the
confidentiality of patient identifying information and not to disclose such
information except as may be required or permitted by Applicable Law.
9.2. Records Owned by Company. All records relating in any way to the
operation of the Practice Offices which are not the property of ROAII under the
provisions of Section 9.1 above, shall at all times be the property of Company.
9.3. Access to Records. During the term of this Agreement, and thereafter,
ROAII or ROAII's designee shall have reasonable access during normal business
hours to ROAII's and Company's financial records, which relate to the operation
of ROAII including, but not limited to, records of collections, expenses and
disbursements as kept by Company in performing Company's obligations under this
Agreement, and ROAII may copy at ROAII's expense any or all such records.
9.4. Government Access to Records. To the extent required by Section
1861(v)(1)(I) of the Social Security Act, each party shall, upon proper request,
allow the United States Department of Health and Human Services, the Comptroller
General of the United States, and their duly authorized representatives access
to this Agreement and to all books, documents, and records necessary to verify
the nature and extent of the costs of services provided by either party under
this Agreement, at any time during the term of this Agreement and for an
additional period of four (4) years following the last date services are
furnished under this Agreement. If either party carries out any of its duties
under this Agreement through an agreement between it and an individual or
organization related to it or through a subcontract with an unrelated party,
that party to this Agreement shall require that a clause be included in such
agreement to the effect that until the expiration of four (4) years after the
furnishing of services pursuant to such agreement, the related organization
shall make available, upon request by the United States Department of Health and
Human Services, the Comptroller General of the United States, or any of their
duly authorized representatives, all agreements, books, documents, and records
of such related organization that are necessary to verify the nature and extent
of the costs of services provided under that agreement.
- 18 -
<PAGE>
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by ROAII. Throughout the term of this
Agreement, ROAII shall maintain comprehensive professional liability and
worker's compensation insurance for ROAII and all employees of ROAII in amounts
approved by the Policy Board. Not in limitation of the foregoing, ROAII shall
maintain excess general liability umbrella coverage with a One Million Dollars
($1,000,000) limit as currently maintained by ROAII (with deductible provisions
not to exceed $25,000 per occurrence), the cost of which shall be paid by
Company as a Clinic Expense. In lieu of the foregoing, Company may provide as a
Clinic Expense group insurance for malpractice and/or worker's compensation
insurance. Notwithstanding the foregoing, in the event that Company procures
such group insurance for malpractice and/or worker's compensation insurance,
ROAII must first approve the amount of coverage, the carrier and the terms of
any such coverage for ROAII.
10.2. Insurance to be Maintained by Company. Throughout the term of this
Agreement, Company shall provide and maintain, as a Clinic Expense,
comprehensive professional liability insurance and worker's compensation
insurance as required by Applicable Law for all professional employees of
Company who work at the Practice Offices with limits as determined reasonable by
Company, comprehensive general liability and property insurance covering the
Practice Offices' premises and operations. The deductible provisions on the
personal liability shall not exceed $25,000 per occurrence and the commercial
general liability insurance shall be in amounts customarily maintained by other
businesses in the same or similar business as Company.
10.3. Additional Insureds. ROAII and Company agree to use their best
efforts to have each other named as an additional insured on the other's
respective professional liability insurance programs at Company's expense.
Further, on any insurance where Company will be named as an additional insured,
ROAII will assist Company to obtain appropriate riders to insure payment of any
party indemnified by Company.
10.4. Indemnification. ROAII shall indemnify, hold harmless and defend
Company, its officers, directors and employees, from and against any and all
liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees), caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts or negligent omissions (other than for any claims for (or in
connection with) malpractice arising from the performance or nonperformance of
medical services) by ROAII and/or ROAII's Physician Owners, agents, employees
and/or subcontractors (other than Company) during the term hereof. Company shall
indemnify, hold harmless and defend ROAII, ROAII's officers, directors and
employees, from and against any and all liability, loss, damage, claim, causes
of action, and expenses (including reasonable attorneys' fees), caused or
asserted to have been caused, directly or indirectly, by or as a result of the
performance of any intentional acts, negligent acts or negligent omissions by
Company and/or its shareholders, agents, employees and/or subcontractors (other
than ROAII) during the term of this Agreement. Neither Company nor ROAII shall
have any obligation to indemnify the other party unless the claim for
indemnification is based upon a liability, loss or damages resulting in the
indemnified party making payments to a third party. Pursuant to the terms of the
Stockholders Agreement, Company may have the right to redeem a Physician Owner's
Company common stock to satisfy a Physician Owner's indemnification obligations.
In the event that either party makes a claim for indemnification under
either the Merger Agreement or this Service Agreement, then the claiming party
shall have the right, to the extent it is owed indemnifications, to pay amounts
owed to the other party under this Agreement into an escrow account (established
pursuant to an escrow agreement to be agreed upon by the parties) to be held by
the escrow agent in an interest bearing account until a determination by either
(i) the parties, (ii) a court of proper jurisdiction or (iii) agreed upon panel
of arbitrators, has been made regarding the claiming party's right to
indemnification. In the event that the claiming party is entitled to
indemnification, then such escrowed funds shall be paid to the claiming party in
partial or complete satisfaction of such indemnification obligation. Any excess
funds remaining in the escrow account after the payment of the indemnification
obligation or any funds held in the escrow account if it is determined that no
indemnification obligation is owed shall be paid to the other party.
- 19 -
<PAGE>
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement. This Service Agreement shall be effective upon
the closing of the Merger Agreement, and shall expire on October 31, 2036 unless
earlier terminated pursuant to the terms hereof. Notwithstanding the foregoing,
for purposes of computing the Service Fee for the month of November of 1996
only, the Service Agreement shall be effective upon November 1, 1996.
11.2. Extended Term. Unless earlier terminated as provided for in this
Agreement, the term of this Agreement shall be automatically extended for
additional terms of five (5) years each, unless either party delivers to the
other party, not less than one hundred eighty (180) days prior to the expiration
of the preceding term, written notice of such party's intention not to extend
the term of this Agreement.
11.3. Termination by ROAII for Cause. ROAII may terminate this Agreement
without breach as follows:
11.3.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by Company, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by Company, except for the filing of a petition in
involuntary bankruptcy against Company which is dismissed within thirty (30)
days thereafter, ROAII may give notice of the immediate termination of this
Agreement.
11.3.2. In the event Company shall materially default in the performance
of any duty or obligation imposed upon it by this Agreement and such default
shall continue for a period of sixty (60) days after written notice thereof has
been given to Company by ROAII; or Company shall fail to remit the payments due
as provided in Article VIII hereof and such failure to remit shall continue for
a period of thirty (30) days after written notice thereof, ROAII may terminate
this Agreement.
11.3.3. In the event Company shall, intentionally or in bad faith,
misapply funds or assets of ROAII or commit a similar act which cause material
harm to ROAII, ROAII may terminate this Agreement.
11.3.4. In the event that Company shall intentionally or in bad faith
violate Applicable Law resulting in a direct, continuing material adverse effect
on the operations, earnings and cash flow of ROAII, ROAII may terminate this
Agreement.
11.4. Termination by Company for Cause. Company may terminate this
Agreement without breach as follows:
11.4.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by ROAII, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by ROAII, except for the filing of a petition in
involuntary bankruptcy against ROAII which is dismissed within thirty (30) days
thereafter, Company may give notice of the immediate termination of this
Agreement.
11.4.2. In the event ROAII shall materially default in the performance of
any duty or obligation imposed upon it by this Agreement, and such default shall
continue for a period of ninety (90) days after written notice thereof has been
given to ROAII by Company, Company may terminate this Agreement.
11.4.3. In the event ROAII's Medicare or Medicaid Number shall be
terminated or suspended as a result of the action or inaction of ROAII or a
Physician Employee, and such termination or suspension shall continue for thirty
(30) days, Company may give notice of the immediate termination of this
Agreement, unless ROAII shall at that time be acting in good faith (and shall
provide reasonable evidence of the action being taken) to reverse such
termination or suspension. Notwithstanding any good faith effort on the part of
ROAII to reverse such termination or suspension, if such termination or
suspension shall not be reversed within ninety (90) days after occurrence,
Company shall have the right to terminate this Agreement immediately.
- 20 -
<PAGE>
11.4.4. In the event this Agreement is terminated by Company pursuant to
Section 11.4.1, Section 11.4.2, or Section 11.4.3, Company, at its option, may
require ROAII to purchase from Company all assets, both tangible and intangible,
owned by Company and used or made available for ROAII's use for the fair market
value of such assets on a going concern basis, without regard to this Agreement.
In addition thereto, ROAII shall assume all debt (including any balance of any
remaining debt incurred by the Company to acquire the assets under the Merger
Agreement) and all contracts, payables and leases which are obligations of
Company which relate to the Company's obligations which are performed at the
Office Locations under this Agreement. The fair market value of the assets shall
be determined by an independent appraiser selected by two (2) independent
accountants practicing with "big six" accounting firms, one (1) selected by
ROAII and one (1) selected by Company and neither of which is providing or has
for a period of two (2) years provided services to Company or ROAII. In addition
to the payment for the practice assets, in the event Company terminates this
Agreement pursuant to Section 11.4.1, Section 11.4.2 or Section 11.4.3
within the first five (5) years of the term of this Agreement, then ROAII's
Physician Owners shall (i) pay to Company an amount of money equal to the Fair
Market Value, as of the date of termination, of one-third (1/3) of the shares of
stock and cash consideration issued by Company to ROAII pursuant to the Merger
Agreement or (ii) surrender to Company for cancellation one-third (1/3) of the
shares of stock and cash consideration issued by Company to ROAII pursuant to
the Merger Agreement. All expenses of any appraisal shall be paid by ROAII. In
the event that Company terminates this Agreement pursuant to Sections 11.4.1
through 11.4.3, inclusive, and Company requires ROAII to purchase the practice
assets, then upon the closing of the purchase of the assets, ROAII and its
Physician Employees shall be released from the restrictive covenants provided
for under Exhibit 11 of this Agreement. In addition, termination of this
Agreement may trigger certain rights of Company to redeem a Physician Owner's
Company common stock pursuant to the terms of Article VIII of the Stockholders
Agreement.
11.5. Early Termination by ROAII or Company Without Cause Upon Third (3rd)
Anniversary of Agreement. Either party may terminate this Agreement without
cause upon written notice delivered to the other party not less than nine (9)
months or more than ten (10) months or more prior to the end of the third (3rd)
anniversary of the date of this Agreement if the Company has not filed a
registration statement with the United States Securities and Exchange
Commission; provided, however, if the Company files a registration statement,
for an underwritten public offering, with the United States Securities and
Exchange Commission before the end of the date of the third (3rd) anniversary of
this Agreement, then such termination shall be ineffective, and this Agreement
shall continue in force unless otherwise terminated pursuant to the other
provisions of Article XI of this Agreement. In the event that such registration
statement is not effective within one hundred twenty (120) days from filing,
then the early termination rights described in the first sentence of this
Section 11.5 shall be again exercisable; provided, further, that if such
registration statement was filed during the above described notice period for
early termination, then such period shall be extended for thirty (30) days from
and after the date such early termination rights again become exercisable.
Notwithstanding any other provision of this Agreement to the contrary, the
termination rights set forth in this Section 11.5 shall immediately terminate
and no longer be effective upon a Change in Control of the Company. Upon a
termination pursuant to this Section 11.5, ROAII shall tender to Company all of
the stock issued to ROAII by Company pursuant to the Merger Agreement, and
Company shall return to ROAII the facilities and all assets, both tangible and
intangible, used or made available for ROAII's use in the Practice Office. ROAII
shall assume all debt (including any balance of any remaining debt incurred by
the Company to acquire the assets under the Merger Agreement) and all contracts,
payables and leases which are obligations of Company and which relate to
Company's obligations which are performed at the Office Locations under this
Agreement. The Company and ROAII shall cooperate to structure any exchange
consummated pursuant to this Section 11.5 in a manner designed to minimize the
aggregate tax consequences to the parties arising from the exchange. Closing of
the exchange pursuant to this Section 11.5 shall occur effective as of the third
(3rd) anniversary of this Agreement.
11.6. Consequences of ROAII Termination. In the event that this Agreement
is terminated by ROAII under the terms of Section 11.3 or is terminated on any
other basis (other than (i) because of the normal expiration of its term set
forth in Section 11.1, (ii) by Company for cause as set forth in Section 11.4 or
(iii) by early termination as set forth in Section 11.5), then upon such
termination, ROAII shall purchase from Company all assets, both tangible and
intangible, owned by Company and used or made available for ROAII's use for the
fair market value of such assets on a going concern basis, without regard to
this Agreement. In addition thereto, ROAII shall assume all debt (including any
balance of any remaining debt incurred by the Company to acquire the assets
under the Merger Agreement) and all contracts, payables and
- 21 -
<PAGE>
leases which are obligations of Company which relate to the Company's
obligations which are performed at the Office Locations under this Agreement.
The fair market value of the assets shall be determined by an independent
appraiser selected by two (2) independent accountants practicing with "big six"
accounting firms, one (1) selected by ROAII and one (1) selected by Company and
neither of which is providing or has for a period of two (2) years provided
services to Company or ROAII. Termination of this Agreement by ROAII or a
Physician Owner may trigger Company's right to redeem all of Company common
stock owned by the Physician Owner as provided for in Section 8.1 (a) of the
Stockholders Agreement.
11.7. Closing of Purchase by ROAII and Effective Date of Termination.
ROAII shall, except as provided below in this Section 11.7, pay cash for the
practice assets purchased pursuant to the provisions of this Section 11. The
amount of the purchase price shall be reduced, but not below zero (0), by the
amount of debt and liabilities of Company assumed by ROAII and shall also be
reduced by any payment Company has failed to make under this Agreement, provided
that such payments or obligations are not otherwise accounted for in the
liabilities assumed by ROAII in connection with the purchase described herein.
The closing date for the purchase shall be determined by ROAII, but shall in no
event occur later than one hundred eighty (180) days from the date of the notice
of termination. The termination of this Agreement shall become effective upon
the closing of the sale of the assets and ROAII and Company shall be released
from the restrictive covenants provided for in Article VII on the closing date.
Company shall give ROAII credit towards the purchase price of the assets for the
Fair Market Value of any Company common stock tendered to the Company in
exchange for such assets. In the event that ROAII terminates this Agreement
pursuant to Sections 11.3.1 through 11.3.4, inclusive, or Sections 11.5, 11.6 or
11.7, then upon the closing of the purchase of the assets, ROAII and its
Physician Employees shall, except as ROAII may so elect to limit through
separate agreements with Physician Owners and Physician Employees, be released
from the restrictive covenants provided for under Article VII or Exhibit 11 of
this Agreement.
11.8. Tail Policy. ROAII shall obtain continuing liability insurance
coverage under either a "tail policy" or a "prior acts policy" with the same
limits and deductibles as set forth in Section 10.1 upon the termination of this
Agreement, or upon a physician's termination of his or her affiliation with
ROAII.
11.9. Restrictions Applicable to Physician Owners. The Physician Owners
hereby acknowledge that the Merger and the terms and conditions of this
Agreement were determined based upon numerous factors, including the Physician
Owners continuing to practice medicine in the future. In connection therewith,
each Physician Owner agrees as follows:
11.9.1. Early Retirement. If at any time prior to the fifth (5th)
anniversary of this Agreement, a Physician Owner desires to retire from the
practice of medicine, such Physician Owner shall be obligated as follows:
(a) to give Company at least twelve (12) months prior written notice
of the intent to retire; provided, however, that once such retiring
physician has located a replacement physician satisfying the requirements
of Section 11.9.1(b), Company shall waive the remaining months of said
twelve (12) month notice period, and such retirement shall be effective
upon the earlier of twelve (12) months from the date of notice or
commencement of the replacement physician's employment;
(b) to locate a physician or physicians (which may be Physician
Employees), reasonably acceptable to the Policy Board, to replace such
Physician Owner under this Agreement (all costs of locating such
replacement physicians shall be paid by such Physician Owner (the
"Substitute Physician(s)");
(c) to pay to Company any loss of service fees payable under this
Agreement for the remainder of the first five (5) years of this Agreement.
Any loss for any periods of less than twelve (12) months shall be
calculated on an annualized and prorated basis. For purposes of this
Section 11.9.1(c), the amount of the loss shall be calculated as follows:
(i) The Policy Board shall calculate the retiring Physician
Owner's contribution to the payment of ROAII's service fees
during the twelve (12) month period preceding the retiring
Physician Owner's notice of intent to retire.
- 22 -
<PAGE>
(ii) In the event the Substitute Physician(s) were Physician
Employees prior to the date upon which notice of intent to
retire was given pursuant to Section 11.9.1(a), the Policy
Board shall calculate such Physician Employee(s) contribution
to the payment of ROAII's service fees during the twelve month
period preceding the notice of intent to retire.
(iii) On each successive anniversary date of this Agreement (through
the fifth anniversary date) following the effective date of
such retirement, the Policy Board shall determine the amount
of service fees generated by the Substitute Physicians between
either (x) the effective date of retirement or (y) the
immediately preceding anniversary date, as applicable, and
such successive anniversary date.
(iv) If the Substitute Physician(s) were Physician Employees prior
to date upon which the notice of intent to retire was given,
the amount of loss shall equal the difference between (i) the
amount calculated pursuant to Section 11.9.1(c)(i) plus the
amount calculated pursuant to Section 11.9.1(c)(ii) and (ii)
the amount calculated pursuant to Section 11.9.1(c)(iii).
(v) If the Substitute Physician(s) were not Physician Employees
prior to the date upon which the notice of intent to retire
was given, the amount of loss shall equal the difference
between (i) the amount calculated pursuant to Section
11.9.1(c)(i) and (ii) the amount calculated pursuant to
Section 11.9.1(c)(iii).
The Policy Board will provide the amount of the loss to the retiring Physician
Owner within thirty (30) days of the applicable anniversary date of this
Agreement and such amount shall be paid by such retiring Physician Owner to
Company within fifteen (15) days of the date of the delivery of the notice of
the amount of loss;
(d) to (i) pay to Company an amount of money equal to the Fair
Market Value as of the date of retirement, of one-third (1/3) of the
shares of stock issued by the Company to the retiring Physician Owner
pursuant to the Merger Agreement or (ii) surrender to Company for
cancellation one-third (1/3) of the stock issued by Company to the
retiring Physician Owner pursuant to the Merger Agreement. (All expenses
of any appraisal shall be paid by such Physician Owner); and
(e) to honor and comply with the restrictive covenants for a period
of thirty-six (36) months, in accordance with the restrictions contained
in Exhibit 11.
11.9.2. Retirement. If at any time after the fifth (5th) anniversary of
this Agreement, a Physician Owner desires to retire, or assume full-time
teaching responsibilities, such Physician Owner shall notify Company in writing
at least twelve (12) months prior to the effective date of such retirement or
start of teaching position; provided, however, that no more than twenty percent
(20%) of the Physician Owners can retire or assume full time teaching
responsibilities within any twelve (12) month period; provided, further, that if
such retiring physician elects to, and has located a replacement physician,
Company shall waive the remaining months of said twelve (12) month notice
period, and such retirement shall be effective upon the earlier of twelve (12)
months from the date of notice or commencement of the replacement physician's
employment. Upon such retirement or start of teaching position, such Physician
Owner shall have no further obligations under this Agreement; provided, however,
the restrictive covenants provided for under Section 11.9.1(e) shall remain in
force. In fulfilling any such full-time teaching responsibilities, such
Physician Owner would be permitted to attend patients in a manner normal and
customary for such faculty position, provided, however, such services must be
incident to the academic/teaching aspects of the institution, and not incident
to the regular examination of patients for a fee whether billed in the name of
the institution or the name of the attending physician. It is not the intent of
the Parties to permit a retired physician to conduct a medical practice through
an academic institution.
11.9.3. Physician Owner Change in Practice/Group Affiliation. In the event
that a Physician Owner leaves the employment of or terminates his or her
affiliation with ROAII, then the terminating Physician Owner may join or
establish
- 23 -
<PAGE>
another group/practice which has or will enter into a Service Agreement with
Company upon such terminating Physician Owner's affiliation with such new
group/practice. Upon entering into such new Service Agreement, the terminating
Physician Owner shall, except as limited by separate employment agreements
between ROAII and Physician Owners, be released from any obligation under this
Service Agreement. Company shall have the right to enter into such new Service
Agreement without satisfying the requirements of paragraph G of Exhibit 11. In
the event that (i) ROAII consents to the Company entering into the new Service
Agreement, (ii) entering into the new Service Agreement will not adversely
affect the operations and earnings of the Company, and (iii) the new
group/practice can satisfy the representations and warranties set forth in
Article XIII of this Agreement, then Company will not unreasonably withhold or
refrain from entering into a new Service Agreement with the terminating
Physician Owner's new group/practice. In the event that the Physician Owner
affiliates with a new group/practice that is not a party to a Service Agreement
with Company, then Company shall terminate this Agreement with respect to such
Physician Owner, and the terminating Physician Owner shall be obligated as
described in Section 11.9.1 (a) and 11.9.1(e) of this Agreement, provided that
if such terminating Physician Owner elects to, and has located a replacement
physician, Company shall waive the remaining months of the twelve (12) month
notice period described in Section 11.9.1(a), and such termination shall be
effective upon the earlier of twelve (12) months from the date of notice or
commencement of the replacement physician's employment and provided further that
if such termination is within the first five (5) years of the term of this
Agreement, the terminating Physician Owner shall also be obligated as described
in Section 11.9.1.(a), 11.9.1(b), 11.9.1(c), 11.9.1(d) and 11.9.1(e).
11.9.4. Robert E. Booth, Jr., M.D. and Arthur R. Bartolozzi, M.D. Change
in Practice/Group Affiliation. Notwithstanding Section 11.9.3, in the event that
either Robert E. Booth, Jr., M.D. ("Booth") or Arthur R. Bartolozzi, M.D.
("Bartolozzi") leaves the employment of or terminates his respective affiliation
with ROAII, then Booth or Bartolozzi, as the case may be, may establish a new
practice [either alone or together with other Physician Owners, current
Physician Employees and/or future Physician Employees (collectively, the "Other
Physicians")] within the radius described in paragraph A of Exhibit 11 so long
as said new practice enters into a Service Agreement with Company. Upon such
occurrence, Company agrees to enter into a Service Agreement on terms and
conditions similar to the provisions of this Agreement upon the establishment of
such new practice with such changes as may be mutually agreed upon by the
parties, provided, that (i) the Base Service Fee payable by Booth shall equal
seventeen percent (17%) of ROAII's Base Service Fee and the Base Service Fee
payable by Bartolozzi shall equal ten percent (10%) of ROAII's Base Service Fee
(plus, in either case, if there are additional Physician Owners who are Other
Physicians, such Physician Owners' percentage of the Base Service Fee); (ii)
following the departure of the Other Physicians, the Base Service Fee payable by
ROAII pursuant to Section 8.1 shall be adjusted to reflect the Base Service Fee
attributable to the Other Physicians; (iii) all time periods measured from the
effective date of this Agreement shall, for purposes of that Service Agreement,
be measured from the effective date of this Agreement (e.g. Section 8.1 - Base
Service Fee shall be payable only in respect of the period from the date of said
Service Agreement to the third anniversary of this Agreement and paragraph F of
Exhibit 11 - the five (5) year period shall end on the fifth anniversary of this
Agreement); and (iv) the computation of Professional Service Revenues provided
for in paragraph F of Exhibit 11 shall include Booth's or Bartolozzi's (and any
such additional Physician Owners') proportionate share of all Professional
Service Revenues collected by ROAII during Booth's or Bartolozzi's (or such
other Physician Owners') employment with ROAII. Upon entering into such new
Service Agreement, Booth or Bartolozzi shall be released from any obligation
under this Service Agreement. Company shall have the right to enter into such
new Service Agreement without satisfying the requirements of paragraph G of
Exhibit 11. Except as set forth above, in the event that Booth or Bartolozzi and
any Other Physicians do not enter into a new Service Agreement with Company,
then Company, at its option, may terminate this Agreement solely with respect to
Booth or Bartolozzi and any Other Physicians, and the provisions of Exhibit 11
shall apply. Moreover, Booth or Bartolozzi and any other Physician Owners who
are Other Physicians shall be obligated as described in Section 11.9.1 (a) and
11.9.1(e) of this Agreement; provided, however, if such termination is within
the first five (5) years of the term of this Agreement, Booth or Bartolozzi and
any other Physician Owners who are Other Physicians shall also be obligated as
described in Section 11.9.1.(a), 11.9.1(b), 11.9.1(c), 11.9.1(d) and 11.9.1(e).
11.9.5. Death or Disability. In the event that a Physician Owner dies or
becomes disabled, then this Agreement shall be terminated with respect to such
Physician Owner; provided, however, in the event of disability, the restrictive
covenants described in Exhibit 11 shall remain in force for a period of
thirty-six (36) months from such termination.
- 24 -
<PAGE>
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds. All insurance or condemnation proceeds
payable by reason of any physical loss of any of the improvements comprising the
facilities or the furniture, fixtures and equipment used by the Practice
Offices, shall be available for the reconstruction, repair or replacement, as
the case may be, of any damage, destruction or loss. The Policy Board, in
consultation with ROAII, shall review and approve such reconstruction, repair or
replacement.
12.2. Temporary Space. In the event of substantial damage to or the
condemnation of a significant portion of the facilities, Company shall use its
best efforts to provide temporary facilities until such time as the facilities
can be restored or replaced.
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF ROAII AND PHYSICIAN OWNERS
ROAII and Physician Owners represent, warrant, covenant and agree with
Company that:
13.1. Validity. ROAII is a Pennsylvania corporation. ROAII has the full
power and authority to own ROAII's property, to carry on ROAII's business as
presently being conducted, to enter into this Agreement, and to consummate the
transactions contemplated hereby. Each Physician Owner is an adult citizen and
resident of the State of Pennsylvania. Each Physician Owner has the full power
and authority to own his or her property, carry on his or her business as
presently being conducted, to enter into this Agreement, and to consummate the
transactions contemplated hereby.
13.2. Litigation. Except as disclosed pursuant to the Merger Agreement,
there is no suit, action, proceeding at law or in equity, arbitration,
administrative proceeding or other proceeding pending, or threatened against, or
affecting ROAII or any Physician Employee, or to the best of ROAII's and each
Physician Owner's knowledge, any provider or other health care professional
associated with or employed by ROAII as pertains to any claim involving the
providing of health care related services, and to the best of ROAII's and each
Physician Owner's knowledge there is no basis for any of the foregoing.
13.3. Permits. ROAII and all health care professionals associated with or
employed by ROAII have all permits and licenses and other Necessary
Authorizations required by all Applicable Law, except where failure to secure
such licenses, permits and other Necessary Authorizations does not have a
material adverse effect; have made all regulatory filings necessary for the
conduct of ROAII's business; and are not in violation of any of said permitting
or licensing requirements.
13.4. Authority. The execution of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
action, and this Agreement is a valid and binding Agreement of ROAII and each
Physician Owner, enforceable in accordance with its terms. ROAII and each
Physician Owner have obtained all third-party consents necessary to enter into
and consummate the transaction contemplated by this Agreement. Neither the
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby, nor compliance by ROAII or any Physician Owner with any of
the provisions hereof, will:
13.4.1. violate or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under any license, agreement or other
instrument or obligation to which either ROAII or any Physician Owner is a
party;
13.4.2. violate any order, writ, injunction, decree, statute, rule or
regulation applicable to either ROAII or any Physician Owner.
13.5. Compliance with Applicable Law. To the best of ROAII's and each
Physician Owner's knowledge and belief, ROAII and each Physician Owner has
operated in compliance with all federal, state, county and municipal laws,
ordinances
- 25 -
<PAGE>
and regulations applicable thereto and neither ROAII nor any provider associated
with or employed by ROAII has received payment or any remuneration whatsoever to
induce or encourage the referral of patients or the purchase of goods and/or
services as prohibited under 42 U.S.C. ss. 1320a-7b(b), or otherwise perpetrated
any Medicare or Medicaid fraud or abuse, nor has any fraud or abuse been alleged
within the last five (5) years by any Governmental Authority, a carrier or a
Third-Party Payor.
13.6. Health Care Compliance. ROAII is presently participating in or
otherwise authorized to receive reimbursement from or is a party to Medicare,
Medicaid, and other Third-Party Payor Programs. All necessary certifications and
contracts required for participation in such programs are in full force and
effect and have not been amended or otherwise modified, rescinded, revoked or
assigned as of the date hereof, and no condition exists or to the knowledge of
ROAII no event has occurred which in itself or with the giving of notice or the
lapse of time or both would result in the suspension, revocation, impairment,
forfeiture or non-renewal of any such Third-Party Payor Program. ROAII is in
full compliance with the material requirements of all such Third-Party Payor
Programs applicable thereto.
13.7. Fraud and Abuse. ROAII and persons and entities providing
professional services for ROAII, have not, to the knowledge of ROAII and each
Physician Owner, after due inquiry, engaged in any activities which are
prohibited by or are in violation of the rules, regulations, policies, contracts
or laws pertaining to any Third-Party Payor Program, or which are prohibited by
rules of professional conduct ("Governmental Rules and Regulations"), including
but not limited to the following: (a) 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; (b) 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; (c) failing to disclose
knowledge by a claimant of the occurrence of any event affecting the initial or
continued right to any benefit or payment on ROAII's own behalf or on behalf of
another, with intent to fraudulently secure such benefit or payment; or (d)
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 (i) in return
for referring an individual to a person for the furnishing or arranging for the
furnishing or any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (ii) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service or item for which payment may be made in whole or in
part by Medicare or Medicaid.
13.8. ROAII Compliance. ROAII has all licenses necessary to operate the
Practice Offices in accordance with the requirements of all Applicable Law and
has all Necessary Authorizations for the use and operation, all of which are in
full force and effect. There are no outstanding notices of deficiencies relating
to ROAII issued by any Governmental Authority or Third-Party Payor requiring
conformity or compliance with any Applicable Law or condition for participation
of such Governmental Authority or Third-Party Payor, and after reasonable and
independent inquiry and due diligence and investigation, ROAII has neither
received notice nor has any knowledge or reason to believe that such Necessary
Authorizations may be revoked or not renewed in the ordinary course.
13.9. Rates and Reimbursement Policies. The jurisdiction in which ROAII is
located does not currently impose any restrictions or limitations on rates which
may be charged to private pay patients receiving services provided by ROAII.
ROAII does not have any rate appeal currently pending before any Governmental
Authority or any administrator of any Third-Party Payor Program. ROAII has no
knowledge of any Applicable Law which has been enacted, promulgated or issued
within the eighteen (18) months preceding the date of this Agreement or any such
legal requirement proposed or currently pending in the jurisdiction in which
ROAII is located which could have a material adverse effect on ROAII or may
result in the imposition of additional Medicaid, Medicare, charity, free care,
welfare, or other discounted or government assisted patients at ROAII or require
ROAII to obtain any necessary authorization which ROAII does not currently
possess.
13.10. Accounts Receivable. With respect to the Purchased A/R, as of the
date of purchase:
13.10.1. All documents and agreements relating to the Purchased A/R that
have been delivered to Company with respect to such Accounts Receivable are true
and correct; ROAII has billed the applicable Account Debtor and ROAII has
delivered or caused to be delivered to such Account Debtor all requested
supporting claim documents with respect to such
- 26 -
<PAGE>
Accounts Receivable; all information set forth in the bill and supporting claim
documents is true and correct, and, if any error has been made, ROAII will
promptly correct the same and, if necessary, rebill or, if requested by Company,
cooperate with Company to rebill such Accounts Receivable.
13.10.2. The Purchased A/R are exclusively owned by ROAII and there is no
security interest or lien in favor of any third party, or the recording or
filing against ROAII, as debtor, covering or purporting to cover any interest of
any kind in any Accounts Receivable, except as has been released by each party
holding such adverse interest in the Accounts Receivable. Upon payment of the
Purchase Price with respect to the Purchased A/R and with respect to
Governmental Receivables, to the extent permissible by law, all right, title and
interest of ROAII with respect thereto shall be vested in Company, free and
clear of any lien, security interest, claim or encumbrance of any kind, and
ROAII agrees to defend the same against the claims of all Persons.
13.10.3. The Purchased A/R (i) are payable, in an amount not less than
their face amount, as adjusted pursuant to the provisions of Section 8.3.2, by
the Account Debtor identified by ROAII as being obligated to do so, (ii) are
based on an actual and bona fide rendition of services or sale of goods to the
patient by ROAII in the ordinary course of business, (iii) are denominated and
payable only in lawful currency of the United States, and (iv) are accounts or
general intangibles within the meaning of the UCC of the state in which ROAII
has its principal place of business, or are rights to payment under a policy of
insurance or proceeds thereof, and are not evidenced by any instrument or
chattel paper. There are no payors other than the Account Debtor identified by
ROAII as the payor primarily liable on any Purchased A/R.
13.10.4. The Purchased A/R are not (i) subject to any action, suit,
proceeding or dispute (pending or threatened), set-off, counterclaim, defense,
abatement, suspension, deferment, deductible, reduction or termination by the
Account Debtors other than routine adjustments and disallowances made in the
ordinary course of business, to the extent of such adjustments and
disallowances, (ii) past or within sixty (60) days of, the statutory limit for
collection applicable to the Account Debtor, (iii) subject to an invoice which
provides for payment more than forty-five (45) days from the date of such
invoice, (iv) an account which arises out of a sale or other transaction by or
between ROAII to an Affiliate of ROAII, (v) from an Account Debtor who is also a
creditor of ROAII, (vi) an account in which the Account Debtor has commenced a
voluntary case, or an involuntary proceeding has been instituted, under the
federal bankruptcy laws, as now constituted or hereafter amended, or made an
assignment for the benefit or creditors, or if a decree or order for relief has
been entered by a court having jurisdiction in the premises in respect to the
Account Debtor, (vii) an account of which the goods giving rise to such Accounts
Receivable have not been shipped and delivered to and accepted by the Account
Debtor or the services giving rise to such Accounts Receivable have not been
performed by ROAII and accepted by the Account Debtor or the Accounts Receivable
otherwise does not represent a final sale, (viii) is evidenced by an instrument
or chattel paper unless such instrument or chattel paper is delivered to Company
with all appropriate endorsements in favor of Company, or (ix) other than a
complete bona fide transaction which requires no further act under any
circumstances on the part of ROAII to make the Accounts Receivable payable by
the Account Debtor.
13.10.5. ROAII does not have any guaranty of, letter of credit providing
credit support for, or collateral security for, the Purchased A/R, other than
any such guaranty, letter of credit or collateral security as has been assigned
to Company, and any such guaranty, letter of credit or collateral security is
not subject to any lien in favor of any other person.
13.10.6. The goods or services provided and reflected by the Purchased A/R
were medically necessary for the patient in the opinion of ROAII and the patient
received such goods or services.
13.10.7. The face amount of the Accounts Receivable for the services
constituting the basis for the Purchased A/R are consistent with the usual,
customary and reasonable fees charged by other similar medical service providers
in ROAII's community for the same or similar service.
13.10.8. Each Account Debtor with respect to the Purchased A/R (i) is not
currently the subject of any bankruptcy, insolvency or receivership proceeding,
nor is it generally unable to make payments on its obligations when due, (ii) is
located in the United States, and (iii) is one of the following: (x) a party
which in the ordinary course of its business or activities agrees to pay for
healthcare services received by individuals, including, without limitation,
Medicare, Medicaid,
- 27 -
<PAGE>
governmental bodies, commercial insurance companies and non-profit insurance
companies (such as Blue Cross and Blue Shield entities) issuing health, personal
injury, workers compensation or other types of insurance; (y) employers or
unions which self-insure for employee or member health insurance, prepaid
healthcare organizations, preferred provider organizations, health maintenance
organizations or any other similar person, or (z) a Third-Party Payor of the
type described in the definition of Governmental Receivables.
13.10.9. The proceeds of the sale of the Purchased A/R will be used for
the business and commercial purposes of ROAII. The sale of the Purchased A/R
hereunder is made in good faith and without actual intent to hinder, delay or
defraud present or future creditors of ROAII.
13.10.10. Except with respect to Governmental Receivables, the insurance
policy, contract or other instrument obligating an Account Debtor to make
payment with respect to the Purchased A/R (i) does not contain any provision
prohibiting the transfer of such payment obligation from the patient to ROAII,
or from ROAII to Company, (ii) has been duly authorized by ROAII and to the
knowledge of ROAII has been duly authorized by the Account Debtor and, together,
with the Purchased A/R, constitutes the legal, valid and binding obligation of
the Account Debtor in accordance with its terms, (iii) together with the
applicable Purchased A/R, does not contravene in any material respect any
requirement of law applicable thereto, and (iv) was in full force and effect and
applicable to the patient at the time the services constituting the basis for
the Purchased A/R were performed.
None of the foregoing representations and warranties shall be deemed to
constitute a guaranty by ROAII that the Purchased A/R will be collected by
Company. ROAII shall not be responsible for any damages for any breach of a
representation or warranty under this Section 13.10 until Company has suffered a
loss on the purchase of ROAII's Accounts Receivable. Damages for such breach
shall be limited to the amount of Company's loss on the purchase of such
Accounts Receivable.
13.11. Full Disclosure. When considered in the context of all information
contained herein, to the knowledge of ROAII no representation or warranty made
by ROAII in this Agreement contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading.
13.12. Exhibits. All the facts recited in Exhibits annexed hereto shall be
deemed to be representations of fact by ROAII as though recited in this Article
XIII.
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents, warrants, covenants and agrees with ROAII as follows:
14.1. Organization. Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Company
has the full power to own its property, to carry on its business as presently
conducted, to enter into this Agreement and to consummate the transactions
contemplated hereby.
14.2. Authority. Company has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, as well as the
consummation of the transactions contemplated hereby. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
hereby will not, violate any provisions of the charter or the bylaws of Company
or any indenture, mortgage, deed of trust, lien, lease, agreement, arrangement,
contract, instrument, license, order, judgment or decree or result in the
acceleration of any obligation thereunder to which Company is a party or by
which it is bound.
- 28 -
<PAGE>
14.3. Absence of Litigation. No action or proceeding by or before any
court or other Governmental Authority has been instituted or is, to the best of
Company's knowledge, threatened with respect to the transactions contemplated by
this Agreement.
14.4. Transactions with Affiliates. Company shall not enter into any
transaction or series of transactions, whether or not related or in the ordinary
course of business, with any Affiliate of ROAII or Company, other than on terms
and conditions substantially as favorable to Company as would be obtainable by
Company at the time in a comparable arm's-length transaction with a person not
an Affiliate.
ARTICLE XV.
COVENANTS OF ROAII AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements. ROAII shall not
incorporate, merge or consolidate with any other entity or individual or
liquidate or dissolve or wind-up ROAII's affairs or enter into any partnerships,
joint ventures or sale-leaseback transactions or purchase or otherwise acquire
(in one or a series of related transactions) any part of the property or assets
(other than purchases or other acquisitions of inventory, materials and
equipment in the ordinary course of business) of any other person or entity.
15.2. Necessary Authorizations/Assignment of Licenses and Permits. ROAII
and each Physician Owner shall maintain all licenses, permits, certifications,
or other Necessary Authorizations and shall not assign or transfer any interest
in any license, permit, certificate or other Necessary Authorization granted to
it by any Governmental Authority, nor shall ROAII or any Physician Owner assign,
transfer, or remove or permit any other individual or entity to assign, transfer
or remove any records of ROAII or any Physician Owner, including without
limitation, patient records, medical and clinical records (except for removal of
such patient records as required under any Applicable Law).
15.3. Transaction with Affiliates. Neither ROAII nor any Physician Owner
shall enter into any transaction or series of transactions, whether or not
related or in the ordinary course of business, with any Affiliate of ROAII or
Company, other than on terms and conditions substantially as favorable to ROAII
or the Physician Owner, as would be obtainable by ROAII or the Physician Owner
at the time in a comparable arms-length transaction with a person not an
Affiliate.
15.4. Compliance with All Laws. ROAII and each Physician Owner shall use
their best efforts to comply with all laws and regulations relating to ROAII's
practice and the operation of any facility, including, but not limited to, all
state, federal and local laws relating to the acquisition or operation of a
health care practice. Furthermore, neither ROAII nor any Physician Owner shall
intentionally violate any Governmental Rules and Regulations.
15.5. Third-Party Payor Programs. ROAII shall maintain ROAII's compliance
with the requirements of all Third- Party Payor Programs in which ROAII is
currently participating or authorized to participate.
15.6. Change in Business or Credit and Collection Policy. ROAII shall not
make any change in the character of ROAII's business or in the credit and
collection policy, which change would, in either case, impair the collectibility
of any Purchased A/R or any Merger A/R or otherwise modify, amend or extend the
terms of any such account other than in the ordinary course of business.
15.7. Treatment of Accounts Receivable. ROAII will (i) treat transfers to
Company of Accounts Receivable hereunder as a sale for all purposes, including
tax and accounting (and shall accurately reflect such sale in its financial
statements), and will advise all persons who inquire about the ownership of such
Accounts Receivable that they have been sold to Company; (ii) not treat any such
Accounts Receivable as an asset on ROAII's books and records; (iii) record in
ROAII's books, records and computer files pertaining thereto that such Accounts
Receivable have been sold to Company; (iv) pay all taxes, if any, relating to
the transfer of such Accounts Receivable after the same have been purchased by
Company; (v) not impede or interfere with Company's collection of such Accounts
Receivable; (vii) not amend, waive or otherwise permit or agree to any deviation
from the terms or conditions of such Accounts Receivable; (viii) use all
reasonable
- 29 -
<PAGE>
efforts to obtain all consents from patients which are required by law in order
for Company, or any servicing entity retained by Company, to secure information
needed to obtain or to expedite payment from the respective Account Debtors; and
(ix) have billed such Accounts Receivable on the same bases and using the same
policies and practices that it has used in the past unless Company has been
advised in writing of a change prior to the purchase of such Accounts
Receivable. Company or its designated representatives from time to time may
verify the Accounts Receivable, inspect, check, take copies or extracts from
ROAII's books, records and files, and ROAII will make the same available to
Company or such representatives at any reasonable time for such purposes.
15.8. Security Interest. If, contrary to the mutual intent of ROAII and
Company, any purchase of Purchased A/R is not characterized as a sale, ROAII
shall, effective as of the date hereof, be deemed to have granted (and ROAII
does hereby grant) to Company a first priority security interest in and to any
and all of the Purchased A/R and the proceeds thereof to secure the repayment of
all amounts advanced to ROAII hereunder with accrued interest thereon, and this
Agreement shall be deemed to be a security agreement. With respect to such grant
of a security interest, Company may at its option exercise from time to time any
and all rights and remedies available to it under the UCC or otherwise. ROAII
agrees that five (5) days shall be reasonable prior notice of the date of any
public or private sale or other disposition of all or part of the Purchased A/R.
ROAII represents and warrants that the location of ROAII's principal place of
business, and all locations where ROAII maintains records with respect to its
accounts are set forth under its name in Section 16.3 hereof. ROAII agrees to
notify Company in writing thirty (30) days prior to any change in any such
location. The exact name of ROAII is as set forth at the beginning of this
Agreement, and except as set forth on the signature page hereof, ROAII has not
changed its name in the last five (5) years, and during such period ROAII did
not use, nor does ROAII now use, any fictitious or trade name. ROAII shall
notify Company in writing thirty (30) days prior to any change in any such name.
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment. Company shall have the right to assign its rights
hereunder to any person, firm or corporation under common control with Company
and to any lending institution from which Company obtains financing, including
but not limiting the restrictive covenants included in Article VII (covenant not
to compete), for security purposes or as collateral. ROAII agrees to, and
acknowledges, Company's right to assign Company's rights under this Agreement to
any Lender and further agrees that upon receipt of written notice from such
Lender, ROAII shall pay to Lender or cause to be paid to Lender all amounts
which are otherwise payable to Company pursuant to the terms of this Agreement,
including, without limitation, all service fees, and other Clinic Expenses and,
until such amounts are delivered to Lender, hold payments in trust for Lender.
Except as set forth above, neither Company nor ROAII shall have the right to
assign their respective rights and obligations hereunder without the written
consent of the other party. Without limiting the foregoing, ROAII acknowledges
that, as collateral for certain obligations, Company has assigned all of its
rights hereunder to NationsBank of Tennessee, N.A. as Agent (the "Agent") for
itself and other banks and institutional lenders from time to time (collectively
the "Banks") and has granted the Agent for the benefit of the Banks a lien and
security interest upon all real and personal property used in the operation of
the Office Locations (the "Pledged Assets"). As an inducement for the Banks to
extend or continue the extension of credit to Company, ROAII (i) acknowledges
that the collateral assignment to the Agent covers all rights of Company
hereunder, including, but not limited to, rights arising from warranties and
representations made by ROAII, rights to enforce covenants made by ROAII, and
rights to receive all payments due Company; (ii) agrees to regard the Agent as
the owner of any or all of the assigned rights upon written notice to ROAII of
this election from the Agent; (iii) agrees that neither the Agent nor any of the
Banks has obligation for the performance of the duties of Company hereunder, and
shall not assume any such duty by the exercise of rights as a secured lender;
(iv) agrees to give the Agent written notice of any material default hereunder
on Company's part at the address of 1 NationsBank Plaza, Nashville, Tennessee
37239, Attn: David Dupuy, and to allow at least thirty (30) days thereafter for
the cure of such default before ROAII terminates this Agreement; (v) agrees that
the rights of ROAII under this Agreement, including, but not limited to, the
right to the use of the Pledged Assets, are and shall be junior to any security
interest that the Agent and the Banks, their successors or assigns may have in
the Pledged Assets at any time; (vi) agrees that the benefits of the above
undertakings in favor of the Agent and Banks shall further extend to all
successors and assigns of the Agent and Banks, provided that any notices given
by ROAII under this Section shall be given to the Agent at the foregoing address
unless ROAII has received written notice of a change
- 30 -
<PAGE>
thereof; and (vii) agrees that this Section may not be modified, and no
provision of this Section may be waived, absent the written approval of the
Agent.
16.2. Whole Agreement; Modification. This Agreement supersedes all prior
agreements between the parties and there are no other agreements or
understandings, written or oral, between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement.
16.3. Notices. All notices required or permitted by this Agreement shall
be in writing and shall be deemed to have been given (i) when received if given
in person, (ii) on the date of acknowledgment of receipt if sent by telex,
facsimile or other wire transmission, (iii) one business day after being sent by
overnight delivery service, or (iv) three days after being deposited in the
United States mail, certified or registered mail, postage prepaid, addressed as
follows:
To Company: Specialty Care Network, Inc.
44 Union Boulevard
Suite 600
Lakewood, Colorado 80228
Attention: Kerry Hicks
With a copy to: Baker, Donelson, Bearman & Caldwell
165 Madison Avenue
Suite 2000
Memphis, Tennessee 38103
Attention: David T. Popwell, Esq.
To ROAII: 800 Spruce Street
Philadelphia, Pennsylvania 19107
Attention: Lauren Albert
With a copy to: Stephen M. Goodman, Esq.
Morgan Lewis & Bockius
2001 Logan Square
Philadelphia, Pennsylvania 19103-3993
or to such other address as either party shall notify the other.
16.4. Binding on Successors. Subject to Section 16.1, this Agreement shall
be binding upon the parties hereto, and their successors, assigns, heirs and
beneficiaries.
16.5. Waiver of Provisions. Any waiver of any terms and conditions hereof
must be in writing, and signed by the parties hereto. The waiver of any of the
terms and conditions of this Agreement shall not be construed as a waiver of any
other terms and conditions hereof.
16.6. Governing Law. The validity, interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
State of Pennsylvania.
16.7. No Practice of Medicine. The parties acknowledge that Company is not
authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or service
required of Company in this Agreement should be construed or deemed by any
Governmental Authority or court to constitute the practice of medicine, the
performance of said act or service by Company shall be deemed waived and
unenforceable to the minimum extent required to comply with Applicable Law.
- 31 -
<PAGE>
16.8. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
16.9. Additional Documents. Each of the parties hereto agrees to execute
any document or documents that may be requested from time to time by any other
party to implement or complete such party's obligations pursuant to this
Agreement.
16.10. Attorneys' Fees. If legal action is commenced by any party to
enforce or defend its rights under this Agreement, the prevailing party in such
action shall be entitled to recover its costs and reasonable attorneys' fees in
addition to any other relief granted.
16.11. Time is of the Essence. Time is hereby expressly declared to be of
the essence in this Agreement.
16.12. Confidentiality. No party hereto shall disseminate or release to
any third party any information regarding any provision of this Agreement, or
any financial information regarding the other (past, present or future) that was
obtained by the other in the course of the negotiations of this Agreement or in
the course of the performance of this Agreement, including, but not limited to,
any information relating to the internal operations of ROAII, ROAII fees or the
terms of any of the managed care contracts, without the other party's written
approval; provided, however, the foregoing shall not apply to information which
(i) is generally available to the public other than as a result of a breach of
confidentiality provisions; (ii) becomes available on a non-confidential basis
from a source other than the other party or its affiliates or agents, which
source was not itself bound by a confidentiality agreement; (iii) which is
required to be disclosed by law or pursuant to court order (Company shall
provide ROAII with copies of any information regarding ROAII provided by Company
to any third party); or (iv) except for disclosure to its banks, underwriters or
lenders, or its advisors to the extent required by Section 9.4, or as required
in connection with reports on filings with the SEC or State Departments of
Securities.
16.13. Contract Modifications for Prospective Legal Events. If any state
or federal laws or regulations, now existing or enacted or promulgated after the
effective date of this Agreement, are interpreted by judicial decision, a
regulatory agency or legal counsel in such a manner as to indicate that the
structure of this Agreement may be in violation of such laws or regulations,
ROAII and Company shall amend this Agreement as necessary. To the maximum extent
possible, any such amendment shall preserve the underlying economic and
financial arrangements between and among ROAII and Company.
16.14. Remedies Cumulative. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any party, but the same shall be distinct,
separate and cumulative and may be exercised from time to time as often as
occasion may arise or as may be deemed expedient.
16.15. Language Construction. The language in all parts of this Agreement
shall be construed, in all cases, according to ROAII's fair meaning, and not for
or against either party hereto. The parties acknowledge that each party and its
counsel have reviewed and revised this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.
16.16. No Obligation to Third Parties. Except as provided in Section 16.1,
none of the obligations and duties of Company or ROAII under this Agreement
shall in any way or in any manner be deemed to create any obligation of Company
or of ROAII to, or any rights in, any person or entity not a party to this
Agreement.
- 32 -
<PAGE>
16.17. Communications. ROAII and Company agree that good communication
between the parties is essential to the successful performance of this
Agreement, and each pledges to communicate fully and clearly with the other on
matters relating to the successful operation of ROAII's practice at the Practice
Offices.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COMPANY:
SPECIALTY CARE NETWORK, INC.
By:________________________________________
Title:_____________________________________
ROAII:
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES II,
INC.
By:________________________________________
Title:_____________________________________
- 33 -
<PAGE>
PHYSICIAN OWNERS:
___________________________________________
RICHARD H. ROTHMAN, M.D.
___________________________________________
ROBERT E. BOOTH, JR., M.D.
___________________________________________
RICHARD A. BALDERSTON, M.D.
___________________________________________
ARTHUR R. BARTOLOZZI, M.D.
___________________________________________
WILLIAM J. HOZACK, M.D.
___________________________________________
MICHAEL G. CICCOTTI, M.D.
___________________________________________
TODD J. ALBERT, M.D.
___________________________________________
ALEXANDER R. VACCARO, M.D.
___________________________________________
PETER F. SHARKEY, M.D.
- 34 -
<PAGE>
EXHIBIT 3.1
LEASE AGREEMENT
3.1-1
<PAGE>
EXHIBIT 4.1
POLICY BOARD GOVERNANCE RULES
A. Number, Tenure and Qualifications. The Policy Board shall consist of
six (6) members. Company shall designate, in its sole discretion, three (3)
members of the Policy Board. ROAII shall designate, in ROAII's sole discretion,
three (3) members of the Policy Board. The initial Policy board shall be chosen
at the time of the closing of the Exchange. Thereafter, the respective Policy
Board Members shall be chosen at such time and in such manner as shall be
determined by the respective party making the appointment.
B. Duties and Responsibilities of the Policy Board. The Policy Board shall
have the duties and responsibilities more particularly described in Section 4.2
of this Agreement.
C. Regular Meetings of the Policy Board. Regular meetings of the Policy
Board shall be held on the first Monday of each calendar quarter at such times
and places as the Policy Board by resolution may determine and specify, and if
so determined no notice thereof need be given.
D. Special Meetings. Special meetings of the Policy Board may be held at
any time or place whenever called by written request of at least two (2) Policy
Board Members, notice thereof being given to each Policy Board Member by the
Policy Board Members calling the meeting, or they may be held at any time
without formal notice provided all of the Policy Board Members are present or
those not present shall at any time waive or have waived notice thereof.
E. Notice. Notice of any special meeting shall be given at least ten (10)
days previously thereto by written notice delivered personally, by telegram, or
facsimile. If mailed, such notice shall be mailed to each Policy Board Member at
his business address no less than ten (10) days previously thereto, and shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. If notice be given by facsimile, such notice shall be deemed to be
delivered when information of the transmission is received.
F. Meetings by any Form of Communication. The Policy Board shall have the
power to permit any and all Policy Board Members to participate in a regular or
special meeting by, or conduct the meeting through the use of any means of
communication by which all Policy Board Members participating may simultaneously
hear each other during the meeting. A Policy Board Member participating in a
meeting by this means is deemed to be present in person at the meeting.
G. Quorum. All of the members of the Policy Board as constituted from time
to time shall constitute a quorum for the transaction of business, but a lesser
number may adjourn any meeting and the meeting may be held as adjourned without
further notice. When a quorum is present at any meeting, a majority of the
members present thereat shall decide any question brought before such meeting,
except as otherwise provided by this Agreement or by these Governance Rules. The
fact that a Policy Board Member has an interest in a matter to be voted on at
the meeting shall not prevent his being counted for purposes of a quorum.
H. Vacancies. Any vacancy occurring in the Policy Board shall be filled by
the Party which chose such vacated Policy Board Member(s).
I. Removal. Any Policy Board Member may be removed without cause by the
Party which chose such Policy Board Member.
J. Committees. The majority of the Policy Board may appoint an executive
committee or such other committees as it may deem advisable, composed of one (1)
or more Policy Board Members, and may delegate authority to such committees as
is not inconsistent with this Agreement. The members of such committee shall
serve at the pleasure of the Policy Board.
4.1-1
<PAGE>
K. Presumption of Assent. A Policy Board Member who is present at a
meeting of the Policy Board at which action on any matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the secretaries of the Company and ROA II immediately after the adjournment
of the meeting. Such right to dissent shall not apply to a Policy Board Member
who voted in favor of such action.
L. Informal Action by Board Members. Any action required to be taken at a
meeting of the Policy Board, or any other action which may be taken at a meeting
of the Policy Board, may be taken without a meeting if all Policy Board Members
consent to taking such action without a meeting. If all Policy Board Members
consent to taking such action without a meeting, the affirmative vote of a
majority of the Policy Board Members is the act of the Policy Board. The action
must be evidenced by one or more written consents describing the action taken,
signed by each Policy Board Member, indicating each signing Policy Board
Member's vote or abstention on the action, and shall be included in the minutes
or filed with the Policy Board records reflecting the action taken.
4.1-2
<PAGE>
EXHIBIT 6.9.1
ROAII PLAN
6.9.1-1
<PAGE>
EXHIBIT 8.1.8(d)
EXCLUDED EXPENSES
Excluded Expenses include, but are not limited to the following items:
a. Accounting, legal and other professional fees attributed to ROAII or
to Physician Employees.
b. Contribution expenses, cash or non-cash, which include, but are not
limited to costs of sponsoring sports teams, political
contributions, unapproved marketing expenses, and contributions to
hospitals and staff.
c. Automobile expenses including payments, repairs and maintenance,
mileage, depreciation, etc.
d. Entertainment expenses of any kind.
e. Physician benefits including insurance (health, life [except to the
extent allowed under Section 8.1.3(f)], dental, disability [except
to the extent allowed under Section 8.1.3(f)], etc., but not
including malpractice insurance), vacation time, sick time, paid
leave of absence, contributions to and administration of physician
retirement plans (pension, 401(k), IRA, others), etc.
f. Employment tax expenses including Federal and State Unemployment
taxes, FICA taxes, Medicare taxes, etc.
g. Home office expenses including the acquisition costs, depreciation,
repairs and maintenance, and ongoing operating expenses of:
computers, software, copying machines, fax machines, telephones and
telephone lines, cellular telephones, etc.; and the costs of having
an office in one's home including allocated rent, utility and
depreciation expenses.
h. Meal expenses.
i. Medical supplies and drugs either used or distributed by a Physician
Employee without billing for such supplies and drugs at standard
rates.
j. Presentation expenses of any kind including professional services,
slide production, travel, meals, entertainment, etc.
k. Personal postage expenses.
l. Personal laundry expenses.
m. Personal assistant expenses (including the time staff spends on
personal errands for Physician Employees).
8.1.8.(d)-1
<PAGE>
EXHIBIT 8.3.6
1. ACCOUNTS RECEIVABLE COLLECTION
1.1 Collection of Accounts Receivable. ROAII agrees to cooperate with
Company in the collection of the Accounts Receivables sold by ROAII, transferred
pursuant to Section 8.3.
1.2 Definitions. In addition to the definitions contained in Article II of
the Agreement, for purposes of this Exhibit 8.3.6., the following terms shall be
applicable:
"Accounts" means, with respect to ROAII, all Accounts Receivable including
any and all rights to payment of money or other forms of consideration of
any kind (whether classified under the Uniform Commercial Code as
accounts, chattel paper, general intangibles, or otherwise) for goods sold
or leased or for services rendered by ROAII, including, but not limited
to, accounts receivable, proceeds of any letters of credit naming ROAII as
beneficiary, chattel paper, insurance proceeds, contract rights, notes,
drafts, instruments, documents, acceptances, and all other debts,
obligations and liabilities in whatever form from any other Person.
"Collecting Bank" means the main office of ______________________________
located at ___________________________________, or such other financial
institution agreed to by Company.
"Finance Charge Rate" means a rate of interest equal to the lesser of (i)
eighteen percent (18%) per annum or (ii) the maximum rate of interest
allowed by applicable law from time to time in effect.
"Governmental Lockbox Account" means an account established at the
Collecting Bank by ROAII into which all proceeds of ROAII's Governmental
Receivables are remitted.
"Lender" shall mean any lender to Company that has a security interest in
the Accounts from time to time.
"Lockbox Agreements" means that certain Lockbox Operating Procedural
Agreements -- Governmental Receivables to be entered into between the
Collecting Bank as to Governmental Receivables and that certain Lockbox
Operating Procedural Agreement -- Non-Governmental Receivables to be
entered between the Collecting Bank, Lender and ROAII as to Accounts which
are not Governmental Receivables, in a form acceptable to counsel for
Company.
"Main Account" means Company's operating account established and
maintained at the Collecting Bank.
"Non-Governmental Lockbox Account" means the account established by the
Company with the Collecting Bank into which all proceeds from ROAII's
Accounts under which a Third-Party Payor is the Account Debtor (other than
Governmental Receivables) are remitted.
"Non-Governmental Receivables" means the Accounts which are not
Governmental Receivables.
"Notification Letter" means a written notification from ROAII to
Third-Party Payors informing such Third-Party Payors that all proceeds due
under ROAII's Accounts are to be remitted to the Non-Governmental Lockbox
Account or the Governmental Lockbox Account, as the case may be,
substantially in a form acceptable to counsel for Company.
1.3 Collection of Governmental Receivables. With respect to payments on
Governmental Receivables, at the request and option of Company, ROAII agrees
that the following procedures shall apply:
(a) ROAII shall enter into a Lockbox Agreement applicable to Governmental
Receivables in a form acceptable to counsel for Company and reasonably
acceptable to ROAII and establish a Governmental Lockbox Account. Governmental
Lockbox Account shall be an account in the name of ROAII. All payments in
respect of ROAII's Governmental Receivables are to be made directly to such
account. In the event Company exercises this option, ROAII shall instruct each
Account Debtor in respect of ROAII's Governmental Receivables to remit all such
payments directly to such
8.3.6-1
<PAGE>
Governmental Lockbox Account pursuant to a Notification Letter. In addition,
ROAII shall attach written instructions to each invoice representing such
Governmental Receivable generated subsequent to the date of this Agreement
instructing such Third-Party Payor or Account Debtor that payment under such
invoice is to be paid to the Governmental Lockbox Account. ROAII agrees that it
shall not deposit any funds other than payments on Governmental Receivables
into, nor make any withdrawals from, the Governmental Lockbox Account without
the prior written consent of Company. ROAII further agrees that it shall not
during the term of this Agreement terminate, modify or amend in any manner the
Lockbox Agreement applicable to the Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to Governmental
Receivables, ROAII shall instruct the Collecting Bank to transfer automatically
all amounts deposited in Governmental Lockbox Account constituting good funds to
Company's Main Account. ROAII shall have no right or interest in the Main
Account. ROAII shall not, so long as any purchased Account remains unpaid,
change or cancel such automatic transfer order at any time, or, without the
prior written consent of Company, change either the identity of Governmental
Lockbox Account or the instructions to each Account Debtor on the related
Governmental Receivable to make its payments to such account. Any such action
shall be considered a breach of this Agreement for which Company shall be
entitled to all remedies at law and in equity, including obtaining an
injunction.
(c) ROAII will cooperate with Company and its agents in the identification
of sums deposited into Governmental Lockbox Account, which cooperation shall
continue until all purchased Accounts sold hereunder have been collected.
(d) ROAII agrees to pay, on demand, a finance charge equal to the Finance
Charge Rate, on any payment on a Governmental Receivable received by ROAII that
is not deposited in Governmental Lockbox Account within forty-eight (48) hours
after receipt by ROAII.
1.4 Collection of Non-Governmental Receivables. With respect to payments
on Non-Governmental Receivables, if requested by Company and at Company's
option, ROAII agrees that the following procedures shall apply:
(a) Prior to the sale of any Non-Governmental Receivable hereunder,
Company, the Collecting Bank and Lender (if requested by Lender) shall enter
into a Lockbox Agreement applicable to Non-Governmental Receivables in a form
acceptable to counsel for Company and Company shall establish Non-Governmental
Lockbox Account. The NonGovernmental Lockbox Account shall be an account in the
name of Company. All payments in respect of ROAII's Non-Governmental Receivables
are to be made directly to such account. If Company exercises its option herein,
at request of Company, ROAII shall instruct each Account Debtor in respect of
ROAII's Non-Governmental Receivables to remit all such payments directly to such
Non-Governmental Lockbox Account pursuant to a Notification Letter. In addition,
ROAII shall attach written instructions to each invoice representing such
Non-Governmental Receivable generated subsequent to the date of this Agreement
instructing such Third-Party Payor or Account Debtor that payment under such
invoice is to be paid to the Non-Governmental Lockbox Account. ROAII agrees that
it shall not deposit any funds other than Non-Governmental Receivables into, nor
make any withdrawals from, the Non-Governmental Lockbox Account without the
prior written consent of Company. ROAII further agrees that it shall not during
the term of this Agreement terminate, modify or amend in any manner the Lockbox
Agreement applicable to the Non-Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to
Non-Governmental Receivables, Company shall instruct the Collecting Bank to
transfer automatically all amounts deposited in the Non-Governmental Lockbox
Account constituting good funds to Company's Main Account. ROAII shall have no
right or interest in the Non-Governmental Lockbox Account nor to the Main
Account and such accounts shall be in the name of and under the control of
Company. ROAII shall not, so long as any purchased Account remains unpaid, and
in any event, during the term of this Agreement, at any time, or, without the
prior written consent of Company, change the instructions to each Account Debtor
on the related Non-Governmental Receivable to make its payments to such account.
Any such action shall be considered a breach of this Agreement for which Company
shall be entitled to all remedies at law and in equity, including obtaining an
injunction.
(c) ROAII will cooperate with Company and its agents in the identification
of sums deposited into NonGovernmental Lockbox Account, which cooperation shall
continue until all purchased Accounts sold hereunder have been collected.
8.3.6-2
<PAGE>
(d) ROAII agrees to pay, on demand, a finance charge equal to the Finance
Charge Rate, on any Non-Governmental Receivable received by ROAII that is not
deposited in Non-Governmental Lockbox Account within forty-eight (48) hours
after receipt by ROAII.
1.5 Procedures Without Lockbox. In the event that Company elects to forego
the procedures established in Sections 1.3 and 1.4, ROAII shall instruct the
Collecting Bank to transfer automatically all amounts constituting good funds in
the account or accounts of ROAII established for the collection of Governmental
Receivables and Non-Governmental Receivables to Company's Main Account at
_____________ __________, ____________________________, Account ______________
(the "Main Account") pursuant to a standing order in a form acceptable to
Company's legal counsel. ROAII shall have no right or interest in Company's Main
Account and such account shall be in the name of and under the control of
Company. ROAII shall not, so long as any purchased account remains unpaid,
change or cancel such standing order at any time, or, without the prior written
consent of Company, change the instructions to each Account Debtor on each
Governmental Receivable and Non-Governmental Receivable to make its payments to
such account. Any such action shall be considered a breach of this Agreement for
which Company shall be entitled to all remedies at law and in equity, including
obtaining an injunction.
1.6 Misdirected Payments. (a) If after the date of this Agreement, an
Account Debtor shall make payment of a purchased Account to a location other
than is provided in the Notification Letter or ROAII otherwise receives payments
on Accounts that are purchased by Company under the terms of this Agreement
("Misdirected Payments"), ROAII (at its own cost and expense) shall promptly
take all necessary steps to effect collection of such Misdirected Payment from
any other party claiming an interest therein or having possession thereof and
(i) hold such payment in trust for Company, (ii) segregate such payment, (iii)
use its best efforts not to commingle such payment with ROAII's own funds or
other assets, and (iv) deliver such payment no later than forty-eight (48) hours
from the day of receipt to the Governmental Lockbox Account or the
Non-Governmental Lockbox Account, as applicable.
(b) ROAII agrees to pay, on demand, the Finance Charge Rate on any
Misdirected Payment received by ROAII that is not deposited in the Company Main
Account within forty-eight (48) hours after receipt by ROAII.
8.3.6-3
<PAGE>
EXHIBIT 11
NON-COMPETITION
A. ROAII and/or each of the Physician Owners agree and covenant that,
during the term of this Agreement and for a period of thirty-six (36) months
after termination of this Agreement (other than a termination pursuant to
Section 11.3.1 through 11.3.4, inclusive, or Section 11.5, of the Service
Agreement), ROAII and/or the Physician Owner(s), as applicable, shall not,
either directly as a partner, employer, agent, independent contractor, employee
or indirectly through a corporation, partnership, affiliate, subsidiary or
otherwise:
(i) Subject to the provisions of paragraph G below, establish,
operate or provide professional orthopaedic surgical services at any
medical office, clinic or other health care facility at any location
within seventy-five (75) miles of (i) the Main Office location; (ii) any
of the Satellite Offices; or (iii) any location at which Company provides
services to any practice at the time of such termination;
(ii) Subject to the provisions of paragraph G below, publicly
announce or offer (by any method) to provide professional orthopaedic
surgical services at any medical office, clinic or other health care
facility at any location within seventy-five (75) miles during the first
five (5) years of the term of this Agreement or fifty (50) miles
thereafter of (i) the Main Office; (ii) any of the Satellite Offices; or
(iii) any location at which Company provides services to any practice at
the time of such termination;
(iii) Solicit, induce or attempt to induce, in connection with any
business competitive with that being serviced by Company, patients of any
physician (including ROAII and/or the Physician Owner(s)) associated or
affiliated with Company to leave the care of physicians associated or
affiliated with Company; or
(iv) Solicit, induce or attempt to induce any employee, consultant
or other persons associated or affiliated with Company or any Affiliate of
Company to leave the employment of, or to discontinue their association
with, Company or such Affiliate of Company.
B. If ROAII and/or the Physician Owner(s) violate the covenants set forth
in paragraph A of this Exhibit 11, then the duration of the restrictions
contained in paragraph A shall be extended an additional month for each month
during which such violation occurred but was not discovered by Company,
beginning upon the date that Company learns of the violation and so notifies
ROAII and/or the Physician Owners in writing. In addition, breach of the
covenants set forth in paragraph A above may trigger certain rights of Company
to redeem a Physician Owner's Company common stock pursuant to the terms of
Article VIII of the Stockholders Agreement.
C. ROAII and/or the Physician Owner(s) acknowledge and agree that the
covenants contained in this Exhibit 11 are necessary to protect the business and
goodwill of Company and that a breach of these covenants will result in
irreparable harm and continuing damage to Company. As a result, ROAII and/or the
Physician Owner(s) agree that if ROAII and/or the Physician Owner(s) breach or
threaten to breach these covenants, Company shall be entitled to specific
performance and/or injunctive or other equitable relief in order to prevent the
continuation of such harm, as well as money damages. ROAII and/or the Physician
Owner(s) waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such equitable relief.
D. ROAII and the Physician Owner(s) acknowledge and agree that if ROAII
and/or the Physician Owner(s) breach the covenants contained in this Exhibit 11
and Company is unable for any reason to obtain a restraining order from a court
of competent jurisdiction within thirty (30) days after application to enjoin
the breach by ROAII and/or the Physician Owner(s), it will be difficult to
calculate the precise amount of Company's damages. As a result, the parties have
determined that, in the event of such a breach, Company's damages shall be equal
to 300% of the total amount of Professional Service Revenues attributable to
ROAII and/or the applicable Physician Owner(s) during the twelve (12) months
prior to the termination of the Agreement.
11-1
<PAGE>
E. The parties have attempted to limit the provisions of this Exhibit 11
only to the extent necessary to protect each party's interests. However, the
parties hereby agree that, in the event that any provision, section or
subsection of this Exhibit 11 is adjudged by any court of competent jurisdiction
to be void or unenforceable, in whole or part, such court shall modify and
enforce any such provision, section or subsection to the extent that it believes
to be reasonable under the circumstances.
F. In the event that the Service Agreement has been in effect for at least
five (5) years, a Physician Owner may buy-out the noncompetition restriction
applicable to him or her by paying to Company an amount equal to (A)(i) the
after tax amount (based upon the actual tax rate applied for any shares
previously sold and the long-term capital gains rate then in effect for any
shares held at the time of termination) of appreciation in value (from the date
of Merger to the earlier of the date of sale of any common stock sold or the
date of termination of affiliation with Company for any common stock then held)
of the Company common stock received by the applicable Physician Owner at the
time of the Merger, less (ii) the after tax amount (based upon the terminating
Physician Owner's effective federal income tax rate during the years in which
this Agreement was in effect) of the terminating Physician Owner's pro rata
share (based on the terminating Physician Owner's proportionate share of all
Professional Services Revenues collected by ROAII during the term of the
Agreement) of service fees paid to Company during the period of the Service
Agreement (but not less than zero), plus (B) one-third of the Fair Market Value
of the Company common stock and cash consideration received by the terminating
Physician Owner at the time of the Merger (valued at the time of the Merger);
provided, however, in the event that at the time of termination, if the Fair
Market Value per share of the Company common stock is less than one-third (1/3)
of the value per share of the Company common stock at the time of the Merger,
then the maximum amount payable to Company to buy out the noncompetition
restriction shall equal the total Fair Market Value of the Company common stock
then held by the terminating Physician Owner plus one-third (1/3) of the cash
consideration (acquired in the Merger) plus the amount of any gains realized by
the terminating Physician Owner from the prior sale of Company common stock. The
terminating Physician Owner may pay the amount owed by transferring to Company
an amount of Company common stock having a Fair Market Value equal to the amount
owed or pay to Company cash in the amount owed (or a combination of cash and
common stock). The above references to Company common stock (except for the
immediately preceding sentence) shall not include any Company common stock
purchased for cash or acquired pursuant to the conversion of the Company's
convertible debentures.
G. Upon the termination of this Agreement, the Policy Board shall have the
authority to modify the terms of the restrictive covenants, including but not
limited to the mileage radius limitations set forth above in paragraph A. In the
event that the individuals representing ROAII or Company, as the case may be, on
the Policy Board can reasonably demonstrate that a modification to the
restrictive covenant will not have a material adverse effect on Company's or
ROAII's practice operations, earnings or cash flow, then the individuals
representing Company or ROAII, as the case may be, shall consent to the proposed
modification.
11-2
<PAGE>
SERVICE AGREEMENT
BY AND BETWEEN
SPECIALTY CARE NETWORK, INC.,
SCN OF PRINCETON, INC.,
PRINCETON ORTHOPEDIC ASSOCIATES II, P.A.
AND
MICHAEL N. JOLLEY, M.D.
HARVEY E. SMIRES, M.D.
ROBERT N. DUNN, M.D.
JEFFREY S. ABRAMS, M.D.
RICHARD E. FLEMING, JR., M.D.
W. THOMAS GUTOWSKI, M.D.
STEVEN R. GECHA, M.D.
C. ALEXANDER MOSKWA, JR., M.D.
DAVID M. SMITH, M.D.
Dated as of November 1, 1996
<PAGE>
TABLE OF CONTENTS Page
----
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1
1.1. Independent Relationship....................................... 1
1.2. Responsibilities of the Parties................................ 2
1.3. Princeton II Matters........................................... 2
1.4. Patient Referrals.............................................. 2
1.5. Professional Judgment.......................................... 2
1.6. Conduct of Professional Medical Practice....................... 2
ARTICLE II.
DEFINITIONS
4
2.1. Definitions.................................................... 4
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY COMPANY
8
3.1. Practice Offices............................................... 8
3.2. Use of Practice Offices........................................ 9
ARTICLE IV.
DUTIES OF THE POLICY BOARD
9
4.1. Formation and Operation of the Policy Board.................... 9
4.2. Duties and Responsibilities of the Policy Board................ 9
4.2.1. Capital Improvements and Expansion..................... 9
4.2.2. Annual Budgets......................................... 9
4.2.3. Marketing.............................................. 9
4.2.4. Patient Fees; Collection Policies...................... 9
4.2.5. Princeton II and Payor Relationships.................. 10
4.2.6. Strategic Planning.................................... 10
4.2.7. Capital Expenditures.................................. 10
4.2.8. Restrictive Covenants for Physician................... 10
4.2.9. Grievance Referrals................................... 10
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
10
5.1. Performance of Management Functions........................... 10
i
<PAGE>
Page
----
5.2. Financial Planning and Goals.................................. 10
5.3. Audits and Financial Statements............................... 11
5.4. Inventory and Supplies........................................ 11
5.5. Management Services and Administration........................ 11
5.6. Personnel..................................................... 14
5.7. Events Excusing Performance................................... 14
5.8. Compliance with Law and Business Standards.................... 15
5.9. Quality Assurance............................................. 15
5.10. New Medical Services and Additional Practice Offices.......... 15
5.11. Collection of Certain Patient Receipts and Payment of
Clinic Expenses............................................. 15
5.12. Other Princeton II Accounts................................... 16
ARTICLE VI.
OBLIGATIONS OF PRINCETON II AND PHYSICIAN OWNERS
16
6.1. Professional Services......................................... 16
6.2. Medical Practice.............................................. 16
6.3. Employment of Physician Employees............................. 16
6.4. Professional Dues and Education Expenses...................... 17
6.5. Professional Insurance Eligibility............................ 17
6.6. Events Excusing Performance................................... 17
6.7. Fees for Professional Services................................ 17
6.8. Peer Review................................................... 17
6.9. Princeton II Employee Benefit Plans........................... 18
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
19
7.1. Exclusive Arrangement......................................... 19
7.2. Restrictive Covenants......................................... 20
7.2.1. By Current Physician Employees........................ 20
7.2.2. By Current and Future Physician Owners................ 20
7.2.3. Limitations on Restrictive Covenants.................. 21
7.3. Restrictive Covenants By Future Physician Employees........... 21
7.4. Rights of Company............................................. 21
7.5. Enforcement................................................... 21
7.6. Modification of Restrictive Covenants......................... 22
ii
<PAGE>
Page
----
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
22
8.1. Service Fees.................................................. 22
8.2. Payment of Service Fee........................................ 26
8.3. Purchase of Accounts Receivable............................... 26
8.4. Payment of Clinic Expenses.................................... 27
ARTICLE IX.
RECORDS
28
9.1. Patient Records............................................... 28
9.2. Records Owned by Company...................................... 28
9.3. Access to Records............................................. 28
9.4. Government Access to Records.................................. 28
ARTICLE X.
INSURANCE AND INDEMNITY
29
10.1. Insurance to be Maintained by Princeton II.................... 29
10.2. Insurance to be Maintained by Company......................... 29
10.3. Additional Insureds........................................... 29
10.4. Indemnification............................................... 29
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
30
11.1. Term of Agreement............................................. 30
11.2. Extended Term................................................. 30
11.3. Termination by Princeton II for Cause......................... 30
11.4. Termination by Company for Cause.............................. 31
11.5. Early Termination by Princeton II or Company Without
Cause Upon Third (3rd) Anniversary of Agreement............. 32
11.6. Consequences of Princeton II Termination...................... 33
11.7. Closing of purchase by Princeton II and Effective Date of
Termination................................................. 33
11.8. Tail Policy................................................... 34
11.9. Restrictions Applicable to Physician Owners................... 34
11.9.1 Early Retirement...................................... 34
11.9.2 Retirement............................................ 36
11.9.3 Physician Owner Change in Practice/Group Affiliation
...................................................... 36
iii
<PAGE>
Page
----
11.9.4 Death or Disability................................... 37
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
37
12.1. Use of Insurance Proceeds.................................... 37
12.2. Temporary Space.............................................. 37
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES
OF PRINCETON II AND PHYSICIAN OWNERS
37
13.1. Validity..................................................... 37
13.2. Litigation................................................... 38
13.3. Permits...................................................... 38
13.4. Authority.................................................... 38
13.5. Compliance with Applicable Law............................... 38
13.6. Health Care Compliance....................................... 39
13.7. Fraud and Abuse.............................................. 39
13.8. Princeton II Compliance...................................... 39
13.9. Rates and Reimbursement Policies............................. 40
13.10. Accounts Receivable.......................................... 40
13.11. Full Disclosure.............................................. 42
13.12. Exhibits..................................................... 42
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
43
14.1. Organization................................................. 43
14.2. Authority.................................................... 43
14.3. Absence of Litigation........................................ 43
14.4. Transactions with Affiliates................................. 43
ARTICLE XV.
COVENANTS OF PRINCETON II AND PHYSICIAN OWNERS
43
15.1. Merger, Consolidation and Other Arrangements................. 43
15.2. Necessary Authorizations/Assignment of Licenses and Permit... 43
15.3. Transaction with Affiliates.................................. 44
15.4. Compliance with All Laws..................................... 44
15.5. Third-Party Payor Programs................................... 44
iv
<PAGE>
Page
----
15.6. Change in Business or Credit and Collection Policy........... 44
15.7. Treatment of Accounts Receivable............................. 44
15.8. Security Interest............................................ 45
ARTICLE XVI.
GENERAL PROVISIONS
45
16.1. Assignment................................................... 45
16.2. Whole Agreement; Modification................................ 46
16.3. Notices...................................................... 46
16.4. Binding on Successors........................................ 47
16.5. Waiver of Provisions......................................... 47
16.6. Governing Law................................................ 47
16.7. No Practice of Medicine...................................... 47
16.8. Severability................................................. 47
16.9. Additional Documents......................................... 48
16.10. Attorneys' Fees.............................................. 48
16.11. Time is of the Essence....................................... 48
16.12. Confidentiality.............................................. 48
16.13. Contract Modifications for Prospective Legal Events.......... 48
16.14. Remedies Cumulative.......................................... 48
16.15. Language Construction........................................ 48
16.16. No Obligation to Third Parties............................... 49
16.17. Communications............................................... 49
EXHIBIT 3.1 - LEASE AGREEMENT......................................3.1-1
EXHIBIT 4.1 - POLICY BOARD GOVERNANCE RULES........................4.1-1
EXHIBIT 6.9.1 - PRINCETON II PLAN................................6.9.1-1
EXHIBIT 8.1.8(d) - EXCLUDED EXPENSES.........................8.1.8.(d)-1
EXHIBIT 8.3.6 - ACCOUNTS RECEIVABLE COLLECTION..................8.3.6.-1
EXHIBIT 11 - NON-COMPETITION........................................11-1
v
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") dated as of November 8, 1996, by and
between SPECIALTY CARE NETWORK, INC., a Delaware corporation, SCN OF PRINCETON,
INC., a New Jersey corporation, PRINCETON ORTHOPEDIC ASSOCIATES, II, P.A., a New
Jersey professional association ("Princeton II") and MICHAEL N. JOLLEY, M.D.,
HARVEY E. SMIRES, M.D., ROBERT N. DUNN, M.D., JEFFREY S. ABRAMS, M.D., RICHARD
E. FLEMING, JR., M.D., W. THOMAS GUTOWSKI, M.D., STEVEN R. GECHA, M.D., C.
ALEXANDER MOSKWA, JR., M.D., and DAVID M. SMITH, M.D. ("Physician Owner[s]"),
citizens and residents of New Jersey.
W I T N E S S E T H:
WHEREAS, Company is in the business of managing medical clinics and
providing support services to and furnishing orthopedic care medical practices
with the necessary equipment, personnel, supplies and support staff; and
WHEREAS, Princeton II and Physician Owners desire to obtain the services
of Company in performing such management functions so as to permit Princeton II
and Physician Owners to devote Princeton II's and Physician Owners' efforts on a
concentrated and continuous basis to the rendering of medical services to
patients.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements herein set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is agreed by the parties as follows:
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship. Princeton II, Physician Owners and Company
intend to act and perform as independent contractors, and the provisions hereof
are not intended to create any partnership, joint venture, agency or employment
relationship between the parties. Notwithstanding the authority granted to
Company herein, Company, Princeton II, and Physician Owners agree that Princeton
II and Physician Owners shall retain all authority to direct the medical,
professional, and ethical aspects of Princeton II's and Physician Owners'
medical practice including but not limited to the admission of new patients and
providing care to indigent patients. Each party shall be solely responsible for
and shall comply with all state and federal laws pertaining to employment taxes,
income withholding, unemployment compensation contributions and other employment
related statutes applicable to that party.
1.2. Responsibilities of the Parties. As more specifically set forth
herein, Company shall provide Princeton II with offices and facilities,
equipment, supplies, certain support personnel,
<PAGE>
management and financial advisory services for its medical and physical therapy
practices. As more specifically set forth herein, Princeton II shall be
responsible for the recruitment and hiring of physicians and all issues related
to the professional practice of medicine, medical practice patterns and
documentation thereof. Notwithstanding anything herein to the contrary, no
"designated health service," as defined in 42 U.S.C. ss. 1395nn, including any
amendments or successors thereto, shall be provided by Company under this
Agreement.
1.3. Princeton II Matters. Matters involving the internal agreements and
finances of Princeton II, including the disposition of professional fee income,
tax planning, and investment planning (and expenses relating solely to these
internal business matters) shall remain the sole responsibility of Princeton II.
1.4. Patient Referrals. The parties agree that the benefits to Princeton
II and Physician Owners hereunder do not require, are not payment for, and are
not in any way contingent upon the admission, referral or any other arrangement
for the provision of any item or service offered by Company to any of Princeton
II's patients in any facility operated by Company.
1.5. Professional Judgment. Each of the parties acknowledges and agrees
that the terms and conditions of this Agreement pertain to and control the
business and financial relationship between and among the parties but do not
pertain to and do not control the professional and clinical relationship between
and among Princeton II, Physician Employees, Princeton II Employees, and
Princeton II's patients. Nothing in this Agreement shall be construed to alter
or in any way affect the legal, ethical, and professional relationship between
and among Princeton II, Physician Owners, Physician Employees, and Princeton
II's patients, nor shall anything contained in this Agreement abrogate any
right, privilege, or obligation arising out of or applicable to the
physician-patient relationship.
1.6. Conduct of Professional Medical Practice. Notwithstanding any other
statement contained in this Agreement to the contrary, both Princeton II and
Company understand and agree that:
(1) Princeton II will have complete and exclusive control with respect to
the provision of professional medical services, the supervision of its
Physician Employees and Technical Employees and with respect to all
medical decisions, such as the administration of patient care, and such
other decisions as may be required by Applicable Law;
(2) Princeton II is solely responsible for determining the salaries or
other compensation to be paid to its Physician Employees;
(3) Princeton II, through its physicians, shall be responsible for
assuring that quality control and assurance mechanisms required by
Applicable Law shall be implemented and observed by the practice. These
physicians shall assure that an appropriate licensed health care
professional determines and carries out all of the following services and
medical care policies:
- 2 -
<PAGE>
(a) Review and approval of the hiring of Physician Employees and
timely demand for and verification of current licensing credentials
and any other educational credentials required by Applicable Law;
(b) Medical policies;
(c) Cleanliness of Office Locations;
(d) Maintenance, registration and inspection of professional
equipment as necessary;
(e) Standards for record keeping as to patient medical records,
billing records and such other records as may be required by law or
rule, including controlled dangerous substance inventories, as
applicable;
(f) Security, including drug storage, prescription pad control,
confidentiality of patient records;
(g) Periodic audit of patient records and of professional services
to assure quality professional care on the premises;
(h) Responsibility for the professional propriety of billing,
including retention of sole discretion regarding establishment of
patient fees and modification or waiver thereof in an individual
case;
(i) Responsibility for the professional propriety of advertising or
other representations including disclosure of financial interest in
health care services offered to the public;
(j) Preparation and maintenance of a written list of current fees
for standard services, which list shall be available to patients on
request; and
(k) Posting a conspicuous notice in the waiting room that
professional fee information is available to patients on request.
ARTICLE II.
DEFINITIONS
2.1. Definitions. For the purpose of this Agreement, the following
definitions shall apply:
"Account Debtor" means an account debtor or any other Person obligated in
respect of an Account Receivable.
- 3 -
<PAGE>
"Accounts Receivable" means, with respect to Princeton II, all accounts
and any and all rights to payment of money or other forms of consideration of
any kind now owned or hereafter acquired (whether classified under the Uniform
Commercial Code as accounts, chattel paper, general intangibles or otherwise)
for goods sold or leased or for services rendered by Princeton II, including,
but not limited to, accounts receivable, proceeds of any letters of credit
naming Princeton II as beneficiary, chattel paper, insurance proceeds, contract
rights, notes, drafts, instruments, documents, acceptances and all other debts,
obligations and liabilities in whatever form from any other Person; provided
that, cash, checks and credit card purchases are not included in the definition
of Accounts Receivable.
"Affiliate" means, with respect to any Person, any entity which directly
or indirectly controls, is controlled by, or is under common control with, such
Person or any Subsidiary of such Person or any Person who is a director, officer
or partner of such Person or any Subsidiary of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to (a) vote ten percent (10%) or more of the securities having ordinary voting
power for the election of directors of such Person, or (b) direct or cause the
direction of management and policies of a business, whether through the
ownership of voting securities, by contract or otherwise and either alone or in
conjunction with others or any group.
"Applicable Law" means all applicable provisions of constitutions,
statutes, rules, regulations, ordinances and orders of all Governmental
Authorities and all orders and decrees of all courts, tribunals and arbitrators,
and shall include, without limitation, Health Care Law.
"Assigned Lease" shall have the meaning as defined in Section 3.1.
"Base Service Fee" shall equal [xxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxx] per year, payable in monthly payments of
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
"CHAMPUS" means the Civilian Health and Medical Program of the Uniformed
Services.
"Change in Control" shall mean any transaction pursuant to which Company
(a) consummates the sale of substantially all of the assets of Company to an
entity which is publicly traded in exchange for voting stock in such publicly
traded entity or (b) merges with a publicly traded corporation, entity or
corporation or entity controlled by a publicly traded corporation or entity in a
transaction where unrelated persons own at least fifty-one percent (51%) of the
issued and outstanding securities of the surviving entity or corporation
controlling the merged entity.
"Clinic Expenses" shall have the meaning as defined in Section 8.1.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
- 4 -
<PAGE>
"Company" shall mean collectively Specialty Care Network, Inc., a Delaware
corporation, together with its successors and assigns and its wholly-owned
subsidiary, SCN of Princeton, Inc., together with its successors and assigns.
"Company Expenses" shall have the meaning as defined in Section 8.1.7.
"Designated Leased Employees" shall have the meaning as defined in Section
6.9.1.
"Direct Lease" shall have the meaning as defined in Section 3.1.
"Disabled" or "Disability" shall mean that a Physician suffers from a
mental or physical condition resulting in such Physician Employee's inability to
perform the essential functions of his job as required by Section 6.1.1 (and as
may be described with greater specificity in written job descriptions prepared
and maintained by Princeton II and approved by the Policy Board) without
significant risk to the health or safety of others, even with such reasonable
accommodation as may be available under the circumstances, and the Policy Board
may reasonably anticipate that such Physician Employee will remain disabled for
at least two years following the commencement of such disability.
"Exchange" shall mean the acquisition of Princeton Orthopaedic Associates,
P.A. ("Princeton") pursuant to the Exchange Agreement.
"Exchange Agreement" means that certain Stock Exchange Agreement, dated
October 21, 1996 by and between Company and Physician Owners.
"Exchange A/R" means the accounts receivable acquired from Princeton by
Company pursuant to the Exchange Agreement.
"Excluded Expenses" shall have the meaning as defined in Section 8.1.8.
"GAAP" shall mean generally accepted accounting principles as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession. For purposes of
this Agreement, GAAP shall be applied in a manner consistent with the historic
practices used by Company or Princeton II as applicable.
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, board, body, agency, bureau or entity or any arbitrator with
authority to bind a party at law.
- 5 -
<PAGE>
"Governmental Receivables" means an Account Receivable of Princeton II
which (i) arises in the ordinary course of business of Princeton II, (ii) has as
its Third-Party Payor the United States of America or any state or any agency or
instrumentality of the United States of America or any state which makes any
payments with respect to Medicare or Medicaid or with respect to any other
program (including CHAMPUS) established by federal or state law, and (iii) is
required by federal or state law to be paid or to be made to Princeton II as a
healthcare provider. Governmental Receivables shall not, however, refer to
amounts payable by private insurers under contract to provide benefits under the
Federal Employee Health Benefit Program.
"Governmental Rules and Regulations" shall have the meaning as defined in
Section 13.7.
"Health Care Law" means any Applicable Law regulating the acquisition,
construction, operation, maintenance or management of a health care practice,
facility, provider or payor, including without limitation, 42 U.S.C. ss.1395nn
and 42 U.S.C. ss. 1320a-7b.
"Lease" shall mean the Assigned Lease, Direct Leases, and the New Leases,
including all amendments thereto, described in Section 3.1 hereof.
"Leased Premises" shall mean the real property described in the Lease.
"Lender" shall have the meaning as defined in Section 7.2.
"Main Office" shall mean the Leased Premises and all equipment and
facilities owned or operated by Company and utilized by Princeton II or any of
its employees within said Leased Premises.
"Medicaid" means any state program pursuant to which health care providers
are paid or reimbursed for care given or goods afforded to indigent persons and
administered pursuant to a plan approved by the Health Care Financing
Administration under Title XIX of the Social Security Act.
"Medicare" means any medical program established under Title XVIII of the
Social Security Act and administered by the Health Care Financing
Administration.
"Necessary Authorizations" means with respect to Princeton II, all
certificates of need, authorization, certifications, consents, approvals,
permits, licenses, notices, accreditations and exemptions, filings and
registrations, and reports required by Applicable Law, including, without
limitation, Health Care Law, which are required, necessary or reasonably useful
to the lawful ownership and operation of Princeton II's business.
"New Lease" shall have the meaning as defined in Section 3.1.
"Office Locations" shall have the meaning as defined in Section 3.1.
- 6 -
<PAGE>
"Person" shall mean an individual, corporation, partnership, association,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof including, without limitation, Third-Party Payors.
"Physician Employees" shall mean the term as defined in Section 8.1.6.
"Physician Extender Employees" shall mean the term as defined in Section
8.1.5.
"Physician Owners" shall mean those Physician Employees who own an
interest, directly or indirectly, in the equity of Princeton II.
"Plans" shall have the meaning as defined in Section 6.9.1.
"Policy Board" shall mean a board established pursuant to Section 4.1.
"Practice Net Revenue" shall mean the term as defined in Section 8.1.1.
"Practice Offices" shall mean (i) the Main Office and (ii) all of the
Satellite Offices.
"Professional Services Revenues" shall mean the term as defined in Section
8.1.2.
"Purchase Price" shall mean the term as defined in Section 8.3.2.
"Purchased A/R" means, with respect to Princeton II, the Accounts
Receivable purchased pursuant to Section 8.3 of this Agreement.
"Princeton II Operating Account" shall mean that certain operating account
established by Princeton II at a bank selected by Princeton II in Princeton II's
sole discretion as more fully described in Section 5.11.
"Princeton II Plan" shall mean the term as defined in Section 6.9.1.
"Satellite Offices" shall mean each location at which one or more of
Princeton II's employees provide services as described on Exhibit 3.1 and all
equipment and facilities owned or operated by Company and utilized by any of
said persons at such location.
"Settlement Date" shall mean the term as defined in Section 8.3.3.
"Service Agreement" means this Agreement.
"Subsidiary" means a Person of which an aggregate of 51% or more of the
voting stock of any class or classes or 51% or more of other voting or equity
interests is owned of record or beneficially by another Person, or by one or
more Subsidiaries of such Person.
- 7 -
<PAGE>
"Substitute Physician(s)" shall mean the term as defined in Section
11.9.1(b).
"Technical Employees" shall mean the term as defined in Section 8.1.4.
"Third-Party Payors" means each Person which makes payment under a
Third-Party Payor Program, and each Person which administers a Third-Party Payor
Program.
"Third-Party Payor Programs" means Medicare, Medicaid, CHAMPUS, insurance
provided by Blue Cross and/or Blue Shield, managed care plans, and any other
private health care insurance programs and employee assistance programs as well
as any future similar programs.
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY COMPANY
3.1. Practice Offices. (a) Company has received a leasehold interest in
certain offices and locations which comprise the Practice location ("Main
Office") and/or satellite offices ("Satellite Offices") as identified on Exhibit
3.1 (collectively the "Office Locations") through (i) an assignment of any
existing leases on said Office Locations (the "Assigned Leases") or (ii)
entering into a new lease with respect to one or more of the Office Locations
(the "Direct Leases") with a copy of the Assigned Leases and Direct Leases
attached hereto as Exhibit 3.1.
(b) Company agrees to provide offices and facilities at the Office
Locations (or at comparable facilities on the termination of the Assigned Leases
or Direct Leases) to Princeton II. Such facilities shall include all personal
property necessary to operate the facility. If any Assigned Leases or Direct
Leases are terminated by their terms, Company shall enter into a lease of a new
facility comparable to the Office Location whose lease is terminated (the "New
Lease") with the consent of the Policy Board. Company shall not enter into a
lease for a new Main Office or Satellite Office for Princeton II without the
approval of the Policy Board.
(c) Princeton II agrees to comply with all terms and provisions of the
Assigned Leases, Direct Leases and New Leases.
3.2. Use of Practice Offices. Princeton II shall not use or occupy the
Main Office or Satellite Offices for any purpose which is prohibited by the
Assigned Leases, Direct Leases or New Leases, by this Agreement or which is
directly or indirectly forbidden by law, ordinance, or governmental or municipal
regulation or order, or which may be dangerous to life, limb or property, or
which would increase the fire and extending coverage insurance rate in any
Practice Office or contents.
- 8 -
<PAGE>
ARTICLE IV.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board. The parties shall
establish a Policy Board which shall be responsible for developing management
and administrative policies for the overall operation of any Practice Office.
The Policy Board shall consist of six (6) members. Company shall designate, in
its sole discretion, three (3) members of the Policy Board. Princeton II shall
designate, in Princeton II's sole discretion, three (3) members of the Policy
Board. Any matter decided by a majority of the members of the Policy Board shall
constitute the decision of the Policy Board with respect to the matter.
4.2. Duties and Responsibilities of the Policy Board. The Policy Board
shall have the following duties and obligations:
4.2.1. Capital Improvements and Expansion. The Policy Board shall review
all requests by Princeton II for any renovations, capital improvements,
expansions and new equipment purchases or leases. The Policy Board shall
determine whether such expenditures are appropriate based upon economic
feasibility, physician support, productivity, market conditions, and the annual
budget formulated pursuant to this Agreement. If the Policy Board determines
that the acquisition of additional equipment or facilities is appropriate, then
Company shall use its best efforts to arrange for the financing and acquisition
of the property. Governance issues affecting the Policy Board shall be addressed
in accordance with the rules set forth in Exhibit 4.1.
4.2.2. Annual Budgets. All annual capital and operating budgets prepared
by Company in accordance with Section 5.2 of this Agreement, shall be subject to
the review of the Policy Board.
4.2.3. Marketing. All advertising and other marketing of the services
performed at any Practice Office shall be subject to the prior review and
approval of the Policy Board.
4.2.4. Patient Fees; Collection Policies. As a part of the annual
operating budget in consultation with Princeton II and Company, to the extent
allowed by Applicable Law, the Policy Board shall review and advise Princeton II
as to an appropriate fee schedule for all physician and ancillary services
rendered by Princeton II, which fee schedule shall ultimately be determined by
Princeton II in Princeton II's sole discretion. In addition, the Policy Board
shall approve the credit collection policies of Princeton II.
4.2.5. Princeton II and Payor Relationships. Decisions regarding the
establishment or maintenance of relationships with institutional health care
providers and payors, or with parties under arrangements for setting up new
Satellite Offices of Princeton II in the future, shall be made by the Policy
Board in consultation with Princeton II.
- 9 -
<PAGE>
4.2.6. Strategic Planning. The Policy Board shall develop long-term
strategic planning objectives.
4.2.7. Capital Expenditures. The Policy Board shall determine the priority
of major capital expenditures including the procurement of any new or additional
office space for Practice Offices.
4.2.8. Restrictive Covenants for Physician. The approval of the Policy
Board shall be required for any variations to the restrictive covenants
prescribed for any physician employment contract as set forth in Article VII or
Exhibit 11 of this Agreement.
4.2.9. Grievance Referrals. The Policy Board shall consider and make final
decisions regarding grievances pertaining to matters not specifically addressed
in this Agreement as referred to it by the Physician Employees.
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions. Company shall use its best
efforts to manage the day-to-day operations of the Main Practice Office and any
Satellite Offices in a business-like manner. Company shall provide or arrange
for the services set forth in this Article V, the cost of all of which shall be
included in Clinic Expenses. Subject to Section 1.6, Company is hereby expressly
authorized to perform its services hereunder in whatever manner it deems
reasonably appropriate to meet the day-to-day requirements of Practice Office
operations in accordance with the general standards approved by the Policy Board
and to maintain the lease agreements for each of the Practice Offices,
including, without limitation, performance of some of the business office
functions at locations other than the Main Practice Office. Princeton II will
not act in a manner which would prevent Company from efficiently managing the
day-to-day operations of the Main Practice Office and maintaining the operations
of the Satellite Offices in a business-like manner.
5.2. Financial Planning and Goals. Subject to Section 4.2.2. of this
Agreement, Company shall prepare annual capital and operating budgets reflecting
in reasonable detail anticipated revenues and expenses, and sources and uses of
capital for growth in Princeton II's practice and medical services rendered at
the Practice Office. Said budgets shall reflect amounts, if any, allocated for
capital purchases, improvements, expansion and any new leasing arrangements.
Thereafter, but no later than thirty (30) days prior to the end of the fiscal
year, the Policy Board and the Company shall agree upon a budget for the
upcoming fiscal year. The budget, as described in Section 4.2.2., shall be
binding upon Company and Princeton II. Company shall consult with Princeton II
and the Policy Board in the preparation of all budgets. Company and Princeton II
acknowledge and agree that once a budget has been approved, neither Company nor
Princeton II shall make expenditures or incur expenses in excess of budgeted
amounts without the prior approval of the Policy Board.
- 10 -
<PAGE>
5.3. Audits and Financial Statements. Company shall prepare annual
financial statements for the operations of Princeton II and, in its sole
discretion, may cause the financial statements to be audited by a certified
public accountant selected by Company. Princeton II shall cooperate fully in
such audit. The cost of such audit shall be included in Clinic Expenses. If
Company elects to have the financial statements audited by a certified public
accountant with a big six accounting firm, the resulting audited financial
statements shall be binding on Princeton II and Company. If Company elects not
to have Princeton II's financial statements so audited, Princeton II shall have
the option to obtain such an audit, by a certified public accountant with a
mutually acceptable accounting firm. Company shall fully cooperate in such
audit. The cost of such audit shall be included in Clinic Expenses. In such
event, Company and Princeton II shall be bound by the resulting audited
financial statements. All parties shall be entitled to copies of any information
provided to or by the auditors by or to any party. Additionally, Company shall
prepare monthly unaudited financial statements containing a balance sheet and
statements of income from Practice Office operations, which shall be delivered
to Princeton II within thirty (30) business days after the close of each
calendar month.
5.4. Inventory and Supplies. Except as limited by Section 5.11, Company
shall order and purchase inventory and supplies and such other ordinary,
necessary or appropriate materials which Company shall deem to be necessary in
the operation of the Practice Offices and which are requested by Princeton II
and are within the budget for the applicable fiscal period. Company shall not
purchase inventory, goods or supplies from any Affiliate of Company without
approval of the Policy Board and after full disclosure of all terms to the
Policy Board.
5.5. Management Services and Administration.
5.5.1. Princeton II hereby appoints Company as Princeton II's sole and
exclusive manager and administrator of all day-to-day business functions.
Princeton II agrees that the purpose and intent of this Agreement is to relieve
Princeton II and Physician Employees to the maximum extent possible of the
administrative, accounting, personnel and business aspects of their practice,
with Company assuming responsibility and being given all necessary authority to
perform these functions. Company agrees that Princeton II and only Princeton II
will perform the medical functions of Princeton II's practice. Company will have
no authority, directly or indirectly, to perform, and will not perform, any
medical function. Company may, however, advise Princeton II as to the
relationship between Princeton II's performance of medical functions and the
overall administrative and business functioning of Princeton II's practice. To
the extent that a Company employee assists Physician Employees in performing
medical functions, such employees shall be subject to the professional direction
and supervision of Physician Employees and in the performance of such medical
functions shall not be subject to any direction or control by, or liability to,
Company, except as may be specifically authorized by Company.
5.5.2. Company shall, on behalf of Princeton II, bill patients and collect
the professional fees for medical services rendered by Princeton II or any
Physician Employee, regardless of when or where such services are rendered. All
billings for Physician Employee's services shall be made in the name of and
under the provider number of Princeton II. Princeton II hereby appoints Company
to
- 11 -
<PAGE>
be Princeton II's true and lawful attorney-in-fact, for the following purposes:
(i) to bill patients in Princeton II's name and on Princeton II's behalf; (ii)
to collect Accounts Receivable resulting from such billing in Princeton II's
name and on Princeton II's behalf; (iii) to receive payments from insurance
companies, prepayments from health care plans, and all other Third-Party Payors;
(iv) to take possession of and endorse in the name of Princeton II (and/or in
the name of an individual physician, such payment intended for purpose of
payment of a physician's bill) any notes, checks, money orders, insurance
payments and other instruments received in payment of Accounts Receivable; and
(v) to initiate legal proceedings in the name of Princeton II to collect any
accounts and monies owed to Princeton II or any Physician Employee, to enforce
the rights of Princeton II as creditors under any contract or in connection with
the rendering of any service, and to contest adjustments and denials by any
Governmental Authority (or its fiscal intermediaries) as Third-Party Payors.
Except for cash proceeds from the collection of Accounts Receivable purchased
from Princeton II by Company, Company shall deposit any cash receipts collected
on behalf of Princeton II into the Princeton II Operating Account described in
Section 5.11.
5.5.3. Company shall design, supervise and maintain possession of all
files and records relating to the operation of Princeton II, including but not
limited to accounting, billing, patient medical records, and collection records.
While the Company shall maintain custody, patient medical records shall at all
times be and remain the property of Princeton II and shall be located at the
Practice Offices so that they are readily accessible for patient care. The
Physician Employees shall have the obligation to oversee the preparation and
maintenance of patient medical records, and to provide such medical information
as shall be necessary and appropriate to the records' clinical function and to
sustain and ensure the availability of Third-Party Payor reimbursement for
services rendered. The management of all files and records shall comply with
applicable state and federal statutes. Company shall use its best efforts to
preserve the confidentiality of patient medical records and use information
contained in such records only as permitted by law, to the extent necessary to
perform the services set forth herein.
5.5.4. Company shall supply to Princeton II necessary clerical,
accounting, bookkeeping and computer services, printing, postage and duplication
services, medical transcribing services and any other ordinary, necessary or
appropriate service for the operation of the Practice Offices.
5.5.5. Subject to the overall guidance of the Policy Board, Company shall
design and implement an adequate and appropriate public relations program on
behalf of Princeton II, with appropriate emphasis on public awareness of the
availability of services at the Practice Offices. The public relations program
shall be conducted in compliance with Applicable Law and regulations governing
advertising by the medical profession and applicable canons of principles of
professional ethics of Princeton II and Physician Employees of Princeton II.
5.5.6. Company shall provide the data necessary for Princeton II to
prepare Princeton II's annual income tax returns. Company shall have no
responsibility for the preparation of Princeton II's federal or state income tax
returns or the payment of such income taxes. Company shall prepare or cause to
be prepared on Princeton II's behalf, necessary employment tax returns.
Princeton II shall
- 12 -
<PAGE>
be obligated to pay any taxes due on such employment tax returns with respect to
the Physician Owners.
5.5.7. Company shall assist Princeton II in recruiting additional
physicians, carrying out such administrative functions as may be appropriate,
such as advertising for and identifying potential candidates, obtaining
credentials, and arranging interviews; provided, however, Princeton II shall
interview and make the ultimate decision as to the suitability of any physician
to become associated with Princeton II. All physicians recruited by Company and
accepted by Princeton II shall be the sole employees of Princeton II, to the
extent such physicians are hired as employees.
5.5.8. Company shall negotiate managed care contracts on behalf of
Princeton II and shall administer all managed care contracts in which Princeton
II participates.
5.5.9. Company shall arrange for legal and accounting services related to
operations of the Practice Offices and Physician Employee's practice at the
Practice Offices incurred traditionally in the ordinary course of business,
including the cost of enforcing any contract with a Physician Employee
containing restrictive covenants, provided such services shall be approved in
advance by the Policy Board. Notwithstanding the foregoing, Princeton II shall
have the authority to arrange for legal and accounting services relating to
matters other than day-to-day management of Princeton II; such other matters
including but not limited to issues relating to Princeton II governance issues,
compensation of Physician Owners, and issues which arise between Princeton II
and Company.
5.5.10. Company shall provide for the proper cleanliness of the premises,
and maintenance and cleanliness of the equipment, furniture and furnishings
located upon such premises.
5.5.11. Upon receipt of dues, statements or license notices from the
Physician Employees, Company shall make payment for the cost of professional
licensure fees and board certification fees of physicians associated with
Princeton II.
5.5.12. Company shall negotiate for and cause premiums to be paid with
respect to the insurance provided for in Section 10.1.
5.6. Personnel. Company shall provide Physician Extender Employees and
other non-physician professional support (administrative personnel, clerical,
secretarial, bookkeeping and collection personnel) reasonably necessary for the
conduct of the operations at the Practice Offices. Company shall determine and
cause to be paid the salaries and fringe benefits of all such personnel. Such
personnel shall be employees of Company, with those personnel performing patient
care services subject to the professional direction and supervision of Physician
Employees. If Princeton II is dissatisfied with the services of any person,
Princeton II shall consult with Company. Company shall in good faith determine
whether the performance of that employee could be brought to acceptable levels
through counsel and assistance, or whether such employee should be terminated.
Company shall not unreasonably refrain from terminating any such employee which
Princeton II requests terminated. All of Company's obligations regarding staff
shall be governed by the overriding principle
- 13 -
<PAGE>
and goal of providing quality medical care. Employee assignments shall be made
to assure consistent and continued rendering of quality medical support services
and to ensure prompt availability and accessibility of individual medical
support staff to physicians in order to develop constant, familiar and routine
working relationships between individual physicians and individual members of
the medical support staff. Company shall not unreasonably refrain from making
employee assignments as requested by Princeton II. If Princeton II disagrees
with an assignment, Princeton II may appeal such assignment to the Policy Board.
Company shall maintain established working relationships wherever possible and
Company shall make every effort consistent with sound business practices to
honor the specific requests of Princeton II with regard to the assignment of
Company's employees. Notwithstanding any other provision of this Agreement to
the contrary, Company and Princeton II acknowledge and agree that Company shall
not employ any individual who provides billable procedures.
5.7. Events Excusing Performance. Company shall not be liable to Princeton
II or Physician Owners for failure to perform any of the services required
herein in the event of strikes, lock-outs, calamities, acts of God,
unavailability of supplies or other events over which Company has no control for
so long as such events continue, and for a reasonable period of time thereafter.
5.8. Compliance with Law and Business Standards. Company shall comply with
Applicable Law, including without limitation, Health Care Law, including without
limitation, federal, state, and local laws and regulations affecting billing and
reimbursement, referrals, patient privacy and confidentiality, and management of
hazardous materials and infectious waste. Company shall discharge its
obligations under this Agreement consistent with applicable business and
industry standards and practices.
5.9. Quality Assurance. Company shall assist Princeton II in fulfilling
Princeton II's obligations to patients to maintain professionally recognized
quality of medical and professional services.
5.10. New Medical Services and Additional Practice Offices. Except as
provided below, if Princeton II desires to have a new medical service provided
at any of the Practice Offices or desires to establish a new clinic, a proposal
of such service or the establishment of such new clinic shall be submitted to
the Policy Board. Should the Policy Board approve the expansion of service or
the establishment of such new clinic, Company, at its option, shall have the
exclusive right to provide services necessary to support Princeton II in
Princeton II's delivery of such new medical services at the Practice Office or
new clinic, as applicable; provided, however, if the type of service is an
ancillary service that would be improper under any rules, regulations or laws
for Company to offer to Princeton II patients, then Company shall not have the
option to provide such service. Should Company decline to provide the necessary
support service for the new service or new clinic, Princeton II shall be
entitled to perform such service at Princeton II's own expense and the revenues
therefrom shall not be included in the calculation of Company's service fees
under Article VIII of this Agreement; provided, however, that Company shall have
the option to assume performance of the necessary support services for providing
such new service or new clinic by buying out Princeton II's
- 14 -
<PAGE>
investment in the service at Princeton II's Book Value at anytime within
eighteen (18) months of the date such new service is first provided, which Book
Value shall be based on the price of the assets purchased by Princeton II less
depreciation accrued to the date of acquisition of such service by Company, as
determined under GAAP. Notwithstanding any other provision of this Agreement to
the contrary, Company and Princeton II acknowledge and agree that Princeton II
or its Affiliates shall have the right to develop, own and operate ambulatory
surgery centers and Company shall not have the right to limit Princeton II's
authority or rights to continue developing, operating or owning such ambulatory
surgery centers.
5.11. Collection of Certain Patient Receipts and Payment of Clinic
Expenses. Princeton II agrees to establish and maintain a bank account, which
shall be referred to as the Princeton II Operating Account, for the purpose of
(a) depositing proceeds from the sale of Princeton II's Accounts Receivable
pursuant to Section 8.3 and (b) paying (i) any Service Fees owed pursuant to
Article VIII of this Agreement, (ii) expenses which are solely the obligation of
Princeton II (Excluded Expenses), and (iii) compensation or distributions to
Physician Owners , and the distributions shall be made in that order of payment.
Princeton II shall designate a Company employee as a signatory on the Princeton
II Operating Account. After the payment of any Service Fees owed pursuant to
Article VIII of this Agreement, and expenses which are solely the obligation of
Princeton II, Princeton II may withdraw amounts for distributions to Physician
Owners.
5.12. Other Princeton II Accounts. Princeton II shall have the right to
open or create bank accounts in addition to the Princeton II Operating Account
described in Section 5.11 of this Agreement.
ARTICLE VI.
OBLIGATIONS OF PRINCETON II AND PHYSICIAN OWNERS
6.1. Professional Services.
6.1.1. Princeton II, its Physician Owners and Physician Employees shall
provide professional services to patients.
6.1.2. Princeton II, its Physician Owners and Physician Employees shall
provide the professional services to patients described in Section 6.1.1 above
in compliance at all times with ethical standards, laws and regulations applying
to Princeton II's professional practice. Princeton II shall also make all
reports and inquiries to the National Practitioners Data Bank and/or any state
data bank required by Applicable Law. Princeton II shall use its best efforts to
ensure that each Physician Employee and Technical Employee associated with
Princeton II who provides medical care to patients of Princeton II is licensed
by the state or states in which he or she renders professional services. If any
disciplinary or medical malpractice action is initiated against any such
individual, Princeton II shall immediately provide Company with copies of any
third-party documents (not otherwise privileged) served on Princeton II or
letters delivered to Princeton II. Such information
- 15 -
<PAGE>
shall be deemed confidential information and shall, notwithstanding such
disclosure, remain subject to all privileges and immunities provided by
Applicable Law. Company shall take all steps reasonably necessary to assure that
such privileges and immunities remain intact. Princeton II shall carry out a
program to monitor the quality of medical care practiced at the Practice Offices
to promote a high quality medical care.
6.2. Medical Practice. Princeton II shall use and occupy the Practice
Offices exclusively for the practice of medicine and shall comply with all
Applicable Law and standards of medical care. It is expressly acknowledged by
the parties that the medical practice or practices conducted at the Main Office
shall be conducted solely by physicians or medical practitioner associated with
Princeton II, and no other physician or medical practitioner shall be permitted
to use or occupy the Main Office without the prior written consent of Company.
6.3. Employment of Physician Employees. Princeton II shall have complete
control of and responsibility for the hiring, compensation, supervision,
evaluation and termination of Physician Employees, although at the request of
Princeton II, Company shall consult with Princeton II respecting such matters.
Princeton II shall be responsible, subject to Section 8.4, for the payment of
such Physician Employees' salaries and wages, payroll taxes, Physician Employee
benefits and all other taxes and charges now or hereafter applicable to them.
With respect to physicians, Princeton II shall only employ and contract with
licensed physicians meeting applicable credentialing guidelines established by
Princeton II.
6.4. Professional Dues and Education Expenses. Except to the extent
provided in Section 8.1.3(k), Physician Owners shall be solely responsible for
the cost of membership in professional associations and the cost of continuing
professional education. Princeton II shall ensure that each Physician Employee
participates in such continuing medical education as is necessary for such
physician to remain licensed.
6.5. Professional Insurance Eligibility. Princeton II shall cooperate in
the obtaining and retaining of professional liability insurance by assuring that
all Physician Employees are insurable and participating in an on-going risk
management program.
6.6. Events Excusing Performance. Princeton II and Physician Owners shall
not be liable to Company for failure to perform any of the services required
herein in the event of strikes, lock-outs, calamities, acts of God,
unavailability of supplies or other events over which Princeton II has no
control for so long as such events continue, and for a reasonable period of time
thereafter.
6.7. Fees for Professional Services. Princeton II shall be solely
responsible for legal, accounting and other professional services fees (Excluded
Expenses) incurred by Princeton II, except as otherwise determined by the Policy
Board.
6.8. Peer Review. Princeton II agrees to cooperate with Company in
establishing a system of peer review within and among the provider practices as
necessary to obtain provider contracts.
- 16 -
<PAGE>
In connection therewith, Princeton II agrees to assist in the formulation of
provider guidelines for each treatment or surgical modality, and agrees to abide
by said guidelines, and further agrees to submit to periodic reviews by a third
party to monitor compliance with said guidelines. Princeton II acknowledges that
the establishment of provider guidelines may be necessary to obtain PPO, HMO,
IPA and other similar provider contracts, both private and government funded. To
the extent that said provider guidelines must be filed or registered with any
Third-Party Payor, Princeton II agrees to cooperate with Company in making such
filings or registrations. It is agreed and acknowledged that all such peer
review guidelines shall be established and monitored by medical personnel on the
staff of Princeton II and other practices that are part of the peer review
process, and shall not be promulgated, established or enforced independently by
Company. To the extent possible, all information obtained through the peer
review process shall remain confidential and the parties shall take all steps
reasonably necessary to assure that all privileges and immunities provided by
Applicable Law remain intact.
6.9. Princeton II Employee Benefit Plans.
6.9.1. Effective as of the date of the closing under the Exchange
Agreement, Princeton II shall amend the tax-qualified retirement plan(s)
described on Exhibit 6.9.1 (the "Princeton II Plan") to provide that employees
of Company who are classified as "leased employees" (as defined in Code Section
414(n)) of Princeton II shall be treated as Princeton II employees for purposes
described in Code Section 414(n)(3). Not less often than annually, Princeton II
and Company shall agree upon and identify in writing those individuals to be
classified as leased employees of Princeton II (the "Designated Leased
Employees"). Princeton II and Company shall establish mutually agreeable
procedures with respect to the participation of Designated Leased Employees in
the Princeton II Plan. Such procedures shall be designed to avoid the tax
disqualification of the Princeton II Plan, similar plans of practices similarly
situated, (collectively, the "Plans").
6.9.2. If the Policy Board determines that the relationship between
Company and Princeton II (and other practices similarly situated) constitutes an
"affiliated service group" (as defined in Code Section 414(m)), Company and
Princeton II shall take such actions as may be necessary to avoid the tax
disqualification of the Plans. Such actions may include the amendment, freeze,
termination or merger of the Princeton II Plan.
6.9.3. The Plans described on Exhibit 6.9.1 attached hereto are approved
by Company. Princeton II shall not enter into any new "employee benefit plan"
(as defined in Section 3(3) of the Employment Retirement Income Security Act of
1974, as amended ("ERISA") without the consent of Company. In addition,
Princeton II shall not offer any retirement benefits or make any material
retirement payments other than under the Princeton II Plan to any stockholder of
Princeton II without the express written consent of Company. Except as otherwise
required by law, Princeton II shall not materially amend, freeze, terminate or
merge the Princeton II Plan without the express written consent of Company. In
the event of either of the foregoing, Company's consent shall not be withheld if
such action would not jeopardize the qualification of any of the Plans.
Princeton II agrees to make such changes to the Princeton II Plan, including the
amendment freeze, termination or merger of the
- 17 -
<PAGE>
Princeton II Plan, as may be approved by the Policy Board and Company but only
if such changes are necessary to prevent the disqualification of any of the
Plans.
6.9.4. Expenses incurred in connection with the Princeton II Plan or other
Princeton II employee benefit plans, including, without limitation, the
compensation of counsel, accountants, corporate trustees, and other agents shall
be included in Clinic Expenses.
6.9.5. The contribution and administration expenses for the Designated
Leased Employees shall be included in Princeton II's operating budget. Princeton
II and Company shall not make employee benefit plan contributions or payments to
Princeton II for their respective employees in excess of such budgeted amounts
unless required by law or the terms of the Princeton II Plan. Company shall make
contributions or payments with respect to the Princeton II Plan or other
Princeton II employee benefit plans, as a Clinic Expense, on behalf of eligible
Designated Leased Employees, and other eligible Princeton II employees. In the
event a Princeton II Plan or other Princeton II employee benefit plan is
terminated, Company shall be responsible, as a Clinic Expense, for any funding
liabilities related to eligible Designated Leased Employees; provided, however,
Company shall only be responsible for the funding of any liability accruing
after the date of the Exchange Agreement.
6.9.6. Company shall have the sole and exclusive authority to adopt, amend
or terminate any employee benefit plan for the benefit of its employees,
regardless of whether such employees are Designated Leased Employees, unless
such actions would require the amendment, freeze or termination of the Princeton
II Plan to avoid disqualification of the Princeton II Plan, in which case any
such action would be subject to the express prior written consent of the Policy
Board. Company shall have the sole and exclusive authority to appoint the
trustee, custodian and administrator of any such plan.
6.9.7. In the event that any "employee welfare benefit plan" (as defined
in ERISA Section 3(l)) maintained or sponsored by Princeton II must be amended,
terminated, modified or changed as a result of Princeton II or Company being
deemed to be a part of an affiliated service group, the Policy Board will
replace such plan or plans with a plan or plans that provides those benefits
approved by the Policy Board. It shall be the goal of the Policy Board in such
event to provide substantially similar or comparable benefits if the same can be
provided at a substantially similar cost to the replaced plan.
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
The parties recognize that the services to be provided by Company shall be
feasible only if Princeton II operates an active medical practice to which both
Princeton II and the physicians associated with Princeton II devote their full
time and attention. To that end:
- 18 -
<PAGE>
7.1. Exclusive Arrangement. During the term of this Agreement, Company
shall be Princeton II's and Physician Owners' sole provider of the management
services described in this Agreement and neither Princeton II, Physician Owners
nor any of Princeton II's or Physician Owners' employees shall provide such
management services during the term of this Agreement. Princeton II and the
Physician Owners agree that during the term of this Agreement, neither Princeton
II nor Physician Owners will enter into any similar agreements with any
physician practice management company or entity. The foregoing restriction shall
not prevent the Physician Owners from entering into separate management
agreements for any ambulatory surgery centers in which they own an interest.
Princeton II and the Physician Owners further agree that during the term of this
Agreement, they will not engage, directly or indirectly, as a principal owner,
shareholder (other than a holder of fewer than 5% of the outstanding shares of a
publicly-traded company), partner, joint venturer, agent, equity owner, or in
any other capacity whatsoever, in any corporation, partnership, joint venture,
or other business association or entity that provides management services of the
nature provided by Company pursuant to this Agreement, within Mercer County, New
Jersey or contiguous counties or any location within seventy-five (75) miles of
the Main Office or any future facility that replaces the Main Office (wherever
located) or any Satellite Office utilized by Princeton II at any time during the
term of this Agreement.
7.2. Restrictive Covenants.
7.2.1. By Current Physician Employees. Princeton II shall obtain and
enforce formal agreements from current Physician Employees, other than Technical
Employees, pursuant to which the Physician Employees agree not to establish,
operate or provide physician services at any medical office, clinic or
diagnostic facility providing services substantially similar to those provided
by Princeton II, except on Princeton II's behalf, within Mercer County, New
Jersey or contiguous counties or any location within seventy-five (75) miles
during the first five (5) years of the term of this Agreement or fifty (50)
miles thereafter of the Main Office or any future facility that replaces the
Main Office (wherever located at such time) or any Satellite Office at the time
of termination of employment with Princeton II and for a period of twenty-four
(24) months after any termination of employment with Princeton II. Such
agreements shall be a condition to employment and shall be in a form
satisfactory to Company and shall provide that Company is a third-party
beneficiary to such agreements and that such third-party beneficiary rights may
be assigned to Company's lender ("Lender"). This Section 7.2 shall relate solely
to Physician Employees who are not also Physician Owners.
7.2.2. By Current and Future Physician Owners. On the earlier of one
hundred eighty (180) days from the effective date of this Agreement, or on
thirty (30) days after written request by Company, which written request
includes a reasonable explanation or basis for the request, Princeton II shall
obtain and enforce formal restrictive covenants with current and future
Physician Owners, the terms of which shall be substantially similar to the
provisions of Exhibit 11. Such agreements shall provide that Company is a
third-party beneficiary to such agreements. Princeton II agrees to enforce the
restrictive covenants. The cost and expense of such enforcement shall be a
Clinic Expense, and all damages and other amounts recovered thereby shall be
included in
- 19 -
<PAGE>
Professional Services Revenue. In the event that after a request by Company,
Princeton II does not pursue any remedy that may be available to it by reason of
a breach or default of a restrictive covenant, upon the request of Company,
Princeton II shall assign to Company such causes of action and/or other rights
it has related to such breach or default and shall cooperate with and provide
reasonable assistance to Company with respect thereto; in which case, all costs
and expenses incurred in connection therewith shall be borne by Company and
shall be included in Company Expenses, and Company shall be entitled to all
damages and other amounts recovered thereby. The above described restrictive
covenants between Princeton II and Physician Owners shall be in addition to and
not in place of the restrictive covenants described in Exhibit 11 between
Company and the Physician Owners.
7.2.3. Limitations on Restrictive Covenants. The foregoing restrictive
covenants shall not limit or prevent a Physician Employee/Physician Owner from
serving in part-time academic positions, working as an expert witness, or
providing services for the Hospital for Special Services, New York, New York, in
a manner consistent with past practices.
7.3. Restrictive Covenants By Future Physician Employees. Princeton II
shall obtain and enforce formal agreements from each future Physician Employee
other than Technical Employees, hired or contracted, pursuant to which such
physicians agree not to establish, operate or provide physician services at any
medical office, clinic or diagnostic facility providing services substantially
similar to those provided by Princeton II except on Princeton II's behalf,
within Mercer County, New Jersey or contiguous counties or any location within
seventy-five (75) miles during the first five (5) years of the term of this
Agreement or fifty (50) miles thereafter of the Main Office or any future
facility that replaces the Main Office (wherever located at such time) or any
Satellite Office at the time of termination of said Physician Employee's
contract with Princeton II and for a period of twenty-four (24) months
thereafter. Such agreements shall be a condition to employment and shall be in a
form satisfactory to Company and shall provide that Company is a third-party
beneficiary to such agreements and that such third-party beneficiary rights may
be assigned to any Lender. This Section 7.3 shall relate solely to Physician
Employees who are not also Physician Owners. The terms and provisions of Exhibit
11 shall govern restrictive covenants relating to Physician Owners. The
foregoing restrictive covenants shall not limit or prevent a Physician
Employee/Physician Owner from serving in part-time academic positions, working
as an expert witness, or providing services for the Hospital for Special
Services, New York, New York, in a manner consistent with past practices.
7.4. Rights of Company. Except as limited below, Company shall at all
times during the term of this Agreement and thereafter have the right to enter
into additional service agreements with other physicians and practices
regardless of where such physicians and/or practices are located providing for
management services and facilities to such physicians and/or practices.
Notwithstanding the foregoing, and except as set forth in Section 11.9.3, in the
event that Company desires to enter into a Service Agreement with another
practice located within seventy-five (75) miles during the first five (5) years
of the term of this Agreement or fifty (50) miles thereafter of Princeton II's
Main Office or any Satellite Office, then the Policy Board must first approve
Company entering into such agreement. In the event that the individuals
representing Company on the Policy Board can reasonably
- 20 -
<PAGE>
demonstrate that entering into such agreement will not have a material adverse
effect on Princeton II's practice operations, earnings or cash flow, then the
individuals representing Princeton II shall consent to Company entering into
such agreement.
7.5. Enforcement. Princeton II acknowledges and agrees that since a remedy
at law for any breach or attempted breach of the provisions of this Article VII
shall be inadequate, Company shall be entitled to specific performance and
injunctive or other equitable relief in case of any such breach or attempted
breach in addition to whatever other remedies may exist by law. All parties
hereto also waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such injunctive or other equitable relief.
If any provision of Article VII relating to the restrictive period, scope of
activity restricted and/or the territory described therein shall be declared by
a court of competent jurisdiction to exceed the maximum time period, scope of
activity restricted or geographical area such court deems reasonable and
enforceable under Applicable Law, the time period, scope of activity restricted
and/or area of restriction held reasonable and enforceable by the court shall
thereafter be the restrictive period, scope of activity restricted and/or the
territory applicable to the restrictive covenant provisions in this Article VII.
7.6. Modification of Restrictive Covenants. Upon the termination of
employment of a Physician Owner or Physician Employee, the Policy Board shall
have the authority to release or reduce in whole or part the terms of the
restrictive covenants, including but not limited to the mileage radius
limitations set forth above in Sections 7.2 and 7.3. In the event that the
individuals representing Princeton II on the Policy Board can reasonably
demonstrate that a modification to the restrictive covenant will not have a
material adverse effect on Company's or Princeton II's practice operations,
earnings or cash flow, then the individuals representing Company shall consent
to the proposed modifications.
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees. During the first thirty-six (36) months of the term of
this Agreement, Company shall receive a service fee equal to the sum of (a) the
greater of (i) [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]or (ii) the
Base Service Fee, plus (b) the amount of Clinic Expenses. Upon the expiration of
the first thirty-six (36) months of the term of this Agreement, Company shall
receive a service fee equal to [xxxxxxxxxxxxxxxxxxxxxxxx] of Practice Net
Revenue plus the amount of Clinic Expenses. In the event that a Physician Owner
ceases to practice medicine during the first thirty-six (36) months of the term
of this Agreement, such Physician Owner shall be personally liable for any
reduction in Princeton II's service fees payable as further described under
Section 11.9.1 of this Agreement. In the event that a Physician Owner either
dies or becomes Disabled during such thirty-six (36) month period, Princeton II,
or the applicable Physician Owner, as the case may be, shall be entitled to
satisfy the amount owed by transferring to Company an amount of Company common
stock having a fair market value equal to the amount
- 21 -
<PAGE>
owed or pay to Company cash in the amount owed (or a combination thereof). Fair
market value of the Company common stock shall be determined as described below
in Section 11.9.1(d).
8.1.1. "Practice Net Revenue" shall mean Professional Services Revenues,
less Clinic Expenses.
8.1.2. "Professional Services Revenue" shall mean all fees actually
recorded each month (net of any amounts reimbursed to any patients or
Third-Party Payors during the applicable month and net of any adjustments for
contractual allowances, Medicaid, worker's compensation, employee/dependent
health care benefit programs, professional courtesies and other activities that
do not generate a collectible fee) by or on behalf of Princeton II as a result
of professional medical services personally furnished to patients and other fees
or income generated in their capacity as Physician Employees and Technical
Employees, and any revenue from the sale of any goods. Professional Services
Revenue shall not include any ambulatory surgery center facility fees.
8.1.3. "Clinic Expenses" shall mean all operating and non-operating
expenses of Princeton II arising hereunder unless expressly provided otherwise,
including, without limitation:
(a) salaries, benefits and other direct costs of all Clinic
employees including Company's employees and Physician Extender Employees
as defined in Section 8.1.5 working at the Practice Offices and salaries,
payroll taxes and employee benefits paid to Physician Employees (other
than Physician Owners) under Section 6.3 and to Technical Employees as
defined in Section 8.1.4,
(b) obligations of Company under Leases provided for herein under
Article III,
(c) the expenses and charges incurred for the Practice Offices,
including without limitation utilities, telephone, etc.,
(d) personal property and intangible taxes assessed against
Company's assets utilized by Princeton II in the Practice Offices from and
after the date of this Agreement,
(e) interest expense on indebtedness incurred by Company to (i)
satisfy the obligations of Princeton, if any, assumed under the Exchange
Agreement, (ii) provide working capital for Company's performance of any
of its obligations to Princeton II hereunder, or (iii) purchase equipment,
(f) malpractice insurance premiums, disability insurance premiums to
cover accommodations to the Practice Offices under the definition of
"Disabled" or "Disability," and fire, workers compensation and general
liability insurance premiums, and life insurance premiums, during the
first three (3) years of this Agreement, for life insurance on the lives
of Physician Owners, with Princeton as the death beneficiary,
(g) the cost of any goods purchased for resale,
- 22 -
<PAGE>
(h) the depreciation, as determined under GAAP, for any equipment or
depreciable property owned by Company and used in Princeton II's Facility
by Princeton II to be billed to Princeton II on a monthly basis and paid
to Company at the same time Company pays for Princeton II's Accounts
Receivable pursuant to Section 8.3,
(i) direct costs of all employees or consultants of Company engaged
to provide services at or in connection with Princeton II or who actually
provide services at or in connection with the Clinic for improved
performance, such as quality assurance, reasonable expenses required for
physician accommodations under the definition of "Disabled" or
"Disability," materials management, purchasing program, change in coding
analysis, physician recruitment; provided, however, only the portion of
expenses related to such employee or consultant, without mark-up, that is
allocable in a fair and reasonable manner to work approved by the Policy
Board which is performed at or for the benefit of Princeton II shall be
included in Clinic Expenses,
(j) expenses related to professional meetings, seminars, dues,
medical books and professional licensing fees for Physician Employees
(other than Physician Owners) provided, however, that such amount shall
not exceed $10,000 during any calendar year for any Physician Employee
(other than Physician Owners). If the cost incurred for such professional
meetings, seminars, dues, medical books and professional licensing fees
exceeds $10,000 during any calendar year, then the Physician Employee
incurring such cost shall be solely liable for the overage;
(k) expenses related to professional meetings, seminars, dues,
medical books and professional licensing fees for Physician Owners;
provided, however, that such amount shall not exceed $10,000 during any
calendar year for any Physician Owner. If the cost incurred for such
professional meetings, seminars, dues, medical books and professional
licensing fees exceeds $10,000 during any calendar year, then the
Physician Owner incurring such cost shall be solely liable for the
overage; and
(l) any and all other ordinary and necessary expenses incurred by
Princeton II, or approved by the Policy Board and reasonably incurred by
the Company for the direct benefit of Princeton II in carrying out their
respective obligations under this Agreement.
Clinic Expenses shall not include Excluded Expenses or Company Expenses.
Excluded Expenses shall be the sole obligation of Princeton II. Company Expenses
shall be the sole obligation of Company.
8.1.4. "Technical Employees" shall mean individuals who provide billable
services on behalf of Princeton II and are employees of Princeton II.
8.1.5. "Physician Extender Employees" shall mean Physician Assistants,
Nurse Practitioners, and other such persons who are employees of Company, but
excluding any Technical Employees.
- 23 -
<PAGE>
8.1.6. "Physician Employees" shall mean only those individuals who are
doctors of medicine (including Physician Owners) and who are employed by
Princeton II or are otherwise under contract with Princeton II to provide
professional services to patients seen in the Main Office or Satellite Offices
and are duly licensed to provide professional medical services in the state or
states in which he or she renders professional services under this Agreement.
8.1.7. "Company Expenses" shall mean, pursuant to GAAP applied on a
consistent basis:
(a) Any corporate overhead charges of Company and other items
incurred by Company that are not incurred specifically for the purpose of
providing services to Princeton II or are not directly attributable to
Princeton II, as reasonably determined by Company, including, without
limitation, salaries and benefits of executive officers of Company, except
as otherwise provided for in the definition of Clinic Expenses;
(b) Any amortization of any intangible asset resulting from the
Exchange;
(c) Any depreciation attributable to increases in the book value of
tangible depreciable assets resulting from the Exchange;
(d) Any legal and accounting expenses incurred by Company in
connection with the Exchange; and
(e) All taxes of Company, including, but not limited to, state and
federal income taxes and franchise taxes, but excluding state and federal
employee taxes related to employees who provide services for Princeton II,
property taxes on assets used by Princeton II and other taxes specifically
included in Clinic Expenses.
8.1.8. "Excluded Expenses" shall be the sole obligation of Princeton II
and shall mean, pursuant to GAAP applied on a consistent basis:
(a) Any salaries or other distributions made to Physician Owners
whether for professional fee income or otherwise;
(b) Any federal, state or other taxes associated therewith;
(c) Except as provided in Section 8.1.3(k), expenses of Physician
Owner's to maintain licensure or meet continuing education requirements,
including related travel expense; and
(d) Any other items specifically designated as Excluded Expenses
elsewhere in this Agreement including but not limited to those items
listed on Exhibit 8.1.8(d).
- 24 -
<PAGE>
8.2. Payment of Service Fee. The amounts to be paid to Company under this
Article VIII shall be payable monthly, at the time that Company pays Princeton
II for the Accounts Receivable previously purchased by Company as described in
Section 8.3 below. The amount payable shall be estimated based upon the previous
month's operating results of Princeton II. Adjustments to the estimated payments
shall be made to reconcile actual cumulative amounts due under this Article
VIII, by the end of the following month during each calendar year. Upon
preparation of annual financial statements as provided in Section 5.3, final
adjustments to the service fee for the preceding year shall be made and any
additional payments owing to Company or Princeton II shall then be made to the
party owed the additional sum of money. The adjustment and any amount owed shall
be calculated and paid within ninety (90) days following the close of Company's
fiscal year.
8.3. Purchase of Accounts Receivable.
8.3.1. Princeton II hereby agrees to sell and assign to Company and
Company agrees to buy, all of Princeton II's Accounts Receivable each month
during which this Agreement is in existence which are owing to Princeton II
arising out of the delivery of medical, surgical, diagnostic or other
professional medical goods or services. Accounts Receivable shall not include,
and Company shall not purchase, any cash, checks or receivables created by
credit cards. Company shall bear the risk of collection and any overage or
underage resulting from any purchased Accounts Receivable.
8.3.2. The purchase price for each Accounts Receivable (the "Purchase
Price") will be equal to the face amount of the Accounts Receivable recorded
each month, less any non-allowed contractual adjustments and net of any reserve
for uncollectible Accounts Receivables based on the historical experience of the
practice as determined by the Company. It is the intent of the parties that the
Purchase Price reflect the actual net realizable value of the Accounts
Receivable.
8.3.3. Princeton II will sell all Accounts Receivable to Company, such
purchase to be deemed to be made on the fifteenth (15th) day of the month
following the month in which such Accounts Receivable are created. Company shall
pay for the Accounts Receivable, not later than the fifteenth (15th) day of each
month following the month in which the Accounts Receivable is created (the
"Settlement Date"). Company shall pay to Princeton II for all Accounts
Receivable purchased by check, wire transfer or intrabank transfer to the
Princeton II Operating Account described in Section 5.11. The purchase of
Accounts Receivable shall be evidenced by sending Company (i) a copy of each
invoice with respect to each Third-Party Payor on the Accounts Receivable then
being purchased; and (ii) any other information or documentation (including all
required Uniform Commercial Code releases or financing statements) Company may
reasonably need to identify the Accounts Receivable and obtain payment from the
Account Debtors; provided that such failure to send such documents shall not
affect the obligation of Princeton II to sell such Accounts Receivable or
Company to buy such Accounts Receivable. As consideration for the purchase of
Accounts Receivable by Company pursuant to this Section 8.3, Company promises to
pay and shall be obligated to pay for such Accounts Receivable at the time and
in the manner provided below. To the extent permissible by Applicable Law,
Princeton II will be deemed to have sold to Company all of Princeton II's right,
title and interest in such Accounts Receivable and in any proceeds thereof, and
- 25 -
<PAGE>
Company will be the sole and absolute owner thereof and will own all of
Princeton II's rights and remedies represented by such Accounts Receivable
(including, without limitation, rights to payment from the respective Account
Debtors on such Accounts Receivable), and Company will have obtained all of
Princeton II's rights under all guarantees, assignments and securities with
respect to each such Accounts Receivable.
8.3.4. Upon expiration or termination of this Agreement for any reason,
(i) all Accounts Receivable purchased by Company shall remain the property of
Company and (ii) all Accounts Receivable purchased and not paid for at such
expiration or termination shall be paid for by the 10th of the following month
but effective as of the effective date of such expiration or termination date,
less the amount of any service fee earned by Company pursuant to Section 8.1 of
this Agreement.
8.3.5. In connection with the initial purchase of Accounts Receivable by
Company, Princeton II will execute such financing statements or amendments under
the UCC (naming Company as secured party and Lender as assignee) as Company may
reasonably request with respect to any Accounts Receivable that may be purchased
pursuant to this Agreement.
8.3.6. Princeton II agrees to cooperate with Company in the collection of
the Accounts Receivable sold by Princeton II, transferred pursuant to Section
8.3. At the option of and upon the request of Company, Princeton II shall
execute any and all documentation necessary for the transfer of amounts
constituting Accounts Receivables and/or the establishment of lockboxes in
accordance with the provisions of Exhibit 8.3.6 attached hereto.
8.3.7. All Accounts Receivable of Princeton II purchased by Company
("Purchased A/R") pursuant to this Section 8.3 hereof will, as such Purchased
A/R are purchased, be treated as Professional Service Revenues for accounting
and financial purposes.
8.4. Payment of Clinic Expenses. All Clinic Expenses shall be incurred in
the name of Company, unless Princeton II is required by law to incur such
expenses, in which case Company shall indemnify Princeton II against any such
expenses. Company shall pay all Clinic Expenses as they become due; provided,
however, that Company may, in the name and on behalf of Princeton II, contest in
good faith any claimed Clinic Expense to which there is any dispute regarding
the nature, existence or validity of such claimed Clinic Expense. Upon receipt
of Princeton II's service fee, Company shall be required to deposit into the
Princeton II Operating Account described in Section 5.11 an amount of money
necessary for Princeton II to pay the compensation and benefits associated with
the Technical Employees and Physician Employees (other than Physician Owners)
employed by Princeton II.
- 26 -
<PAGE>
ARTICLE IX.
RECORDS
9.1. Patient Records. Upon termination of this Agreement and unless
otherwise provided herein, Princeton II shall retain all patient medical records
maintained by Princeton II or Company in the name of Princeton II. Princeton II
shall, at Princeton II's option, be entitled to retain copies of financial and
accounting records relating to all services performed by Princeton II. All
parties agree to maintain the confidentiality of patient identifying information
and not to disclose such information except as may be required or permitted by
Applicable Law.
9.2. Records Owned by Company. All records relating in any way to the
operation of the Practice Offices which are not the property of Princeton II
under the provisions of Section 9.1 above, shall at all times be the property of
Company.
9.3. Access to Records. During the term of this Agreement, and thereafter,
Princeton II or Princeton II's designee shall have reasonable access during
normal business hours to Princeton II's and Company's financial records, which
relate to the operation of Princeton II including, but not limited to, records
of collections, expenses and disbursements as kept by Company in performing
Company's obligations under this Agreement, and Princeton II may copy at
Princeton II's expense any or all such records.
9.4. Government Access to Records. To the extent required by Section
1861(v)(1)(I) of the Social Security Act, each party shall, upon proper request,
allow the United States Department of Health and Human Services, the Comptroller
General of the United States, and their duly authorized representatives access
to this Agreement and to all books, documents, and records necessary to verify
the nature and extent of the costs of services provided by either party under
this Agreement, at any time during the term of this Agreement and for an
additional period of four (4) years following the last date services are
furnished under this Agreement. If either party carries out any of its duties
under this Agreement through an agreement between it and an individual or
organization related to it or through a subcontract with an unrelated party,
that party to this Agreement shall require that a clause be included in such
agreement to the effect that until the expiration of four (4) years after the
furnishing of services pursuant to such agreement, the related organization
shall make available, upon request by the United States Department of Health and
Human Services, the Comptroller General of the United States, or any of their
duly authorized representatives, all agreements, books, documents, and records
of such related organization that are necessary to verify the nature and extent
of the costs of services provided under that agreement.
- 27 -
<PAGE>
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by Princeton II. Throughout the term of
this Agreement, Princeton II shall maintain comprehensive professional liability
and worker's compensation insurance for Princeton II and all employees of
Princeton II in amounts approved by the Policy Board. Not in limitation of the
foregoing, Princeton II shall maintain excess general liability umbrella
coverage with a One Million Dollars ($1,000,000) limit as currently maintained
by Princeton II (with deductible provisions not to exceed $25,000 per
occurrence), the cost of which shall be paid by Company as a Clinic Expense. In
lieu of the foregoing, Company may provide as a Clinic Expense group insurance
for malpractice and/or worker's compensation insurance. Notwithstanding the
foregoing, in the event that Company procures such group insurance for
malpractice and/or worker's compensation insurance, Princeton II must first
approve the amount of coverage, the carrier and the terms of any such coverage
for Princeton II.
10.2. Insurance to be Maintained by Company. Throughout the term of this
Agreement, Company shall provide and maintain, as a Clinic Expense,
comprehensive professional liability insurance and worker's compensation
insurance as required by Applicable Law for all professional employees of
Company who work at the Practice Offices with limits as determined reasonable by
Company, comprehensive general liability and property insurance covering the
Practice Offices' premises and operations. The deductible provisions on the
personal liability shall not exceed $25,000 per occurrence and the commercial
general liability insurance shall be in amounts customarily maintained by other
businesses in the same or similar business as Company.
10.3. Additional Insureds. Princeton II and Company agree to use their
best efforts to have each other named as an additional insured on the other's
respective professional liability insurance programs at Company's expense.
Further, on any insurance where Company will be named as an additional insured,
Princeton II will assist Company to obtain appropriate riders to insure payment
of any party indemnified by Company.
10.4. Indemnification. Princeton II shall indemnify, hold harmless and
defend Company, its officers, directors and employees, from and against any and
all liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees), caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts or negligent omissions (other than for any claims for (or in
connection with) malpractice arising from the performance or nonperformance of
medical services) by Princeton II and/or Princeton II's Physician Owners,
agents, employees and/or subcontractors (other than Company) during the term
hereof. Company shall indemnify, hold harmless and defend Princeton II,
Princeton II's officers, directors and employees, from and against any and all
liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees), caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts or negligent omissions by Company and/or its shareholders,
agents, employees and/or subcontractors (other than
- 28 -
<PAGE>
Princeton II) during the term of this Agreement. Neither Company nor Princeton
II shall have any obligation to indemnify the other party unless the claim for
indemnification is based upon a liability, loss or damage resulting in the
indemnified party making payments to a third party.
In the event that either party makes a claim for indemnification under
either the Exchange Agreement or this Service Agreement, then the claiming party
shall have the right, to the extent it is owed indemnifications, to pay amounts
owed to the other party under this Agreement into an escrow account (established
pursuant to an escrow agreement to be agreed upon by the parties) to be held by
the escrow agent in an interest bearing account until a determination by either
(i) the parties, (ii) a court of proper jurisdiction or (iii) agreed upon panel
of arbitrators, has been made regarding the claiming party's right to
indemnification. In the event that the claiming party is entitled to
indemnification, then such escrowed funds shall be paid to the claiming party in
partial or complete satisfaction of such indemnification obligation. Any excess
funds remaining in the escrow account after the payment of the indemnification
obligation or any funds held in the escrow account if it is determined that no
indemnification obligation is owed shall be paid to the other party.
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement. This Service Agreement shall be effective as of
November 12, 1996, and shall expire on November 11, 2036 unless earlier
terminated pursuant to the terms hereof.
11.2. Extended Term. Unless earlier terminated as provided for in this
Agreement, the term of this Agreement shall be automatically extended for
additional terms of five (5) years each, unless either party delivers to the
other party, not less than one hundred eighty (180) days prior to the expiration
of the preceding term, written notice of such party's intention not to extend
the term of this Agreement.
11.3. Termination by Princeton II for Cause. Princeton II may terminate
this Agreement without breach as follows:
11.3.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by Company, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by Company, except for the filing of a petition in
involuntary bankruptcy against Company which is dismissed within thirty (30)
days thereafter, Princeton II may give notice of the immediate termination of
this Agreement.
11.3.2. In the event Company shall materially default in the performance
of any duty or obligation imposed upon it by this Agreement and such default
shall continue for a period of sixty (60) days after written notice thereof has
been given to Company by Princeton II; or Company shall fail to remit the
payments due as provided in Article VIII hereof and such failure to remit shall
- 29 -
<PAGE>
continue for a period of thirty (30) days after written notice thereof,
Princeton II may terminate this Agreement.
11.3.3. In the event Company shall, intentionally or in bad faith,
misapply funds or assets of Princeton II or commit a similar act which cause
material harm to Princeton II, Princeton II may terminate this Agreement.
11.3.4. In the event that Company shall intentionally or in bad faith
violate Applicable Law resulting in a direct, continuing material adverse effect
on the operations, earnings and cash flow of Princeton II, Princeton II may
terminate this Agreement.
11.4. Termination by Company for Cause. Company may terminate this
Agreement without breach as follows:
11.4.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by Princeton II, or upon other
action taken or suffered, voluntarily or involuntarily, under any federal or
state law for the benefit of debtors by Princeton II, except for the filing of a
petition in involuntary bankruptcy against Princeton II which is dismissed
within thirty (30) days thereafter, Company may give notice of the immediate
termination of this Agreement.
11.4.2. In the event Princeton II shall materially default in the
performance of any duty or obligation imposed upon it by this Agreement, and
such default shall continue for a period of ninety (90) days after written
notice thereof has been given to Princeton II by Company, Company may terminate
this Agreement.
11.4.3. In the event Princeton II's Medicare or Medicaid Number shall be
terminated or suspended as a result of the action or inaction of Princeton II or
a Physician Employee, and such termination or suspension shall continue for
thirty (30) days, Company may give notice of the immediate termination of this
Agreement, unless Princeton II shall at that time be acting in good faith (and
shall provide reasonable evidence of the action being taken) to reverse such
termination or suspension. Notwithstanding any good faith effort on the part of
Princeton II to reverse such termination or suspension, if such termination or
suspension shall not be reversed within ninety (90) days after occurrence,
Company shall have the right to terminate this Agreement immediately.
11.4.4. In the event this Agreement is terminated by Company pursuant to
Section 11.4.1, Section 11.4.2, or Section 11.4.3, Company, at its option, may
require Princeton II to purchase from Company all assets, both tangible and
intangible (including the stock of any subsidiary of Company which owns any such
assets), owned by Company and used or made available for Princeton II's use for
the fair market value of such assets on a going concern basis, without regard to
this Agreement. In addition thereto, Princeton II shall assume all contracts,
payables and leases which are obligations of Company which relate to the
performance of Company's obligations which are performed at the Practice
Locations under this Agreement. Company shall be required to sell any such
assets (including the stock of any subsidiary of Company which owns any such
assets) free and clear of any
- 30 -
<PAGE>
liens and encumbrances other than any liens or encumbrances being assumed
by Princeton II. The fair market value of the assets and/or stock of any
subsidiary of Company owning such assets shall be determined by an independent
appraiser selected by two (2) independent accountants practicing with "big six"
accounting firms, one (1) selected by Princeton II and one (1) selected by
Company and neither of which is providing or has for a period of two (2) years
provided services to Company or Princeton II. In addition to the payment for the
practice assets, in the event Company terminates this Agreement pursuant to
Section 11.4.1, Section 11.4.2 or Section 11.4.3 within the first five (5) years
of the term of this Agreement, then Princeton II's Physician Owners shall (i)
pay to Company an amount of money equal to the fair market value, as of the date
of termination, of one-third (1/3) of the shares of stock issued by Company to
Princeton II pursuant to the Exchange Agreement or (ii) surrender to Company for
cancellation one-third (1/3) of the shares of stock issued by Company to
Princeton II pursuant to the Exchange Agreement. If there is no public market
for the stock, then Company shall engage an independent appraiser to value
Company's stock for purposes of this Section 11.4.4. All expenses of such
appraisal shall be paid by Princeton II. Such determination of fair market value
shall be binding upon Princeton II's Physician Owners. In the event that Company
terminates this Agreement pursuant to Sections 11.4.1 through 11.4.3, inclusive,
and Company requires Princeton II to purchase the practice assets and/or stock
of any subsidiary of Company owning such assets, then upon the closing of the
purchase of the assets and/or stock of any subsidiary of Company owning such
assets, Princeton II and its Physician Employees shall be released from the
restrictive covenants provided for under Exhibit 11 of this Agreement.
11.5. Early Termination by Princeton II or Company Without Cause Upon
Third (3rd) Anniversary of Agreement. Either party may terminate this Agreement
without cause upon written notice delivered to the other party not less than
nine (9) months or more than ten (10) months or more prior to the end of the
third (3rd) anniversary of the date of this Agreement if the Company has not
filed a registration statement with the United States Securities and Exchange
Commission; provided, however, if the Company files a registration statement,
for an underwritten public offering, with the United States Securities and
Exchange Commission before the end of the date of the third (3rd) anniversary of
this Agreement, then such termination shall be ineffective, and this Agreement
shall continue in force unless otherwise terminated pursuant to the other
provisions of Article XI of this Agreement. In the event that such registration
statement is not effective within one hundred twenty (120) days from filing,
then the early termination rights described in the first sentence of this
Section 11.5 shall be again exercisable; provided, further, that if such
registration statement was filed during the above described notice period for
early termination, then such period shall be extended for thirty (30) days from
and after the date such early termination rights again become exercisable.
Notwithstanding any other provision of this Agreement to the contrary, the
termination rights set forth in this Section 11.5 shall immediately terminate
and no longer be effective upon a Change in Control of the Company. Upon a
termination pursuant to this Section 11.5, Princeton II shall tender to Company
all of the stock issued to Princeton II by Company pursuant to the Exchange
Agreement, and Company shall return to Princeton II the facilities and all
assets, both tangible and intangible (including the stock of any subsidiary of
Company which owns any such assets), used or made available for Princeton II's
use in the Practice Office. Company shall be required to sell any such assets
(including the stock of any subsidiary of Company which owns any such assets)
free and clear of any liens and encumbrances other than any liens or
encumbrances being assumed by Princeton II.
- 31 -
<PAGE>
Princeton II shall assume all contracts, payables and leases which are
obligations of Company and which related to Company's obligations which are
performed at the Office Locations under this Agreement. The Company and
Princeton II shall cooperate to structure any exchange consummated pursuant to
this Section 11.5 in a manner designed to minimize the aggregate tax
consequences to the parties arising from the exchange. Closing of the exchange
pursuant to this Section 11.5 shall occur effective as of the third (3rd)
anniversary of this Agreement.
11.6. Consequences of Princeton II Termination. In the event that this
Agreement is terminated by Princeton II under the terms of Section 11.3 or is
terminated on any other basis (other than (i) because of the normal expiration
of its term set forth in Section 11.1, (ii) by Company for cause as set forth in
Section 11.4 or (iii) by early termination as set forth in Section 11.5), then
upon such termination, Princeton II shall purchase from Company all assets, both
tangible and intangible, owned by Company and used or made available for
Princeton II's use for the fair market value of such assets. Company shall be
required to sell any such assets (including the stock of any subsidiary of
Company which owns any such assets) free and clear of any liens and encumbrances
other than any liens or encumbrances being assumed by Princeton II. In addition
thereto, Princeton II shall assume all contracts, payables and leases which are
obligations of Company which relate to the performance of Company's obligations
which are performed at the Office Locations under this Agreement. The fair
market value of the assets shall be determined by an independent appraiser
selected by two (2) independent accountants practicing with "big six" accounting
firms, one (1) selected by Princeton II and one (1) selected by Company and
neither of which is providing or has for a period of two (2) years provided
services to Company or Princeton II.
11.7. Closing of purchase by Princeton II and Effective Date of
Termination. Princeton II shall pay cash for the practice assets purchased
pursuant to the provisions of this Section 11. The amount of the purchase price
shall be reduced, but not below zero (0), by the amount of debt and liabilities
of Company assumed by Princeton II and shall also be reduced by any payment
Company has failed to make under this Agreement, provided that such payments or
obligations are not otherwise accounted for in the liabilities assumed by
Princeton II in connection with the purchase described herein. The closing date
for the purchase shall be determined by Princeton II, but shall in no event
occur later than one hundred eighty (180) days from the date of the notice of
termination. The termination of this Agreement shall become effective upon the
closing of the sale of the assets and Princeton II and Company shall be released
from the restrictive covenants provided for in Article VII on the closing date.
Company shall give Princeton II credit towards the purchase price of the assets
for the fair market value of any Company common stock tendered to the Company in
exchange for such assets. In the event that Princeton II terminates this
Agreement pursuant to Sections 11.3.1 through 11.3.4, inclusive, or Sections
11.5, 11.6, or 11.7 then upon the closing of the purchase of the assets,
Princeton II and its Physician Employees shall, except as Princeton II may so
elect to limit through separate agreements with Physician Owners and Physician
Employees, be released from the restrictive covenants provided for under Article
VII and Exhibit 11 of this Agreement.
- 32 -
<PAGE>
11.8. Tail Policy. Princeton II shall obtain continuing liability
insurance coverage under either a "tail policy" or a "prior acts policy" with
the same limits and deductibles as set forth in Section 10.1 upon the
termination of this Agreement, or upon a physician's termination of his or her
affiliation with Princeton II.
11.9. Restrictions Applicable to Physician Owners. The Physician Owners
hereby acknowledge that the Exchange and the terms and conditions of this
Agreement were determined based upon numerous factors, including the Physician
Owners continuing to practice medicine in the future. In connection therewith,
each Physician Owner agrees as follows:
11.9.1. Early Retirement. If at any time prior to the fifth (5th)
anniversary of this Agreement, a Physician Owner desires to retire from the
practice of medicine, such Physician Owner shall be obligated as follows:
(a) to give Company at least twelve (12) months prior written notice
of the intent to retire; provided, however, that once such retiring
physician has located a replacement physician satisfying the requirements
of Section 11.9.1(b), Company shall waive the remaining months of said
twelve (12) month notice period, and such retirement shall be effective
upon the earlier of twelve (12) months from the date of notice or
commencement of the replacement physician's employment;
(b) to locate a physician or physicians (which may be Physician
Employees), acceptable to the Policy Board, to replace such Physician
Owner under this Agreement (all costs of locating such replacement
physicians shall be paid by such Physician Owner (the "Substitute
Physician(s)");
(c) to pay to Company any loss of service fees payable under this
Agreement for the remainder of the first five (5) years of this Agreement.
Any loss for any periods of less than twelve (12) months shall be
calculated on an annualized and prorated basis. For purposes of this
Section 11.9.1(c), the amount of the loss shall be calculated as follows:
(i) The Policy Board shall calculate the retiring Physician
Owner's contribution to the payment of Princeton II's service
fees during the twelve (12) month period preceding the
retiring Physician Owner's notice of intent to retire.
(ii) In the event the Substitute Physician(s) were Physician
Employees prior to the date upon which notice of intent to
retire was given pursuant to Section 11.9.1(a), the Policy
Board shall calculate such Physician Employee(s) contribution
to the payment of Princeton II's service fees during the
twelve month period preceding the notice of intent to retire.
(iii) On each successive anniversary date of this Agreement (through
the fifth anniversary date) following the effective date of
such retirement, the Policy
- 33 -
<PAGE>
Board shall determine the amount of service fees generated by
the Substitute Physicians between either (x) the effective
date of retirement or (y) the immediately preceding
anniversary date, as applicable, and such successive
anniversary date.
(iv) If the Substitute Physician(s) were Physician Employees prior
to date upon which the notice of intent to retire was given,
the amount of loss shall equal the difference between (i) the
amount calculated pursuant to Section 11.9.1(c)(i) plus the
amount calculated pursuant to Section 11.9.1(c)(ii) and (ii)
the amount calculated pursuant to Section 11.9.1(c)(iii).
(v) If the Substitute Physician(s) were not Physician Employees
prior to the date upon which the notice of intent to retire
was given, the amount of loss shall equal the difference
between (i) the amount calculated pursuant to Section
11.9.1(c)(i) and (ii) the amount calculated pursuant to
Section 11.9.1(c)(iii).
The Policy Board will provide the amount of the loss to the retiring Physician
Owner within thirty (30) days of the applicable anniversary date of this
Agreement and such amount shall be paid by such retiring Physician Owner to
Company within fifteen (15) days of the date of the delivery of the notice of
the amount of loss;
(d) to (i) pay to Company an amount of money equal to the fair
market value, as of the date of retirement, of one-third (1/3) of the
shares of stock issued by the Company to the retiring Physician Owner
pursuant to the Exchange Agreement or (ii) surrender to Company for
cancellation one-third (1/3) of the shares of stock issued by Company to
the retiring Physician Owner pursuant to the Exchange Agreement. (If
there is no public market for Company's stock, then Company shall engage
an independent appraiser to value Company's stock for purposes of this
Section 11.9.1(d). All expenses of such appraisal shall be paid by such
Physician Owner. Such determination of fair market value shall be binding
upon such Physician Owner); and
(e) to honor and comply with the restrictive covenants provided for
under Exhibit 11.
11.9.2. Retirement. If at any time after the fifth (5th) anniversary of
this Agreement, a Physician Owner desires to retire, or assume full-time
teaching responsibilities, such Physician Owner shall notify Company in writing
at least twelve (12) months prior to the effective date of such retirement or
start of teaching position; provided, however, that no more than twenty percent
(20%) of the Physician Owners can retire or assume full time teaching
responsibilities within any twelve (12) month period; provided, further, that if
such retiring physician elects to, and has located a replacement physician,
Company shall waive the remaining months of said twelve (12) month notice
period, and such retirement shall be effective upon the earlier of twelve (12)
months from the date of notice or commencement of the replacement physician's
employment. Upon such retirement or start of
- 34 -
<PAGE>
teaching position, such Physician Owner shall have no further obligations under
this Agreement; provided, however, the restrictive covenants provided for under
Section 11.9.1(e) shall remain in force. In fulfilling any such full-time
teaching responsibilities, such Physician Owner would be permitted to attend
patients in a manner normal and customary for such faculty position, provided,
however, such services must be incident to the academic/teaching aspects of the
institution, and not incident to the regular examination of patients for a fee
whether billed in the name of the institution or the name of the attending
physician. It is not the intent of the Parties to permit a retired physician to
conduct a medical practice through an academic institution.
11.9.3. Physician Owner Change in Practice/Group Affiliation. In the event
that a Physician Owner leaves the employment of or terminates his or her
affiliation with Princeton II, then the terminating Physician Owner may join or
establish another group/practice which has or will enter into a Service
Agreement with Company upon such terminating Physician Owner's affiliation with
such new group/practice. Upon entering into such new Service Agreement, the
terminating Physician Owner shall, except as limited by separate employment
agreements between Princeton II and Physician Owners, be released from any
obligation under this Service Agreement. Company shall have the right to enter
into such new Service Agreement without satisfying the requirements of paragraph
G of Exhibit 11. In the event that (i) Princeton consents to the Company
entering into the new Service Agreement, (ii) entering into the new Service
Agreement will not adversely affect the operations and earnings of the Company,
and (iii) the new group/practice can satisfy the representations and warranties
set forth in Article XIII of this Agreement, then Company will not unreasonably
withhold or refrain from entering into a new Service Agreement with the
terminating Physician Owner's new group/practice. In the event that the
Physician Owner affiliates with a new group/practice that is not a party to a
Service Agreement with Company, then Company, at its option, may terminate this
Agreement solely with respect to the terminating Physician Owner, and the
provisions of Exhibit 11 shall apply. In the event that Company does not enter
into a new Service Agreement, then Company shall terminate this Agreement with
respect to such Physician Owner, and the terminating Physician Owner shall be
obligated as described in Sections 11.9.1(a) and 11.9.1(e) of this Agreement;
provided, however, if such termination is within the first five (5) years of the
term of this Agreement, the terminating Physician Owner shall also be obligated
as described in Section 11.9.1.(a), 11.9.1(b), 11.9.1(c), 11.9.1(d) and
11.9.1(e).
11.9.4. Death or Disability. In the event that a Physician Owner dies or
becomes disabled, then this Agreement shall be terminated with respect to such
Physician Owner shall have no continuing obligations under this Agreement;
provided, however, in the event of disability, the restrictive covenants
described in Exhibit 11 shall remain in force for a period of thirty-six (36)
months from such termination.
- 35 -
<PAGE>
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds. All insurance or condemnation proceeds
payable by reason of any physical loss of any of the improvements comprising the
facilities or the furniture, fixtures and equipment used by the Practice
Offices, shall be available for the reconstruction, repair or replacement, as
the case may be, of any damage, destruction or loss. The Policy Board, in
consultation with Princeton II, shall review and approve such reconstruction,
repair or replacement.
12.2. Temporary Space. In the event of substantial damage to or the
condemnation of a significant portion of the facilities, Company shall use its
best efforts to provide temporary facilities until such time as the facilities
can be restored or replaced.
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES
OF PRINCETON II AND PHYSICIAN OWNERS
Princeton II and Physician Owners represent, warrant, covenant and agree
with Company that:
13.1. Validity. Princeton II is a New Jersey corporation. Princeton II has
the full power and authority to own Princeton II's property, to carry on
Princeton II's business as presently being conducted, to enter into this
Agreement, and to consummate the transactions contemplated hereby. Each
Physician Owner is an adult citizen and resident of the State of New Jersey.
Each Physician Owner has the full power and authority to own his or her
property, carry on his or her business as presently being conducted, to enter
into this Agreement, and to consummate the transactions contemplated hereby.
13.2. Litigation. Except as disclosed pursuant to the Exchange Agreement,
there is no suit, action, proceeding at law or in equity, arbitration,
administrative proceeding or other proceeding pending, or threatened against, or
affecting Princeton II or any Physician Employee, or to the best of Princeton
II's and each Physician Owner's knowledge, any provider or other health care
professional associated with or employed by Princeton II as pertains to any
claim involving the providing of health care related services, and to the best
of Princeton II's and each Physician Owner's knowledge there is no basis for any
of the foregoing.
13.3. Permits. Princeton II and all health care professionals associated
with or employed by Princeton II have all permits and licenses and other
Necessary Authorizations required by all Applicable Law, except where failure to
secure such licenses, permits and other Necessary Authorizations does not have a
material adverse effect; have made all regulatory filings necessary for
- 36 -
<PAGE>
the conduct of Princeton II's business; and are not in violation of any of said
permitting or licensing requirements.
13.4. Authority. The execution of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
action, and this Agreement is a valid and binding Agreement of Princeton II and
each Physician Owner, enforceable in accordance with its terms. Princeton II and
each Physician Owner have obtained all third-party consents necessary to enter
into and consummate the transaction contemplated by this Agreement. Neither the
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby, nor compliance by Princeton II or any Physician Owner with
any of the provisions hereof, will:
13.4.1. violate or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under any license, agreement or other
instrument or obligation to which either Princeton II or any Physician Owner is
a party;
13.4.2. violate any order, writ, injunction, decree, statute, rule or
regulation applicable to either Princeton II or any Physician Owner.
13.5. Compliance with Applicable Law. To the best of Princeton II's and
each Physician Owner's knowledge and belief, Princeton II and each Physician
Owner has operated in compliance with all federal, state, county and municipal
laws, ordinances and regulations applicable thereto and neither Princeton II nor
any provider associated with or employed by Princeton II has received payment or
any remuneration whatsoever to induce or encourage the referral of patients or
the purchase of goods and/or services as prohibited under 42 U.S.C. ss.
1320a-7b(b), or otherwise perpetrated any Medicare or Medicaid fraud or abuse,
nor has any fraud or abuse been alleged within the last five (5) years by any
Governmental Authority, a carrier or a Third-Party Payor.
13.6. Health Care Compliance. Princeton II is presently participating in
or otherwise authorized to receive reimbursement from or is a party to Medicare,
Medicaid, and other Third-Party Payor Programs. All necessary certifications and
contracts required for participation in such programs are in full force and
effect and have not been amended or otherwise modified, rescinded, revoked or
assigned as of the date hereof, and no condition exists or to the knowledge of
Princeton II no event has occurred which in itself or with the giving of notice
or the lapse of time or both would result in the suspension, revocation,
impairment, forfeiture or non-renewal of any such Third-Party Payor Program.
Princeton II is in full compliance with the material requirements of all such
Third-Party Payor Programs applicable thereto.
13.7. Fraud and Abuse. Princeton II and persons and entities providing
professional services for Princeton II, have not, to the knowledge of Princeton
II and each Physician Owner, after due inquiry, engaged in any activities which
are prohibited by or are in violation of the rules, regulations, policies,
contracts or laws pertaining to any Third-Party Payor Program, or which are
prohibited by rules of professional conduct ("Governmental Rules and
Regulations"), including but not limited to
- 37 -
<PAGE>
the following: (a) 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; (b) 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; (c) failing to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on Princeton II's own behalf or on behalf of another,
with intent to fraudulently secure such benefit or payment; or (d) 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 (i) in return for referring
an individual to a person for the furnishing or arranging for the furnishing or
any item or service for which payment may be made in whole or in part by
Medicare or Medicaid, or (ii) in return for purchasing, leasing, or ordering or
arranging for or recommending purchasing, leasing, or ordering any good,
facility, service or item for which payment may be made in whole or in part by
Medicare or Medicaid.
13.8. Princeton II Compliance. Princeton II has all licenses necessary to
operate the Practice Offices in accordance with the requirements of all
Applicable Law and has all Necessary Authorizations for the use and operation,
all of which are in full force and effect. There are no outstanding notices of
deficiencies relating to Princeton II issued by any Governmental Authority or
Third-Party Payor requiring conformity or compliance with any Applicable Law or
condition for participation of such Governmental Authority or Third-Party Payor,
and after reasonable and independent inquiry and due diligence and
investigation, Princeton II has neither received notice nor has any knowledge or
reason to believe that such Necessary Authorizations may be revoked or not
renewed in the ordinary course.
13.9. Rates and Reimbursement Policies. The jurisdiction in which
Princeton II is located does not currently impose any restrictions or
limitations on rates which may be charged to private pay patients receiving
services provided by Princeton II. Princeton II does not have any rate appeal
currently pending before any Governmental Authority or any administrator of any
Third-Party Payor Program. Princeton II has no knowledge of any Applicable Law
which has been enacted, promulgated or issued within the eighteen (18) months
preceding the date of this Agreement or any such legal requirement proposed or
currently pending in the jurisdiction in which Princeton II is located which
could have a material adverse effect on Princeton II or may result in the
imposition of additional Medicaid, Medicare, charity, free care, welfare, or
other discounted or government assisted patients at Princeton II or require
Princeton II to obtain any necessary authorization which Princeton II does not
currently possess.
13.10. Accounts Receivable. With respect to the Purchased A/R, as of the
date of purchase:
13.10.1. All documents and agreements relating to the Purchased A/R that
have been delivered to Company with respect to such Accounts Receivable are true
and correct; Princeton II has billed the applicable Account Debtor and Princeton
II has delivered or caused to be delivered to such Account Debtor all requested
supporting claim documents with respect to such Accounts Receivable; all
information set forth in the bill and supporting claim documents is true and
correct,
- 38 -
<PAGE>
and, if any error has been made, Princeton II will promptly correct the same
and, if necessary, rebill or, if requested by Company, cooperate with Company to
rebill such Accounts Receivable.
13.10.2. The Purchased A/R are exclusively owned by Princeton II and there
is no security interest or lien in favor of any third party, or the recording or
filing against Princeton II, as debtor, covering or purporting to cover any
interest of any kind in any Accounts Receivable, except as has been released by
each party holding such adverse interest in the Accounts Receivable. Upon
payment of the Purchase Price with respect to the Purchased A/R and with respect
to Governmental Receivables, to the extent permissible by law, all right, title
and interest of Princeton II with respect thereto shall be vested in Company,
free and clear of any lien, security interest, claim or encumbrance of any kind,
and Princeton II agrees to defend the same against the claims of all Persons.
13.10.3. The Purchased A/R (i) are payable, in an amount not less than
their face amount, as adjusted pursuant to the provisions of Section 8.3.2, by
the Account Debtor identified by Princeton II as being obligated to do so, (ii)
are based on an actual and bona fide rendition of services or sale of goods to
the patient by Princeton II in the ordinary course of business, (iii) are
denominated and payable only in lawful currency of the United States, and (iv)
are accounts or general intangibles within the meaning of the UCC of the state
in which Princeton II has its principal place of business, or are rights to
payment under a policy of insurance or proceeds thereof, and are not evidenced
by any instrument or chattel paper. There are no payors other than the Account
Debtor identified by Princeton II as the payor primarily liable on any Purchased
A/R.
13.10.4. The Purchased A/R are not (i) subject to any action, suit,
proceeding or dispute (pending or threatened), set-off, counterclaim, defense,
abatement, suspension, deferment, deductible, reduction or termination by the
Account Debtors other than routine adjustments and disallowances made in the
ordinary course of business, to the extent of such adjustments and
disallowances, (ii) past or within sixty (60) days of, the statutory limit for
collection applicable to the Account Debtor, (iii) subject to an invoice which
provides for payment more than forty-five (45) days from the date of such
invoice, (iv) an account which arises out of a sale or other transaction by or
between Princeton II to an Affiliate of Princeton II, (v) from an Account Debtor
who is also a creditor of Princeton II, (vi) an account in which the Account
Debtor has commenced a voluntary case, or an involuntary proceeding has been
instituted, under the federal bankruptcy laws, as now constituted or hereafter
amended, or made an assignment for the benefit or creditors, or if a decree or
order for relief has been entered by a court having jurisdiction in the premises
in respect to the Account Debtor, (vii) an account of which the goods giving
rise to such Accounts Receivable have not been shipped and delivered to and
accepted by the Account Debtor or the services giving rise to such Accounts
Receivable have not been performed by Princeton II and accepted by the Account
Debtor or the Accounts Receivable otherwise does not represent a final sale,
(viii) is evidenced by an instrument or chattel paper unless such instrument or
chattel paper is delivered to Company with all appropriate endorsements in favor
of Company, or (ix) other than a complete bona fide transaction which requires
no further act under any circumstances on the part of Princeton II to make the
Accounts Receivable payable by the Account Debtor.
- 39 -
<PAGE>
13.10.5. Princeton II does not have any guaranty of, letter of credit
providing credit support for, or collateral security for, the Purchased A/R,
other than any such guaranty, letter of credit or collateral security as has
been assigned to Company, and any such guaranty, letter of credit or collateral
security is not subject to any lien in favor of any other person.
13.10.6. The goods or services provided and reflected by the Purchased A/R
were medically necessary for the patient in the opinion of Princeton II and the
patient received such goods or services.
13.10.7. The face amount of the Accounts Receivable for the services
constituting the basis for the Purchased A/R are consistent with the usual,
customary and reasonable fees charged by other similar medical service providers
in Princeton II's community for the same or similar service.
13.10.8. Each Account Debtor with respect to the Purchased A/R (i) is not
currently the subject of any bankruptcy, insolvency or receivership proceeding,
nor is it generally unable to make payments on its obligations when due, (ii) is
located in the United States, and (iii) is one of the following: (x) a party
which in the ordinary course of its business or activities agrees to pay for
healthcare services received by individuals, including, without limitation,
Medicare, Medicaid, governmental bodies, commercial insurance companies and
non-profit insurance companies (such as Blue Cross and Blue Shield entities)
issuing health, personal injury, workers compensation or other types of
insurance; (y) employers or unions which self-insure for employee or member
health insurance, prepaid healthcare organizations, preferred provider
organizations, health maintenance organizations or any other similar person, or
(z) a Third-Party Payor of the type described in the definition of Governmental
Receivables.
13.10.9. The proceeds of the sale of the Purchased A/R will be used for
the business and commercial purposes of Princeton II. The sale of the Purchased
A/R hereunder is made in good faith and without actual intent to hinder, delay
or defraud present or future creditors of Princeton II.
13.10.10. Except with respect to Governmental Receivables, the insurance
policy, contract or other instrument obligating an Account Debtor to make
payment with respect to the Purchased A/R (i) does not contain any provision
prohibiting the transfer of such payment obligation from the patient to
Princeton II, or from Princeton II to Company, (ii) has been duly authorized by
Princeton II and to the knowledge of Princeton II has been duly authorized by
the Account Debtor and, together, with the Purchased A/R, constitutes the legal,
valid and binding obligation of the Account Debtor in accordance with its terms,
(iii) together with the applicable Purchased A/R, does not contravene in any
material respect any requirement of law applicable thereto, and (iv) was in full
force and effect and applicable to the patient at the time the services
constituting the basis for the Purchased A/R were performed.
None of the foregoing representations and warranties shall be deemed to
constitute a guaranty by Princeton II that the Purchased A/R will be collected
by Company. Princeton II shall not be responsible for any damages for any breach
of a representation or warranty under this Section 13.10
- 40 -
<PAGE>
until Company has suffered a loss on the purchase of Princeton II's Accounts
Receivable. Damages for such breach shall be limited to the amount of Company's
loss on the purchase of such Accounts Receivable.
13.11. Full Disclosure. When considered in the context of all information
contained herein, to the knowledge of Princeton II no representation or warranty
made by Princeton II in this Agreement contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein not misleading.
13.12. Exhibits. All the facts recited in Exhibits annexed hereto shall be
deemed to be representations of fact by Princeton II as though recited in this
Article XIII.
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents, warrants, covenants and agrees with Princeton II as
follows:
14.1. Organization. Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Company
has the full power to own its property, to carry on its business as presently
conducted, to enter into this Agreement and to consummate the transactions
contemplated hereby.
14.2. Authority. Company has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, as well as the
consummation of the transactions contemplated hereby. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
hereby will not, violate any provisions of the charter or the bylaws of Company
or any indenture, mortgage, deed of trust, lien, lease, agreement, arrangement,
contract, instrument, license, order, judgment or decree or result in the
acceleration of any obligation thereunder to which Company is a party or by
which it is bound.
14.3. Absence of Litigation. No action or proceeding by or before any
court or other Governmental Authority has been instituted or is, to the best of
Company's knowledge, threatened with respect to the transactions contemplated by
this Agreement.
14.4. Transactions with Affiliates. Company shall not enter into any
transaction or series of transactions, whether or not related or in the ordinary
course of business, with any Affiliate of Princeton II or Company, other than on
terms and conditions substantially as favorable to Company as would be
obtainable by Company at the time in a comparable arm's-length transaction with
a person not an Affiliate.
- 41 -
<PAGE>
ARTICLE XV.
COVENANTS OF PRINCETON II AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements. Princeton II shall not
incorporate, merge or consolidate with any other entity or individual or
liquidate or dissolve or wind-up Princeton II's affairs or enter into any
partnerships, joint ventures or sale-leaseback transactions or purchase or
otherwise acquire (in one or a series of related transactions) any part of the
property or assets (other than purchases or other acquisitions of inventory,
materials and equipment in the ordinary course of business) of any other person
or entity.
15.2. Necessary Authorizations/Assignment of Licenses and Permits.
Princeton II and each Physician Owner shall maintain all licenses, permits,
certifications, or other Necessary Authorizations and shall not assign or
transfer any interest in any license, permit, certificate or other Necessary
Authorization granted to it by any Governmental Authority, nor shall Princeton
II or any Physician Owner assign, transfer, or remove or permit any other
individual or entity to assign, transfer or remove any records of Princeton II
or any Physician Owner, including without limitation, patient records, medical
and clinical records (except for removal of such patient records as required
under any Applicable Law).
15.3. Transaction with Affiliates. Neither Princeton II nor any Physician
Owner shall enter into any transaction or series of transactions, whether or not
related or in the ordinary course of business, with any Affiliate of Princeton
II or Company, other than on terms and conditions substantially as favorable to
Princeton II or the Physician Owner, as would be obtainable by Princeton II or
the Physician Owner at the time in a comparable arms-length transaction with a
person not an Affiliate.
15.4. Compliance with All Laws. Princeton II and each Physician Owner
shall comply with all laws and regulations relating to Princeton II's practice
and the operation of any facility, including, but not limited to, all state,
federal and local laws relating to the acquisition or operation of a health care
practice. Furthermore, neither Princeton II nor any Physician Owner shall
violate any Governmental Rules and Regulations.
15.5. Third-Party Payor Programs. Princeton II shall maintain Princeton
II's compliance with the requirements of all Third-Party Payor Programs in which
Princeton II is currently participating or authorized to participate.
15.6. Change in Business or Credit and Collection Policy. Princeton II
shall not make any change in the character of Princeton II's business or in the
credit and collection policy, which change would, in either case, impair the
collectibility of any Purchased A/R or any Exchange A/R or otherwise modify,
amend or extend the terms of any such account other than in the ordinary course
of business.
- 42 -
<PAGE>
15.7. Treatment of Accounts Receivable. Princeton II will (i) treat
transfers to Company of Accounts Receivable hereunder as a sale for all
purposes, including tax and accounting (and shall accurately reflect such sale
in its financial statements), and will advise all persons who inquire about the
ownership of such Accounts Receivable that they have been sold to Company; (ii)
not treat any such Accounts Receivable as an asset on Princeton II's books and
records; (iii) record in Princeton II's books, records and computer files
pertaining thereto that such Accounts Receivable have been sold to Company; (iv)
pay all taxes, if any, relating to the transfer of such Accounts Receivable
after the same have been purchased by Company; (v) not impede or interfere with
Company's collection of such Accounts Receivable; (vii) not amend, waive or
otherwise permit or agree to any deviation from the terms or conditions of such
Accounts Receivable; (viii) use all reasonable efforts to obtain all consents
from patients which are required by law in order for Company, or any servicing
entity retained by Company, to secure information needed to obtain or to
expedite payment from the respective Account Debtors; and (ix) have billed such
Accounts Receivable on the same bases and using the same policies and practices
that it has used in the past unless Company has been advised in writing of a
change prior to the purchase of such Accounts Receivable. Company or its
designated representatives from time to time may verify the Accounts Receivable,
inspect, check, take copies or extracts from Princeton II's books, records and
files, and Princeton II will make the same available to Company or such
representatives at any reasonable time for such purposes.
15.8. Security Interest. If, contrary to the mutual intent of Princeton II
and Company, any purchase of Purchased A/R is not characterized as a sale,
Princeton II shall, effective as of the date hereof, be deemed to have granted
(and Princeton II does hereby grant) to Company a first priority security
interest in and to any and all of the Purchased A/R and the proceeds thereof to
secure the repayment of all amounts advanced to Princeton II hereunder with
accrued interest thereon, and this Agreement shall be deemed to be a security
agreement. With respect to such grant of a security interest, Company may at its
option exercise from time to time any and all rights and remedies available to
it under the UCC or otherwise. Princeton II agrees that five (5) days shall be
reasonable prior notice of the date of any public or private sale or other
disposition of all or part of the Purchased A/R. Princeton II represents and
warrants that the location of Princeton II's principal place of business, and
all locations where Princeton II maintains records with respect to its accounts
are set forth under its name in Section 16.3 hereof. Princeton II agrees to
notify Company in writing thirty (30) days prior to any change in any such
location. The exact name of Princeton II is as set forth at the beginning of
this Agreement, and except as set forth on the signature page hereof, Princeton
II has not changed its name in the last five (5) years, and during such period
Princeton II did not use, nor does Princeton II now use, any fictitious or trade
name. Princeton II shall notify Company in writing thirty (30) days prior to any
change in any such name.
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment. Company shall have the right to assign its rights
hereunder to any person, firm or corporation under common control with Company
and to any lending institution from which
- 43 -
<PAGE>
Company obtains financing, including but not limiting the restrictive covenants
included in Article VII (covenant not to compete), for security purposes or as
collateral. Princeton II agrees to, and acknowledges, Company's right to assign
Company's rights under this Agreement to any Lender and further agrees that upon
receipt of written notice from such Lender, Princeton II shall pay to Lender or
cause to be paid to Lender all amounts which are otherwise payable to Company
pursuant to the terms of this Agreement, including, without limitation, all
service fees, and other Clinic Expenses and, until such amounts are delivered to
Lender, hold payments in trust for Lender. Except as set forth above, neither
Company nor Princeton II shall have the right to assign their respective rights
and obligations hereunder without the written consent of the other party.
Without limiting the foregoing, Princeton II acknowledges that, as collateral
for certain obligations, Company has assigned all of its rights hereunder to
NationsBank of Tennessee, N.A. as Agent (the "Agent") for itself and other banks
and institutional lenders from time to time (collectively the "Banks") and has
granted the Agent for the benefit of the Banks a lien and security interest upon
all real and personal property used in the operation of the Office Locations
(the "Pledged Assets"). As an inducement for the Banks to extend or continue the
extension of credit to Company, Princeton II (i) acknowledges that the
collateral assignment to the Agent covers all rights of Company hereunder,
including, but not limited to, rights arising from warranties and
representations made by Princeton II, rights to enforce covenants made by
Princeton II, and rights to receive all payments due Company; (ii) agrees to
regard the Agent as the owner of any or all of the assigned rights upon written
notice to Princeton II of this election from the Agent; (iii) agrees that
neither the Agent nor any of the Banks has obligation for the performance of the
duties of Company hereunder, and shall not assume any such duty by the exercise
of rights as a secured lender; (iv) agrees to give the Agent written notice of
any material default hereunder on Company's part at the address of 1 NationsBank
Plaza, Nashville, Tennessee 37239, Attn: David Dupuy, and to allow at least
thirty (30) days thereafter for the cure of such default before Princeton II
terminates this Agreement; (v) agrees that the rights of Princeton II under this
Agreement, including, but not limited to, the right to the use of the Pledged
Assets, are and shall be junior to any security interest that the Agent and the
Banks, their successors or assigns may have in the Pledged Assets at any time;
(vi) agrees that the benefits of the above undertakings in favor of the Agent
and Banks shall further extend to all successors and assigns of the Agents and
Banks, provided that any notices given by Princeton II under this Section shall
be given to the Agent at the foregoing address unless Princeton II has received
written notice of a change thereof; and (vii) agrees that this Section may not
be modified, and no provision of this Section may be waived, absent the written
approval of the Agent.
16.2. Whole Agreement; Modification. This Agreement supersedes all prior
agreements between the parties and there are no other agreements or
understandings, written or oral, between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement.
16.3. Notices. All notices required or permitted by this Agreement shall
be in writing and shall be deemed to have been given (i) when received if given
in person, (ii) on the date of acknowledgment of receipt if sent by telex,
facsimile or other wire transmission, (iii) one business day
- 44 -
<PAGE>
after being sent by overnight delivery service, or (iv) three days after being
deposited in the United States mail, certified or registered mail, postage
prepaid, addressed as follows:
To Company: Specialty Care Network, Inc.
44 Union Boulevard
Suite 600
Lakewood, Colorado 80228
Attention: Kerry Hicks
With a copy to: Baker, Donelson, Bearman & Caldwell
165 Madison Avenue
Suite 2000
Memphis, Tennessee 38103
Attention: David T. Popwell, Esq.
To Princeton II: Princeton Orthopaedic Associates, II P.A.
325 Princeton Avenue
Princeton, New Jersey 08540
Attention: Robert Simpson
With a copy to: Norris McLaughlin & Marcus
P.O. Box 1018
721 Route 202-206
Somerville, New Jersey 08876-1018
Attention: Victor S. Elgort, Esq.
or to such other address as either party shall notify the other.
16.4. Binding on Successors. Subject to Section 16.1, this Agreement shall
be binding upon the parties hereto, and their successors, assigns, heirs and
beneficiaries.
16.5. Waiver of Provisions. Any waiver of any terms and conditions hereof
must be in writing, and signed by the parties hereto. The waiver of any of the
terms and conditions of this Agreement shall not be construed as a waiver of any
other terms and conditions hereof.
16.6. Governing Law. The validity, interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
State of New Jersey.
16.7. No Practice of Medicine. The parties acknowledge that Company is not
authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or service
required of Company in this Agreement should be construed or deemed by any
Governmental Authority or court to constitute the practice of medicine,
- 45 -
<PAGE>
the performance of said act or service by Company shall be deemed waived and
unenforceable to the minimum extent required to comply with Applicable Law.
16.8. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
16.9. Additional Documents. Each of the parties hereto agrees to execute
any document or documents that may be requested from time to time by any other
party to implement or complete such party's obligations pursuant to this
Agreement.
16.10. Attorneys' Fees. If legal action is commenced by any party to
enforce or defend its rights under this Agreement, the prevailing party in such
action shall be entitled to recover its costs and reasonable attorneys' fees in
addition to any other relief granted.
16.11. Time is of the Essence. Time is hereby expressly declared to be of
the essence in this Agreement.
16.12. Confidentiality. No party hereto shall disseminate or release to
any third party any information regarding any provision of this Agreement, or
any financial information regarding the other (past, present or future) that was
obtained by the other in the course of the negotiations of this Agreement or in
the course of the performance of this Agreement, including, but not limited to,
any information relating to the internal operations of Princeton II, Princeton
II fees or the terms of any of the managed care contracts, without the other
party's written approval; provided, however, the foregoing shall not apply to
information which (i) is generally available to the public other than as a
result of a breach of confidentiality provisions; (ii) becomes available on a
non-confidential basis from a source other than the other party or its
affiliates or agents, which source was not itself bound by a confidentiality
agreement; (iii) which is required to be disclosed by law or pursuant to court
order. Company shall provide Princeton II with copies of any information
regarding Princeton II provided by Company to any third party; or (iv) except
for disclosure to its bankers, underwriters or lenders, or its advisors to the
extent required by Section 9.4, or as required in connection with reports on
filings with the SEC or State Departments of Securities.
16.13. Contract Modifications for Prospective Legal Events. If any state
or federal laws or regulations, now existing or enacted or promulgated after the
effective date of this Agreement, are interpreted by judicial decision, a
regulatory agency or legal counsel in such a manner as to indicate that the
structure of this Agreement may be in violation of such laws or regulations,
Princeton II and Company shall amend this Agreement as necessary. To the maximum
extent possible, any such amendment shall preserve the underlying economic and
financial arrangements between and among Princeton II and Company.
16.14. Remedies Cumulative. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any
- 46 -
<PAGE>
party, but the same shall be distinct, separate and cumulative and may be
exercised from time to time as often as occasion may arise or as may be deemed
expedient.
16.15. Language Construction. The language in all parts of this Agreement
shall be construed, in all cases, according to Princeton II's fair meaning, and
not for or against either party hereto. The parties acknowledge that each party
and its counsel have reviewed and revised this Agreement and that the normal
rule of construction to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation of this
Agreement.
16.16. No Obligation to Third Parties. Except as provided in Section 16.1,
none of the obligations and duties of Company or Princeton II under this
Agreement shall in any way or in any manner be deemed to create any obligation
of Company or of Princeton II to, or any rights in, any person or entity not a
party to this Agreement.
16.17. Communications. Princeton II and Company agree that good
communication between the parties is essential to the successful performance of
this Agreement, and each pledges to communicate fully and clearly with the other
on matters relating to the successful operation of Princeton II's practice at
the Practice Offices.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COMPANY:
SPECIALTY CARE NETWORK, INC.
By:______________________________________________
Title:___________________________________________
SCN OF PRINCETON, INC.
By:______________________________________________
Title:___________________________________________
PRINCETON II:
PRINCETON ORTHOPEDIC ASSOCIATES, II P.A.
By:______________________________________________
Title:___________________________________________
- 47 -
<PAGE>
PHYSICIAN OWNERS:
_________________________________________________
MICHAEL N. JOLLEY, M.D.
_________________________________________________
HARVEY E. SMIRES, M.D.
_________________________________________________
ROBERT N. DUNN, M.D.
_________________________________________________
JEFFREY S. ABRAMS, M.D.
_________________________________________________
RICHARD E. FLEMING, JR., M.D.
_________________________________________________
W. THOMAS GUTOWSKI, M.D.
_________________________________________________
STEVEN R. GECHA, M.D.
_________________________________________________
C. ALEXANDER MOSKWA, JR., M.D.
_________________________________________________
DAVID M. SMITH, M.D.
- 48 -
<PAGE>
EXHIBIT 3.1
LEASE AGREEMENT
3.1-1
<PAGE>
EXHIBIT 4.1
POLICY BOARD GOVERNANCE RULES
A. Number, Tenure and Qualifications. The Policy Board shall consist of
six (6) members. Company shall designate, in its sole discretion, three (3)
members of the Policy Board. Princeton II shall designate, in Princeton II's
sole discretion, three (3) members of the Policy Board. The initial Policy board
shall be chosen at the time of the closing of the Exchange. Thereafter, the
respective Policy Board Members shall be chosen at such time and in such manner
as shall be determined by the respective party making the appointment.
B. Duties and Responsibilities of the Policy Board. The Policy Board shall
have the duties and responsibilities more particularly described in Section 4.2
of this Agreement.
C. Regular Meetings of the Policy Board. Regular meetings of the Policy
Board shall be held on the first Monday of each calendar quarter at such times
and places as the Policy Board by resolution may determine and specify, and if
so determined no notice thereof need be given.
D. Special Meetings. Special meetings of the Policy Board may be held at
any time or place whenever called by written request of at least two (2) Policy
Board Members, notice thereof being given to each Policy Board Member by the
Policy Board Members calling the meeting, or they may be held at any time
without formal notice provided all of the Policy Board Members are present or
those not present shall at any time waive or have waived notice thereof.
E. Notice. Notice of any special meeting shall be given at least ten (10)
days previously thereto by written notice delivered personally, by telegram, or
facsimile. If mailed, such notice shall be mailed to each Policy Board Member at
his business address no less than ten (10) days previously thereto, and shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. If notice be given by facsimile, such notice shall be deemed to be
delivered when information of the transmission is received.
F. Meetings by any Form of Communication. The Policy Board shall have the
power to permit any and all Policy Board Members to participate in a regular or
special meeting by, or conduct the meeting through the use of any means of
communication by which all Policy Board Members participating may simultaneously
hear each other during the meeting. A Policy Board Member participating in a
meeting by this means is deemed to be present in person at the meeting.
G. Quorum. All of the members of the Policy Board as constituted from time
to time shall constitute a quorum for the transaction of business, but a lesser
number may adjourn any meeting and the meeting may be held as adjourned without
further notice. When a quorum is present at any meeting, a majority of the
members present thereat shall decide any question brought before
4.1-1
<PAGE>
such meeting, except as otherwise provided by this Agreement or by these
Governance Rules. The fact that a Policy Board Member has an interest in a
matter to be voted on at the meeting shall not prevent his being counted for
purposes of a quorum.
H. Vacancies. Any vacancy occurring in the Policy Board shall be filled by
the Party which chose such vacated Policy Board Member(s).
I. Removal. Any Policy Board Member may be removed without cause by the
Party which chose such Policy Board Member.
J. Committees. The majority of the Policy Board may appoint an executive
committee or such other committees as it may deem advisable, composed of one (1)
or more Policy Board Members, and may delegate authority to such committees as
is not inconsistent with this Agreement. The members of such committee shall
serve at the pleasure of the Policy Board.
K. Presumption of Assent. A Policy Board Member who is present at a
meeting of the Policy Board at which action on any matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the secretaries of the Company and Princeton II immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a Policy
Board Member who voted in favor of such action.
L. Informal Action by Board Members. Any action required to be taken at a
meeting of the Policy Board, or any other action which may be taken at a meeting
of the Policy Board, may be taken without a meeting if all Policy Board Members
consent to taking such action without a meeting. If all Policy Board Members
consent to taking such action without a meeting, the affirmative vote of a
majority of the Policy Board Members is the act of the Policy Board. The action
must be evidenced by one or more written consents describing the action taken,
signed by each Policy Board Member, indicating each signing Policy Board
Member's vote or abstention on the action, and shall be included in the minutes
or filed with the Policy Board records reflecting the action taken.
4.1-2
<PAGE>
EXHIBIT 6.9.1
PRINCETON II PLAN
6.9.1-1
<PAGE>
EXHIBIT 8.1.8(d)
EXCLUDED EXPENSES
Excluded Expenses include, but are not limited to the following items:
a. Accounting, legal and other professional fees attributed to
Princeton II or to Physician Employees.
b. Contribution expenses, cash or non-cash, which include, but are not
limited to costs of sponsoring sports teams, political
contributions, unapproved marketing expenses, and contributions to
hospitals and staff.
c. Automobile expenses including payments, repairs and maintenance,
mileage, depreciation, etc.
d. Entertainment expenses of any kind.
e. Physician benefits including insurance (health, life, dental,
disability, etc., but not including malpractice insurance), vacation
time, sick time, paid leave of absence, contributions to and
administration of physician retirement plans (pension, 401(k), IRA,
others), etc.
f. Employment tax expenses including Federal and State Unemployment
taxes, FICA taxes, Medicare taxes, etc.
g. Home office expenses including the acquisition costs, depreciation,
repairs and maintenance, and ongoing operating expenses of:
computers, software, copying machines, fax machines, telephones and
telephone lines, cellular telephones, etc.; and the costs of having
an office in one's home including allocated rent, utility and
depreciation expenses.
h. Meal expenses.
i. Medical supplies and drugs either used or distributed by a Physician
Employee without billing for such supplies and drugs at standard
rates.
j. Presentation expenses of any kind including professional services,
slide production, travel, meals, entertainment, etc.
k. Personal postage expenses.
l. Personal laundry expenses.
m. Personal assistant expenses (including the time staff spends on
personal errands for Physician Employees).
8.1.8.(d)-1
<PAGE>
EXHIBIT 8.3.6
1. ACCOUNTS RECEIVABLE COLLECTION
1.1 Collection of Accounts Receivable. Princeton II agrees to cooperate
with Company in the collection of the Accounts Receivables sold by Princeton II,
transferred pursuant to Section 8.3.
1.2 Definitions. In addition to the definitions contained in Article II of
the Agreement, for purposes of this Exhibit 8.3.6., the following terms shall be
applicable:
"Accounts" means, with respect to Princeton II, all Accounts Receivable
including any and all rights to payment of money or other forms of
consideration of any kind (whether classified under the Uniform Commercial
Code as accounts, chattel paper, general intangibles, or otherwise) for
goods sold or leased or for services rendered by Princeton II, including,
but not limited to, accounts receivable, proceeds of any letters of credit
naming Princeton II as beneficiary, chattel paper, insurance proceeds,
contract rights, notes, drafts, instruments, documents, acceptances, and
all other debts, obligations and liabilities in whatever form from any
other Person.
"Collecting Bank" means the main office of ______________________________
located at ___________________________________, or such other financial
institution agreed to by Company.
"Finance Charge Rate" means a rate of interest equal to the lesser of (i)
eighteen percent (18%) per annum or (ii) the maximum rate of interest
allowed by applicable law from time to time in effect.
"Governmental Lockbox Account" means an account established at the
Collecting Bank by Princeton II into which all proceeds of Princeton II's
Governmental Receivables are remitted.
"Lender" shall mean any lender to Company that has a security interest in
the Accounts from time to time.
"Lockbox Agreements" means that certain Lockbox Operating Procedural
Agreements --Governmental Receivables to be entered into between the
Collecting Bank as to Governmental Receivables and that certain Lockbox
Operating Procedural Agreement --Non-Governmental Receivables to be
entered between the Collecting Bank, Lender and Princeton II as to
Accounts which are not Governmental Receivables, in a form acceptable to
counsel for Company.
"Main Account" means Company's operating account established and
maintained at the Collecting Bank.
8.3.6.-1
<PAGE>
"Non-Governmental Lockbox Account" means the account established by the
Company with the Collecting Bank into which all proceeds from Princeton
II's Accounts under which a Third-Party Payor is the Account Debtor (other
than Governmental Receivables) are remitted.
"Non-Governmental Receivables" means the Accounts which are not
Governmental Receivables.
"Notification Letter" means a written notification from Princeton II to
Third-Party Payors informing such Third-Party Payors that all proceeds due
under Princeton II's Accounts are to be remitted to the Non-Governmental
Lockbox Account or the Governmental Lockbox Account, as the case may be,
substantially in a form acceptable to counsel for Company.
1.3 Collection of Governmental Receivables. With respect to payments on
Governmental Receivables, at the request and option of Company, Princeton II
agrees that the following procedures shall apply:
(a) Princeton II shall enter into a Lockbox Agreement applicable to
Governmental Receivables in a form acceptable to counsel for Company and
reasonably acceptable to Princeton II and establish a Governmental Lockbox
Account. Governmental Lockbox Account shall be an account in the name of
Princeton II. All payments in respect of Princeton II's Governmental Receivables
are to be made directly to such account. In the event Company exercises this
option, Princeton II shall instruct each Account Debtor in respect of Princeton
II's Governmental Receivables to remit all such payments directly to such
Governmental Lockbox Account pursuant to a Notification Letter. In addition,
Princeton II shall attach written instructions to each invoice representing such
Governmental Receivable generated subsequent to the date of this Agreement
instructing such Third-Party Payor or Account Debtor that payment under such
invoice is to be paid to the Governmental Lockbox Account. Princeton II agrees
that it shall not deposit any funds other than payments on Governmental
Receivables into, nor make any withdrawals from, the Governmental Lockbox
Account without the prior written consent of Company. Princeton II further
agrees that it shall not during the term of this Agreement terminate, modify or
amend in any manner the Lockbox Agreement applicable to the Governmental Lockbox
Account.
(b) In accordance with the Lockbox Agreement pertaining to Governmental
Receivables, Princeton II shall instruct the Collecting Bank to transfer
automatically all amounts deposited in Governmental Lockbox Account constituting
good funds to Company's Main Account. Princeton II shall have no right or
interest in the Main Account. Princeton II shall not, so long as any purchased
Account remains unpaid, change or cancel such automatic transfer order at any
time, or, without the prior written consent of Company, change either the
identity of Governmental Lockbox Account or the instructions to each Account
Debtor on the related Governmental Receivable to make its payments to such
account. Any such action shall be considered a breach of this Agreement for
which Company shall be entitled to all remedies at law and in equity, including
obtaining an injunction.
(c) Princeton II will cooperate with Company and its agents in the
identification of sums deposited into Governmental Lockbox Account, which
cooperation shall continue until all purchased Accounts sold hereunder have been
collected.
8.3.6.-2
<PAGE>
(d) Princeton II agrees to pay, on demand, a finance charge equal to the
Finance Charge Rate, on any payment on a Governmental Receivable received by
Princeton II that is not deposited in Governmental Lockbox Account within
forty-eight (48) hours after receipt by Princeton II.
1.4 Collection of Non-Governmental Receivables. With respect to payments
on Non-Governmental Receivables, if requested by Company and at Company's
option, Princeton II agrees that the following procedures shall apply:
(a) Prior to the sale of any Non-Governmental Receivable hereunder,
Company, the Collecting Bank and Lender (if requested by Lender) shall enter
into a Lockbox Agreement applicable to Non-Governmental Receivables in a form
acceptable to counsel for Company and Company shall establish Non-Governmental
Lockbox Account. The Non-Governmental Lockbox Account shall be an account in the
name of Company. All payments in respect of Princeton II's Non-Governmental
Receivables are to be made directly to such account. If Company exercises its
option herein, at request of Company, Princeton II shall instruct each Account
Debtor in respect of Princeton II's Non-Governmental Receivables to remit all
such payments directly to such Non-Governmental Lockbox Account pursuant to a
Notification Letter. In addition, Princeton II shall attach written instructions
to each invoice representing such Non-Governmental Receivable generated
subsequent to the date of this Agreement instructing such Third-Party Payor or
Account Debtor that payment under such invoice is to be paid to the
Non-Governmental Lockbox Account. Princeton II agrees that it shall not deposit
any funds other than Non-Governmental Receivables into, nor make any withdrawals
from, the Non-Governmental Lockbox Account without the prior written consent of
Company. Princeton II further agrees that it shall not during the term of this
Agreement terminate, modify or amend in any manner the Lockbox Agreement
applicable to the Non-Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to
Non-Governmental Receivables, Company shall instruct the Collecting Bank to
transfer automatically all amounts deposited in the Non-Governmental Lockbox
Account constituting good funds to Company's Main Account. Princeton II shall
have no right or interest in the Non-Governmental Lockbox Account nor to the
Main Account and such accounts shall be in the name of and under the control of
Company. Princeton II shall not, so long as any purchased Account remains
unpaid, and in any event, during the term of this Agreement, at any time, or,
without the prior written consent of Company, change the instructions to each
Account Debtor on the related Non-Governmental Receivable to make its payments
to such account. Any such action shall be considered a breach of this Agreement
for which Company shall be entitled to all remedies at law and in equity,
including obtaining an injunction.
(c) Princeton II will cooperate with Company and its agents in the
identification of sums deposited into Non-Governmental Lockbox Account, which
cooperation shall continue until all purchased Accounts sold hereunder have been
collected.
(d) Princeton II agrees to pay, on demand, a finance charge equal to the
Finance Charge Rate, on any Non-Governmental Receivable received by Princeton II
that is not deposited in NonGovernmental Lockbox Account within forty-eight (48)
hours after receipt by Princeton II.
8.3.6.-3
<PAGE>
1.5 Procedures Without Lockbox. In the event that Company elects to forego
the procedures established in Sections 1.3 and 1.4, Princeton II shall instruct
the Collecting Bank to transfer automatically all amounts constituting good
funds in the account or accounts of Princeton II established for the collection
of Governmental Receivables and Non-Governmental Receivables to Company's Main
Account at _____________ __________, ____________________________, Account
______________ (the "Main Account") pursuant to a standing order in a form
acceptable to Company's legal counsel. Princeton II shall have no right or
interest in Company's Main Account and such account shall be in the name of and
under the control of Company. Princeton II shall not, so long as any purchased
account remains unpaid, change or cancel such standing order at any time, or,
without the prior written consent of Company, change the instructions to each
Account Debtor on each Governmental Receivable and Non-Governmental Receivable
to make its payments to such account. Any such action shall be considered a
breach of this Agreement for which Company shall be entitled to all remedies at
law and in equity, including obtaining an injunction.
1.6 Misdirected Payments. (a) If after the date of this Agreement, an
Account Debtor shall make payment of a purchased Account to a location other
than is provided in the Notification Letter or Princeton II otherwise receives
payments on Accounts that are purchased by Company under the terms of this
Agreement ("Misdirected Payments"), Princeton II (at its own cost and expense)
shall promptly take all necessary steps to effect collection of such Misdirected
Payment from any other party claiming an interest therein or having possession
thereof and (i) hold such payment in trust for Company, (ii) segregate such
payment, (iii) use its best efforts not to commingle such payment with Princeton
II's own funds or other assets, and (iv) deliver such payment no later than
forty-eight (48) hours from the day of receipt to the Governmental Lockbox
Account or the Non-Governmental Lockbox Account, as applicable.
(b) Princeton II agrees to pay, on demand, the Finance Charge Rate on any
Misdirected Payment received by Princeton II that is not deposited in the
Company Main Account within forty-eight (48) hours after receipt by Princeton
II.
8.3.6.-4
<PAGE>
EXHIBIT 11
NON-COMPETITION
A. Princeton II and each of the Physician Owners agree and covenant that,
during the term of this Agreement and for a period of thirty-six (36) months
after termination of this Agreement (other than a termination pursuant to
Section 11.3.1 through 11.3.3, inclusive, or Section 11.5, of the Service
Agreement). Princeton II and/or the Physician Owner(s), as applicable, shall
not, either directly as a partner, employer, agent, independent contractor,
employee or indirectly through a corporation, partnership, affiliate, subsidiary
or otherwise:
(i) Establish, operate or provide professional medical services at
any medical office, clinic or other health care facility at any location
within seventy-five (75) miles of (i) the Main Office location; (ii) any
of the Satellite Offices; or (iii) any location at which Company provides
services to any practice at the time of such termination;
(ii) Subject to the provisions of paragraph G below, publicly
announce or offer (by any method) to provide professional medical services
at any medical office, clinic or other health care facility at any
location within seventy-five (75) miles during the first five (5) years of
the term of this Agreement or fifty (50) miles thereafter of (i) the Main
Office; (ii) any of the Satellite Offices; or (iii) any location at which
Company provides services to any practice at the time of such termination;
(iii) Solicit, induce or attempt to induce, in connection with any
business competitive with that being serviced by Company, patients of any
physician (including Princeton II and/or the Physician Owner(s))
associated or affiliated with Company to leave the care of physicians
associated or affiliated with Company; or
(iv) Solicit, induce or attempt to induce any employee, consultant
or other persons associated or affiliated with Company or any Affiliate of
Company to leave the employment of, or to discontinue their association
with, Company or such Affiliate of Company.
B. If Princeton II and/or the Physician Owner(s) violate the covenants set
forth in paragraph A of this Exhibit 11, then the duration of the restrictions
contained in paragraph A shall be extended an additional month for each month
during which such violation occurred but was not discovered by Company,
beginning upon the date that Company learns of the violation and so notifies
Princeton II and/or the Physician Owners in writing.
C. Princeton II and/or the Physician Owner(s) acknowledge and agree that
the covenants contained in this Exhibit 11 are necessary to protect the business
and goodwill of Company and that a breach of these covenants will result in
irreparable harm and continuing damage to Company. As a result, Princeton II
and/or the Physician Owner(s) agree that if Princeton II and/or the Physician
Owner(s) breach or threaten to breach these covenants, Company shall be entitled
to specific performance and/or injunctive or other equitable relief in order to
prevent the continuation of such
11-1
<PAGE>
harm, as well as money damages. Princeton II and/or the Physician Owner(s) waive
any requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief.
D. Princeton II and the Physician Owner(s) acknowledge and agree that if
Princeton II and/or the Physician Owner(s) breach the covenants contained in
this Exhibit 11 and Company is unable for any reason to obtain a restraining
order from a court of competent jurisdiction within thirty (30) days after
application to enjoin the breach by Princeton II and/or the Physician Owner(s),
it will be difficult to calculate the precise amount of Company's damages. As a
result, the parties have determined that, in the event of such a breach,
Company's damages shall be equal to 300% of the total amount of Professional
Service Revenues attributable to Princeton II and/or the applicable Physician
Owner(s) during the twelve (12) months prior to the termination of the
Agreement.
E. The parties have attempted to limit the provisions of this Exhibit 11
only to the extent necessary to protect each party's interests. However, the
parties hereby agree that, in the event that any provision, section or
subsection of this Exhibit 11 is adjudged by any court of competent jurisdiction
to be void or unenforceable, in whole or part, such court shall modify and
enforce any such provision, section or subsection to the extent that it believes
to be reasonable under the circumstances.
F. In the event that the Service Agreement has been in effect for at least
five (5) years, a Physician Owner may buy-out the noncompetition restriction
applicable to him or her by paying to Company an amount computed as follows:
(A) the excess, if any, of: (i) the appreciation in value of the Company
common stock held by the terminating Physician Owner (either on shares held
directly or on shares held indirectly by a related permissible transferee) and
accrued between the dare of the Exchange and the date of termination of
employment, net of the estimated federal and state income tax liability
associated with such gains, determined on the basis of the highest marginal
aggregate federal and state income tax rates applicable to capital gains in the
year of termination with respect to any shares held on the comparable tax rates
in effect for the year of sale, as applicable; over
(ii) the terminating Physician Owner's proportionate share (based on the
number of shares of Company common stock received in the Exchange by the
terminating Physician Owner relative to the other Princeton II Physician Owners)
of aggregate service fees paid or payable to Company between the date of the
Exchange and the date of termination, net of the estimated federal and state
income tax liability that such Physician Owner would have incurred had he or she
received such service fees directly as compensation, determined on the basis of
the highest marginal aggregate federal and state income tax rates applicable to
ordinary income in each year of payment of such service fees, as applicable;
plus
(B) one-third of the aggregate value of the Company common stock received
by the terminating Physician Owner in the Exchange, determined on the basis of
the value of such shares at the time of the Exchange; provided, however, that
if, at the time of termination, the fair market value of each share of the
Company common stock is less than one-third (1/3) of the fair market value of
such share at the time
11-2
<PAGE>
of the Exchange, then the maximum amount payable to Company by the terminating
Physician Owner to buy out the noncompetition restriction under this Paragraph F
shall not exceed the sum of the aggregate value of the Company common stock
still held by the terminating Physician Owner plus the amount of any proceeds
realized by the terminating Physician Owner from any prior sale of such stock,
net of the estimated federal and state income tax liability that would be
associated with a sale of any such shares still held and any such tax liability
associated with previous sales of such shares, determined on the basis of the
highest marginal aggregate federal and state income tax rates applicable to
capital gains in the year of termination with respect to any shares held on such
date of termination, and for any shares previously sold, using the comparable
tax rates in effect for the year of sale.
The terminating Physician Owner may pay the amount owed by transferring to
Company an amount of Company common stock having a fair market value equal to
the amount owed or pay to Company cash in the amount owed (or a combination of
cash and common stock). The above references to Company common stock (except for
the immediately pre ceding sentence) shall not include any Company common stock
purchased for cash or acquired pursuant to the conversion of the Company's
convertible debentures.
G. Upon the termination of this Agreement, the Policy Board shall have the
authority to modify the terms of the restrictive covenants, including but not
limited to the mileage radius limitations set forth above in paragraph A. In the
event that the individuals representing Princeton II or Company, as the case may
be, on the Policy Board can reasonably demonstrate that a modification to the
restrictive covenant will not have a material adverse effect on Company's or
Princeton's practice operations, earnings or cash flow, then the individuals
representing Company or Princeton II, as the case may be, shall consent to the
proposed modification.
H. The foregoing restrictive covenant shall not limit or prevent a
Physician Employee/Physician Owner from serving in part-time academic positions,
working as an expert witness, or providing services for the Hospital for Special
Services, New York, New York, in a manner consistent with past practices.
11-3
<PAGE>
SERVICE AGREEMENT
BY AND BETWEEN
TOC SPECIALISTS, P.L.,
(d/b/a Tallahassee Orthopedic Clinic)
TOC SERVICES, INC.
(f/k/a Tallahassee Orthopedic Clinic, P.A.)
AND
Greg A. Alexander, M.D.
David C. Berg, M.D.
Richard E. Blackburn, M.D.
Donald Dewey, M.D.
Mark E. Fahey, M.D.
Tom C. Haney, M.D.
William D. Henderson, Jr., M.D.
Steve E. Jordan, M.D.
J. Rick Lyon, M.D.
Kris D. Stowers, M.D.
Robert L. Thornberry, M.D.
Billy C. Weinstein, M.D.
Charles H. Wingo, M.D.
Dated as of November 12, 1996
<PAGE>
TABLE OF CONTENTS Page
----
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship........................................ 1
1.2. Responsibilities of the Parties................................. 2
1.3. TOC Matters..................................................... 2
1.4. Patient Referrals............................................... 2
1.5. Professional Judgment........................................... 2
ARTICLE II.
DEFINITIONS
2.1. Definitions..................................................... 2
ARTICLE III.
PRACTICE OFFICES FURNISHINGS, EQUIPMENT AND TRADE NAME
TO BE PROVIDED BY COMPANY
3.1. Practice Offices................................................ 7
3.2. Use of Practice Offices......................................... 8
3.3. Furniture, Fixtures and Equipment............................... 8
3.4. Tradename....................................................... 8
4.1. Formation and Operation of the Policy Board..................... 8
4.2. Duties and Responsibilities of the Policy Board................. 8
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions............................. 9
5.2. Financial Planning and Goals................................... 10
5.3. Audits and Financial Statements................................ 10
5.4. Inventory and Supplies......................................... 10
5.5. Management Services and Administration......................... 10
5.6. Personnel...................................................... 13
5.7. Events Excusing Performance.................................... 13
5.8. Compliance with Law and Business Standards..................... 13
5.9. Quality Assurance.............................................. 13
5.10. New Medical Services and Additional Practice Offices........... 13
5.11. Collection of Certain Patient Receipts and Payment
of Clinic Expenses ............................................ 14
i
<PAGE>
Page
----
5.12. Other TOC Accounts............................................. 14
5.13. Discounts...................................................... 14
5.14 MRI Services................................................... 14
ARTICLE VI.
OBLIGATIONS OF TOC AND PHYSICIAN OWNERS
6.1. Professional Services.......................................... 15
6.2. Medical Practice............................................... 15
6.3. Employment of Physician Employees.............................. 15
6.4. Professional Dues and Education Expenses....................... 16
6.5. Professional Insurance Eligibility............................. 16
6.6. Events Excusing Performance.................................... 16
6.7. Fees for Professional Services................................. 16
6.8. Peer Review.................................................... 16
6.9. TOC Employee Benefit Plans..................................... 17
6.10. Credentialing.................................................. 18
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
7.1. Exclusive Arrangement.......................................... 19
7.2. Restrictive Covenants.......................................... 19
7.3. Restrictive Covenants By Future Physician Employees............ 20
7.4. Rights of Company.............................................. 21
7.5. Enforcement.................................................... 21
7.6. Modification of Restrictive Covenants.......................... 21
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees................................................... 22
8.2. Payment of Service Fee......................................... 25
8.3. Purchase of Accounts Receivable................................ 26
8.4. Payment of Clinic Expenses..................................... 27
ARTICLE IX.
RECORDS
9.1. Patient Records................................................ 27
9.2. Records Owned by Company....................................... 27
ii
<PAGE>
Page
----
9.3. Access to Records.............................................. 28
9.4. Government Access to Records................................... 28
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by TOC.............................. 28
10.2. Insurance to be Maintained by Company.......................... 28
10.3. Additional Insureds............................................ 29
10.4. Indemnification................................................ 29
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement.............................................. 30
11.2. Extended Term.................................................. 30
11.3. Termination by TOC for Cause................................... 30
11.4. Termination by Company for Cause............................... 31
11.5. Early Termination by TOC or Company Without Cause Upon
Eighteenth (18th) Month Anniversary of Agreement............... 32
11.6. Consequences of TOC Termination................................ 32
11.7. Closing of Purchase by TOC and Effective Date of Termination... 33
11.8. Tail Policy.................................................... 33
11.9. Restrictions Applicable to Physician Owners.................... 33
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds...................................... 36
12.2. Temporary Space................................................ 36
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF TOC AND PHYSICIAN OWNERS
13.1. Validity....................................................... 37
13.2. Litigation..................................................... 37
13.3. Permits........................................................ 37
13.4. Authority...................................................... 37
13.5. Compliance with Applicable Law................................. 38
13.6. Health Care Compliance......................................... 38
13.7. Fraud and Abuse................................................ 38
iii
<PAGE>
Page
----
13.8. TOC Compliance................................................. 38
13.9. Rates and Reimbursement Policies............................... 39
13.10.Accounts Receivable............................................ 39
13.11.Full Disclosure................................................ 41
13.12.Exhibits....................................................... 41
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
14.1. Organization................................................... 42
14.2. Authority...................................................... 42
14.3. Absence of Litigation.......................................... 42
14.4. Transactions with Affiliates................................... 42
ARTICLE XV.
COVENANTS OF TOC AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements................... 42
15.2. Necessary Authorizations/Assignment of Licenses and Permit..... 42
15.3. Transaction with Affiliates.................................... 43
15.4. Compliance with All Laws....................................... 43
15.5. Third-Party Payor Programs..................................... 43
15.6. Change in Business or Credit and Collection Policy............. 43
15.7. Treatment of Accounts Receivable............................... 43
15.8. Security Interest.............................................. 44
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment..................................................... 44
16.2. Whole Agreement; Modification.................................. 45
16.3. Notices........................................................ 45
16.4. Binding on Successors.......................................... 46
16.5. Waiver of Provisions........................................... 46
16.6. Governing Law.................................................. 46
16.7. No Practice of Medicine........................................ 46
16.8. Severability................................................... 46
16.9. Additional Documents........................................... 46
16.10.Attorneys' Fees................................................ 46
16.11.Time is of the Essence......................................... 46
16.12.Confidentiality................................................ 46
iv
<PAGE>
Page
----
16.13.Contract Modifications for Prospective Legal Events............ 47
16.14.Remedies Cumulative............................................ 47
16.15.Language Construction.......................................... 47
16.16.No Obligation to Third Parties................................. 47
16.17.Communications................................................. 47
EXHIBIT 3.1 LEASE AGREEMENT................................... 3.1-1
EXHIBIT 4.1 POLICY BOARD GOVERNANCE RULES..................... 4.1-1
EXHIBIT 6.9.1 TOC PLAN........................................ 6.9.1-1
EXHIBIT 8.1.8(d) EXCLUDED EXPENSES........................... 8.1.8.(d)-1
EXHIBIT 8.3.6 ACCOUNTS RECEIVABLE COLLECTION.................. 8.3.6-1
EXHIBIT 11 NON-COMPETITION
v
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") dated as of November 12, 1996, by and
between TOC SERVICES, INC. (f/k/a Tallahassee Orthopedic Clinic, P.A.), a
Florida corporation ("Company"), TOC SPECIALISTS, P.L. (d/b/a Tallahassee
Orthopaedic Clinic), a Florida professional limited liability company, ("TOC")
and GREG A. ALEXANDER, M.D., DAVID C. BERG, M.D., RICHARD E. BLACKBURN, M.D.,
DONALD DEWEY, M.D., MARK E. FAHEY, M.D., TOM C. HANEY, M.D., WILLIAM D.
HENDERSON, JR., M.D., STEVE E. JORDAN, M.D., J. RICK LYON, M.D., KRIS D.
STOWERS, M.D., ROBERT L. THORNBERRY, M.D., BILLY C. WEINSTEIN, M.D. AND CHARLES
H. WINGO, M.D ("Physician Owner[s]"), citizens and residents of Florida.
W I T N E S S E T H:
WHEREAS, Company has been formed to engage in the business of managing
medical clinics and providing support services to and furnishing orthopedic care
medical practices with the necessary equipment, personnel, supplies and support
staff; and
WHEREAS, TOC and Physician Owners desire to obtain the services of Company
in performing such management functions so as to permit TOC and Physician Owners
to devote TOC's and Physician Owners' efforts on a concentrated and continuous
basis to the rendering of medical services to patients.
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements herein set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is agreed by the parties as follows:
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship. TOC, Physician Owners and Company intend to
act and perform as independent contractors, and the provisions hereof are not
intended to create any partnership, joint venture, agency or employment
relationship between the parties. Notwithstanding the authority granted to
Company herein, Company, TOC, and Physician Owners agree that TOC and Physician
Owners shall retain all authority to direct the medical, professional, and
ethical aspects of TOC's and Physician Owners' medical practice including but
not limited to the admission of new patients and providing care to indigent
patients. Each party shall be solely responsible for and shall comply with all
state and federal laws pertaining to employment taxes, income withholding,
unemployment compensation contributions and other employment related statutes
applicable to that party.
<PAGE>
1.2. Responsibilities of the Parties. As more specifically set forth
herein, Company shall provide TOC with offices and facilities, equipment,
supplies, certain support personnel, management and financial advisory services.
As more specifically set forth herein, TOC shall be responsible for the
recruitment and hiring of physicians and all issues related to the professional
practice of medicine, medical practice patterns and documentation thereof.
Notwithstanding anything herein to the contrary, no "designated health service,"
as defined in 42 U.S.C. ss. 1395nn, including any amendments or successors
thereto, shall be provided by Company under this Agreement.
1.3. TOC Matters. Matters involving the internal agreements and finances
of TOC, including the disposition of professional fee income, tax planning, and
investment planning (and expenses relating solely to these internal business
matters) shall remain the sole responsibility of TOC.
1.4. Patient Referrals. The parties agree that the benefits to TOC and
Physician Owners hereunder do not require, are not payment for, and are not in
any way contingent upon the admission, referral or any other arrangement for the
provision of any item or service offered by Company to any of TOC's patients in
any facility operated by Company.
1.5. Professional Judgment. Each of the parties acknowledges and agrees
that the terms and conditions of this Agreement pertain to and control the
business and financial relationship between and among the parties but do not
pertain to and do not control the professional and clinical relationship between
and among TOC, Physician Employees, TOC Employees, and TOC's patients. Nothing
in this Agreement shall be construed to alter or in any way affect the legal,
ethical, and professional relationship between and among TOC, Physician Owners,
Physician Employees, and TOC's patients, nor shall anything contained in this
Agreement abrogate any right, privilege, or obligation arising out of or
applicable to the physician-patient relationship.
ARTICLE II.
DEFINITIONS
2.1. Definitions. For the purpose of this Agreement, the following
definitions shall apply:
"Account Debtor" means an account debtor or any other Person obligated in
respect of an Account Receivable.
"Accounts Receivable" means, with respect to TOC and except as noted
below, all accounts and any and all rights to payment of money or other forms of
consideration of any kind now owned or hereafter acquired (whether classified
under the Uniform Commercial Code as accounts, chattel paper, general
intangibles or otherwise) for goods sold or leased or for services rendered by
TOC, including, but not limited to, accounts receivable, proceeds of any letters
of credit naming TOC as beneficiary, chattel paper, insurance proceeds, contract
rights, notes, drafts, instruments, documents, acceptances and all other debts,
obligations and liabilities in whatever form from any other Person;
- 2 -
<PAGE>
provided that, cash, checks and credit card purchases are not included in the
definition of Accounts Receivable.
Accounts Receivable do not include any receivables arising from facility
fees earned from the use and operation of TOC's magnetic resonating imaging
facilities. All such receivables shall be referred to as "MRI Receivables", and
all revenue resulting from such activities shall be deemed "MRI Revenue."
Accounts Receivable shall also not include (i) any facility fees arising out of
TOC's direct or indirect ownership interest in Tallahassee Orthopaedic Surgery
Center, (ii) any revenues or fees generated by any Physician Owner for services
provided outside of TOC, including medical directorships, research and
development activities, sports affiliations and literary works, or (iii) any
revenues generated by any new medical service or additional practice office not
acquired by Company pursuant to Section 5.10 below.
"Affiliate" means, with respect to any Person, any entity which directly
or indirectly controls, is controlled by, or is under common control with, such
Person or any Subsidiary of such Person or any Person who is a director, officer
or partner of such Person or any Subsidiary of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to (a) vote ten percent (10%) or more of the securities having ordinary voting
power for the election of directors of such Person, or (b) direct or cause the
direction of management and policies of a business, whether through the
ownership of voting securities, by contract or otherwise and either alone or in
conjunction with others or any group.
"Applicable Law" means all applicable provisions of constitutions,
statutes, rules, regulations, ordinances and orders of all Governmental
Authorities and all orders and decrees of all courts, tribunals and arbitrators,
and shall include, without limitation, Health Care Law.
"Base Service Fee" shall equal [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxx]per year, payable in monthly payments of [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxx] in arrears on or before the 15th day of the following month.
"CHAMPUS" means the Civilian Health and Medical Program of the Uniformed
Services.
"Change in Control" shall mean any transaction pursuant to which Company
(a) consummates the sale of substantially all of the assets of Company to an
entity which is publicly traded in exchange for voting stock in such publicly
traded entity or (b) merges with a publicly traded corporation, entity or
corporation or entity controlled by a publicly traded corporation or entity in a
transaction where unrelated persons own at least fifty-one percent (51%) of the
issued and outstanding securities of the surviving entity or corporation
controlling the merged entity.
"Clinic Expenses" shall have the meaning as defined in Section 8.1.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
- 3 -
<PAGE>
"Company" shall mean TOC Services, Inc. a Florida corporation, together
with its permitted successors and assigns.
"Company Expenses" shall have the meaning as defined in Section 8.1.7.
"Designated Leased Employees" shall have the meaning as defined in Section
6.9.1.
"Disabled" or "Disability" shall mean that a Physician suffers from a
mental or physical condition resulting in such Physician Employee's inability to
perform the essential functions of his job as required by Section 6.1.1 (and as
may be described with greater specificity in written job descriptions prepared
and maintained by TOC and approved by the Policy Board) without significant risk
to the health or safety of others, even with such reasonable accommodation as
may be available under the circumstances, and the Policy Board may reasonably
anticipate that such Physician Employee will remain disabled for at least two
years following the commencement of such disability.
"Excluded Expenses" shall have the meaning as defined in Section 8.1.8.
"Fair Market Value" with respect to Company common stock means (i) the
average closing price for the Company common stock as reported on a securities
exchange or quoted on a national quotation system, if any, upon which the
Company common stock is traded or quoted or (ii) in the event Company's common
stock is not traded on any exchange or quoted on a national quotation system,
the fair market value of the Company common stock shall be determined by an
independent appraiser or investment banker selected by two (2) independent
appraisers or investment bankers (one (1) such firm selected by Company and one
(1) such firm selected by the Physician Owner or the Physician Owners as a group
(as the case may be)). Such valuation may include the consideration of discounts
for marketability, minority ownership and other discounts usual and customary in
the valuation process. Unless otherwise specified herein, the cost of any
appraisal shall be borne equally by Company and the Physician Owner or the
Physician Owners as a group (as the case may be).
"GAAP" shall mean generally accepted accounting principles as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession. For purposes of
this Agreement, GAAP shall be applied in a manner consistent with the historic
practices used by Company or TOC as applicable.
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, board, body, agency, bureau or entity or any arbitrator with
authority to bind a party at law.
"Governmental Receivables" means an Account Receivable of TOC which (i)
arises in the ordinary course of business of TOC, (ii) has as its Third-Party
Payor the United States of America
- 4 -
<PAGE>
or any state or any agency or instrumentality of the United States of America or
any state which makes any payments with respect to Medicare or Medicaid or with
respect to any other program (including CHAMPUS) established by federal or state
law, and (iii) is required by federal or state law to be paid or to be made to
TOC as a healthcare provider. Governmental Receivables shall not, however, refer
to amounts payable by private insurers under contract to provide benefits under
the Federal Employee Health Benefit Program.
"Governmental Rules and Regulations" shall have the meaning as defined in
Section 13.7.
"Health Care Law" means any Applicable Law regulating the acquisition,
construction, operation, maintenance or management of a health care practice,
facility, provider or payor, including without limitation, 42 U.S.C. ss.1395nn
and 42 U.S.C. ss. 1320a-7b.
"Lease" shall mean the Leases and the New Leases, including all amendments
thereto, described in Section 3.1 hereof.
"Leased Premises" shall mean the real property described in the Lease.
"Lender" shall have the meaning as defined in Section 7.2.1.
"Main Office" shall mean the Leased Premises at 3334 Capital Medical
Blvd., Tallahassee, Florida 32300 and all equipment and facilities owned or
operated by Company and utilized by TOC or any of its employees within said
Leased Premises.
"Medicaid" means any state program pursuant to which health care providers
are paid or reimbursed for care given or goods afforded to indigent persons and
administered pursuant to a plan approved by the Health Care Financing
Administration under Title XIX of the Social Security Act.
"Medicare" means any medical program established under Title XVIII of the
Social Security Act and administered by the Health Care Financing
Administration.
"Merger" shall mean the acquisition of Company pursuant to the Merger
Agreement.
"Merger Agreement" means that certain Merger Agreement, dated November 12,
1996 by and between Company, Special Care Network, Inc. ("SCN") and Physician
Owners.
"Merger A/R" means the accounts receivable acquired from Company by SCN
pursuant to the Merger Agreement.
"Necessary Authorizations" means with respect to TOC, all certificates of
need, authorization, certifications, consents, approvals, permits, licenses,
notices, accreditations and exemptions, filings and registrations, and reports
required by Applicable Law, including, without limitation, Health Care
- 5 -
<PAGE>
Law, which are required, necessary or reasonably useful to the lawful ownership
and operation of TOC's business.
"New Lease" shall have the meaning as defined in Section 3.1.
"Office Locations" shall have the meaning as defined in Section 3.1.
"Person" shall mean an individual, corporation, partnership, association,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof including, without limitation, Third-Party Payors.
"Physician Employees" shall mean the term as defined in Section 8.1.6.
"Physician Extender Employees" shall mean the term as defined in Section
8.1.5.
"Physician Owners" shall mean those Physician Employees who own an
interest, directly or indirectly, in the equity of TOC.
"Plans" shall have the meaning as defined in Section 6.9.1.
"Policy Board" shall mean a board established pursuant to Section 4.1.
"Practice Net Revenue" shall mean the term as defined in Section 8.1.1.
"Practice Offices" shall mean (i) the Main Office and (ii) the Satellite
Offices.
"Professional Services Revenue" shall mean the term as defined in Section
8.1.2.
"Purchase Price" shall mean the term as defined in Section 8.4.2.
"Purchased A/R" means, with respect to TOC, the Accounts Receivable
purchased pursuant to Section 8.3 of this Agreement.
"TOC Operating Account" shall mean that certain operating account
established by TOC at a bank selected by TOC in TOC's sole discretion as more
fully described in Section 5.11.
"TOC Plan" shall mean the term as defined in Section 6.9.1.
"Satellite Office" shall mean the location at which one or more of TOC's
employees provide services as described on Exhibit 2.1 and all equipment and
facilities owned or operated by Company and utilized by any of said persons at
such location.
"Settlement Date" shall mean the term as defined in Section 8.3.3.
- 6 -
<PAGE>
"Service Agreement" means this Agreement.
"Subsidiary" means a Person of which an aggregate of 51% or more of the
voting stock of any class or classes or 51% or more of other voting or equity
interests is owned of record or beneficially by another Person, or by one or
more Subsidiaries of such Person.
"Substitute Physician(s)" shall mean the term as defined in Section
11.9.1(b).
"Technical Employees" shall mean the term as defined in Section 8.1.4.
"Third-Party Payors" means each Person which makes payment under a
Third-Party Payor Program, and each Person which administers a Third-Party Payor
Program.
"Third-Party Payor Programs" means Medicare, Medicaid, CHAMPUS, insurance
provided by Blue Cross and/or Blue Shield, managed care plans, and any other
private health care insurance programs and employee assistance programs as well
as any future similar programs.
ARTICLE III.
PRACTICE OFFICES FURNISHINGS, EQUIPMENT AND TRADE NAME
TO BE PROVIDED BY COMPANY
3.1. Practice Offices. (a) Company has leasehold interests as lessee
arising out of the leases described on Exhibit 3.1 (the "Leases") and relating
to certain offices and locations which comprise the principal location of TOC's
administrative and medical offices ("Main Office") and a satellite office
("Satellite Office") as identified on Exhibit 3.1 (collectively the "Office
Locations"). Copies of the Leases are attached hereto as Exhibit 3.1.
(b) Company agrees to provide offices and facilities necessary and
suitable for an orthopedic, neurology and family medicine medical practice at
the Office Locations (or at comparable facilities on the termination of the
Leases) to TOC. If any Leases are terminated by their terms, Company shall enter
into a lease of a new facility comparable to the Office Location whose lease is
terminated (the "New Lease") with the consent of the Policy Board. Company shall
not enter into a lease for a new Main Office or Satellite Office for TOC without
the approval of the Policy Board.
(c) TOC agrees to comply with all terms and provisions of the Leases.
3.2. Use of Practice Offices. Neither Company nor TOC shall use or occupy
the Main Office or Satellite Offices for any purpose which is prohibited by the
Leases, by this Agreement or which is directly or indirectly forbidden by law,
ordinance, or governmental or municipal regulation or order, or which may be
dangerous to life, limb or property, or which would increase the fire and
extending coverage insurance rate in any Practice Office or contents.
- 7 -
<PAGE>
3.3. Furniture, Fixtures and Equipment. Company agrees to provide all
furniture, furnishings, fixtures, medical and other equipment necessary and
suitable for an orthopaedic, neurology and family medicine medical practice at
each Office Location.
3.4. Tradename. Company shall license to TOC during the term of this
Agreement the trade name "Tallahassee Orthopaedic Clinic."
ARTICLE IV.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board. The parties shall
establish a Policy Board which shall be responsible for developing management
and administrative policies for the overall operation of any Practice Office.
The Policy Board shall consist of six (6) members. Company shall designate, in
its sole discretion, three (3) members of the Policy Board. TOC shall designate,
in TOC's sole discretion, three (3) members of the Policy Board. Any matter
decided by a majority of the members of the Policy Board shall constitute the
decision of the Policy Board with respect to the matter. Governance issues
affecting the Policy Board shall be addressed in accordance with the rules set
forth in Exhibit 4.1.
4.2. Duties and Responsibilities of the Policy Board. The Policy Board
shall have the following duties and obligations:
4.2.1. Capital Improvements and Expansion. The Policy Board shall review
all requests by TOC for any renovations, capital improvements, expansions and
new and replacement equipment purchases or leases. The Policy Board shall
determine whether such expenditures are appropriate based upon economic
feasibility, physician support, productivity, market conditions, and the annual
budget formulated pursuant to this Agreement. If the Policy Board determines
that the acquisition of additional or replacement equipment or facilities is
appropriate, then Company shall use its best efforts to arrange for the
financing and acquisition of the property.
4.2.2. Annual Budgets. All annual capital and operating budgets prepared
by Company in accordance with Section 5.2 of this Agreement, shall be subject to
the prior review and approval of the Policy Board.
4.2.3. Marketing. All advertising and other marketing of the services
performed at any Practice Office shall be subject to the prior review and
approval of the Policy Board.
4.2.4. Patient Fees; Collection Policies. As a part of the annual
operating budget in consultation with TOC and Company, to the extent allowed by
Applicable Law, the Policy Board shall review and advise TOC as to an
appropriate fee schedule for all physician and ancillary services rendered by
TOC, which fee schedule shall ultimately be determined by TOC in TOC's sole
discretion. In addition, the Policy Board shall approve the credit collection
policies of TOC.
- 8 -
<PAGE>
4.2.5. TOC and Payor Relationships. Decisions regarding the establishment
or maintenance of relationships with institutional health care providers and
payors, or with parties under arrangements for setting up new Satellite Offices
of TOC in the future, shall be made by the Policy Board in consultation with
TOC.
4.2.6. Strategic Planning. The Policy Board shall develop long-term
strategic planning objectives.
4.2.7. Capital Expenditures. The Policy Board shall determine the priority
of major capital expenditures including the procurement of any new or additional
office space for Practice Offices.
4.2.8. Restrictive Covenants for Physician. The approval of the Policy
Board shall be required for any variations to the restrictive covenants
prescribed for any physician employment contract as set forth in Article VII or
Exhibit 11 of this Agreement.
4.2.9. Grievance Referrals. The Policy Board shall consider and make final
decisions regarding grievances pertaining to matters not specifically addressed
in this Agreement as referred to it by the Physician Employees.
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions. Company shall manage the
day-to-day operations of the Main Practice Office and any Satellite Offices in a
business-like manner. Company shall provide or arrange for the services set
forth in this Article V, the cost of all of which shall be included in Clinic
Expenses. Company is hereby expressly authorized to perform its services
hereunder in whatever manner it deems reasonably appropriate to meet the
day-to-day requirements of Practice Office operations in accordance with the
general standards approved by the Policy Board and to maintain the lease
agreements for each of the Practice Offices, including, without limitation,
performance of some of the business office functions at locations other than the
Main Practice Office. TOC will not act in a manner which would prevent Company
from efficiently managing the day-to-day operations of the Main Practice Office
and maintaining the operations of the Satellite Offices in a business-like
manner.
5.2. Financial Planning and Goals. Subject to Section 4.2.2. of this
Agreement, Company shall prepare annual capital and operating budgets reflecting
in reasonable detail anticipated revenues and expenses, and sources and uses of
capital for growth in TOC's practice and medical services rendered at the
Practice Office. Said budgets shall reflect amounts, if any, allocated for
capital purchases, improvements, expansion and any new leasing arrangements.
Thereafter, but no later than thirty (30) days prior to the end of the fiscal
year, the Policy Board shall approve a budget for the upcoming fiscal year. The
budget, as described in Section 4.2.2., shall be binding upon Company and TOC.
Company shall consult with TOC and the Policy Board in the preparation of all
budgets.
- 9 -
<PAGE>
Company and TOC acknowledge and agree that once a budget has been approved,
neither Company nor TOC shall make expenditures or incur expenses in excess of
budgeted amounts without the prior approval of the Policy Board.
5.3. Audits and Financial Statements. Company shall prepare annual
financial statements for the operations of TOC and, in its sole discretion, may
cause the financial statements to be audited by a certified public accountant
selected by Company. TOC shall cooperate fully in such audit. The cost of such
audit shall be included in Clinic Expenses. If Company elects to have the
financial statements audited by a certified public accountant with a big six
accounting firm, the resulting audited financial statements shall be binding on
TOC and Company. If Company elects not to have TOC's financial statements so
audited, TOC shall have the option to obtain such an audit, by a certified
public accountant with a mutually acceptable accounting firm. Company shall
fully cooperate in such audit. The cost of such audit shall be included in
Clinic Expenses. In such event, Company and TOC shall be bound by the resulting
audited financial statements. All parties shall be entitled to copies of any
information provided to or by the auditors by or to any party. Additionally,
Company shall prepare monthly unaudited financial statements containing a
balance sheet and statements of income from Practice Office operations, and such
other matters as TOC may reasonably request which shall be delivered to TOC
within thirty (30) business days after the close of each calendar month.
5.4. Inventory and Supplies. Except as limited by Section 5.11, Company
shall order and purchase inventory and supplies and such other ordinary,
necessary or appropriate materials which Company shall deem to be necessary in
the operation of the Practice Offices and which are requested by TOC and are
within the budget for the applicable fiscal period. Company shall not purchase
inventory, goods or supplies from any Affiliate of Company without approval of
the Policy Board and after full disclosure of all terms to the Policy Board.
5.5. Management Services and Administration.
5.5.1. TOC hereby appoints Company as TOC's sole and exclusive manager and
administrator of all day-to-day business functions. TOC agrees that the purpose
and intent of this Agreement is to relieve TOC and Physician Employees to the
maximum extent possible of the administrative, accounting, personnel and
business aspects of their practice, with Company assuming responsibility and
being given all necessary authority to perform these functions. Company agrees
that TOC and only TOC will perform the medical functions of TOC's practice.
Company will have no authority, directly or indirectly, to perform, and will not
perform, any medical function. Company may, however, advise TOC as to the
relationship between TOC's performance of medical functions and the overall
administrative and business functioning of TOC's practice. To the extent that a
Company employee assists Physician Employees in performing medical functions,
such employees shall be subject to the professional direction and supervision of
Physician Employees and in the performance of such medical functions shall not
be subject to any direction or control by, or liability to, Company, except as
may be specifically authorized by Company.
- 10 -
<PAGE>
5.5.2. Subject to the restrictions of any Health Care Law, Company shall,
on behalf of TOC, bill patients and collect the professional fees for medical
services rendered by TOC, any Physician Employee, any Technical Employee and any
Physician Extender Employee, regardless of when or where such services are
rendered. All billings for Physician Employee's services shall be made in the
name of and under the provider number of TOC. TOC hereby appoints Company to be
TOC's true and lawful attorney-in-fact, for the following purposes: (i) to bill
patients, insurers, healthcare plans, and other third-party payors on behalf of
patients in TOC's name and on TOC's behalf; (ii) to collect Accounts Receivable
resulting from such billing in TOC's name and on TOC's behalf; (iii) to receive
payments from insurance companies, prepayments from health care plans, and all
other Third-Party Payors; (iv) to take possession of and endorse in the name of
TOC (and/or in the name of an individual physician, such payment intended for
purpose of payment of a physician's bill) any notes, checks, money orders,
insurance payments and other instruments received in payment of Accounts
Receivable; and (v) to initiate legal proceedings in the name of TOC to collect
any accounts and monies owed to TOC or any Physician Employee, to enforce the
rights of TOC as creditors under any contract or in connection with the
rendering of any service, and to contest adjustments and denials by any
Governmental Authority (or its fiscal intermediaries) as Third-Party Payors.
Except for cash proceeds from the collection of Accounts Receivable purchased
from TOC by Company, Company shall deposit any cash receipts collected on behalf
of TOC into the TOC Operating Account described in Section 5.11.
5.5.3. Company shall design, supervise and maintain possession of all
files and records relating to the operation of TOC, including but not limited to
accounting, billing, patient medical records (which patient medical records
shall remain the property of TOC), and collection records. While the Company
shall maintain custody, patient medical records shall at all times be and remain
the property of TOC and shall be located at the Practice Offices so that they
are readily accessible for patient care. The Physician Employees shall have the
obligation to oversee the preparation and maintenance of patient medical
records, and to provide such medical information as shall be necessary and
appropriate to the records' clinical function and to sustain and ensure the
availability of Third-Party Payor reimbursement for services rendered. The
management of all files and records shall comply with applicable state and
federal statutes. Company shall preserve the confidentiality of patient medical
records and use information contained in such records only as permitted by law,
to the extent necessary to perform the services set forth herein.
5.5.4. Company shall supply to TOC necessary clerical, accounting,
bookkeeping and computer services, printing, postage and duplication services,
medical transcribing services and any other ordinary, necessary or appropriate
service for the operation of the Practice Offices.
5.5.5. Subject to the approval of the Policy Board, Company shall design
and implement an adequate and appropriate public relations program on behalf of
TOC, with appropriate emphasis on public awareness of the availability of
services at the Practice Offices. The public relations program shall be
conducted in compliance with Applicable Law and regulations governing
advertising by the
- 11 -
<PAGE>
medical profession and applicable canons of principles of professional ethics of
TOC and Physician Employees of TOC.
5.5.6. Company shall provide the data necessary for TOC to prepare TOC's
annual income tax returns. Company shall have no responsibility for the
preparation of TOC's federal or state income tax returns or the payment of such
income taxes. Company shall prepare or cause to be prepared on TOC's behalf,
necessary employment tax returns. TOC shall be obligated to pay any taxes due on
such employment tax returns with respect to the Physician Owners.
5.5.7. Company shall assist TOC in recruiting additional physicians,
carrying out such administrative functions as may be appropriate, such as
advertising for and identifying potential candidates, obtaining credentials, and
arranging interviews; provided, however, TOC shall interview and make the
ultimate decision as to the suitability of any physician or other professional
clinical employee to become employed and to remain associated with TOC. All
physicians recruited by Company and accepted by TOC shall be the sole employees
of TOC, to the extent such physicians are hired as employees.
5.5.8. Company shall negotiate managed care contracts on behalf of TOC and
shall administer all managed care contracts in which TOC participates. TOC, at
its discretion, shall have the right to enter into or reject such contracts
negotiated by Company.
5.5.9. TOC shall have the authority to arrange for legal and accounting
services relating to matters other than day-to-day management of TOC; such other
matters including but not limited to issues relating to TOC governance issues,
compensation of Physician Owners, and issues which arise between TOC and
Company; provided, however, such fees shall be considered Excluded Expenses.
5.5.10. Company shall provide for the proper cleanliness of the Leased
Premises, and maintenance and cleanliness of the equipment, furniture and
furnishings located upon such Leased Premises.
5.5.11. Upon receipt of dues, statements or license notices from the
Physician Employees, Company shall make payment for the cost of professional
licensure fees and board certification fees of physicians associated with TOC.
5.5.12. Company shall negotiate for and cause premiums to be paid with
respect to the insurance provided for in Section 10.1.
5.6. Personnel. After Company (or a subsidiary of Company) has obtained a
license from the Florida Department of Business and Professional Regulation to
offer staff leasing services pursuant to Chapter 402 of the Florida Statutes
Annotated (prior to Company having obtained such license, the employees
referenced in this sentence shall be employees of TOC), Company shall provide
non-physician professional support (administrative personnel, clerical,
secretarial, bookkeeping and collection personnel) reasonably necessary for the
conduct of the operations at the Practice Offices.
- 12 -
<PAGE>
Company shall determine and cause to be paid the salaries and fringe benefits of
all such personnel. Such personnel shall be employees of Company, with those
personnel performing patient care services subject to the professional direction
and supervision of Physician Employees. If TOC is dissatisfied with the services
of any person, TOC shall consult with Company. Company shall in good faith
determine whether the performance of that employee could be brought to
acceptable levels through counsel and assistance, or whether such employee
should be terminated. All of Company's obligations regarding staff shall be
governed by the overriding principle and goal of providing quality medical care.
Employee assignments shall be made to assure consistent and continued rendering
of quality medical support services and to ensure prompt availability and
accessibility of individual medical support staff to physicians in order to
develop constant, familiar and routine working relationships between individual
physicians and individual members of the medical support staff. If TOC disagrees
with an assignment, TOC may appeal such assignment to the Policy Board. Company
shall maintain established working relationships wherever possible and Company
shall make every effort consistent with sound business practices to honor the
specific requests of TOC with regard to the assignment of Company's employees.
5.7. Events Excusing Performance. Company shall not be liable to TOC or
Physician Owners for failure to perform any of the services required herein in
the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which Company has no control for so long as such
events continue, and for a reasonable period of time thereafter.
5.8. Compliance with Law and Business Standards. Company shall comply with
Applicable Law, including without limitation, Health Care Law, including without
limitation, federal, state, and local laws and regulations affecting billing and
reimbursement, referrals, patient privacy and confidentiality, and management of
hazardous materials and infectious waste. Company shall discharge its
obligations under this Agreement consistent with applicable business and
industry standards and practices.
5.9. Quality Assurance. Company shall assist TOC in fulfilling TOC's
obligations to patients to maintain professionally recognized quality of medical
and professional services.
5.10. New Medical Services and Additional Practice Offices. If TOC desires
to have a new medical service provided at any of the Practice Offices or desires
to establish a new clinic, a proposal of such service or the establishment of
such new clinic shall be submitted to the Policy Board. Should the Policy Board
approve the expansion of service or the establishment of such new clinic,
Company, at its option, shall have the exclusive right to provide services
necessary to support TOC in TOC's delivery of such new medical services at the
Practice Office or new clinic, as applicable; provided, however, if the type of
service is an ancillary service that would be improper under any rules,
regulations or laws for Company to offer to TOC patients, then Company shall not
have the option to provide such service. Should Company decline to provide the
necessary support service for the new service or new clinic, TOC shall be
entitled to perform such service at TOC's own expense and the revenues therefrom
shall not be included in the calculation of Company's service fees under Article
VIII of this Agreement; provided, however, that Company shall have the option to
assume
- 13 -
<PAGE>
performance of the necessary support services for providing such new service or
new clinic by buying out TOC's investment in the service, at an amount equal to
the greater of: (i) TOC's Book Value as of the date of such purchase of all of
the assets owned by TOC and used in connection with the operation of such new
service or new clinic, or (ii) an amount equal to TOC's net income from the
investment, based on the twelve (12) months' operations immediately preceding
the date of purchase (and if less than twelve (12) months of operations have
occurred the actual net income from the investment on an annualized basis)
multiplied by five (5). For purposes of this Section 5.10, Book Value and net
income shall be determined on the basis of GAAP.
5.11. Collection of Certain Patient Receipts and Payment of Clinic
Expenses. TOC agrees to establish and maintain a bank account, which shall be
referred to as the TOC Operating Account, for the purpose of (a) depositing
proceeds from the sale of TOC's Accounts Receivable pursuant to Section 8.3 and
(b) paying (i) any Service Fees owed pursuant to Article VIII of this Agreement,
(ii) expenses which are solely the obligation of TOC (Excluded Expenses), and
(iii) compensation or distributions to Physician Owners, and the distributions
shall be made in that order of payment. TOC shall retain control of the account
but shall designate a Company employee as a signatory on the TOC Operating
Account. After the payment of any Service Fees owed pursuant to Article VIII of
this Agreement, and expenses which are solely the obligation of TOC, TOC may
withdraw amounts for distributions to Physician Owners.
5.12. Other TOC Accounts. TOC shall have the right to open or create bank
accounts in addition to the TOC Operating Account described in Section 5.11 of
this Agreement.
5.13. Discounts. All discounts on purchases made by Company on behalf of
TOC shall be passed on to TOC.
5.14 MRI Services. At the request of TOC, Company will bill and collect
the MRI Receivables. All such collections shall be deposited in a separate bank
account of TOC designated as the "MRI Account." Also, at the request of TOC,
Company will provide services to maintain the payroll records and accounting for
all full-time Technical Employees who provide only MRI Services and will pay all
employee related expenses thereto from funds deposited in the MRI Account.
Company shall also furnish to TOC a portion of the Main Office sufficient for
TOC to provide MRI Services. In exchange for these services, TOC will pay to
Company, in arrears, on the 15th day of each month, a fee equal to
[xxxxxxxxxxxxxxxxxxxxxxx] of the prior month's collection of MRI Receivables.
TOC Revenue and fees generated from MRI Services and collections of MRI
Receivables shall be kept separate from, and not commingled with, TOC's other
practice revenues and collections and TOC's Accounts Receivable.
- 14 -
<PAGE>
ARTICLE VI.
OBLIGATIONS OF TOC AND PHYSICIAN OWNERS
6.1. Professional Services.
6.1.1. TOC, its Physician Owners and Physician Employees shall provide
professional services to patients.
6.1.2. TOC, its Physician Owners and Physician Employees shall provide the
professional services to patients in compliance at all times with ethical
standards, laws and regulations applying to TOC's professional practice. TOC
shall also make all reports and inquiries to any state or federal data bank
(including the National Practitioners Data Bank) required by Applicable Law. TOC
shall use its best efforts to determine that each Physician Employee, each
Physician Extender Employee and Technical Employee associated with TOC who
provides medical care to patients of TOC is licensed by the state or states in
which he or she renders professional services. If any disciplinary or medical
malpractice action is initiated against any such individual, TOC shall
immediately provide Company with copies of any third-party documents (not
otherwise privileged) served on TOC or letters delivered to TOC. Such
information shall be deemed confidential information and shall, notwithstanding
such disclosure, remain subject to all privileges and immunities provided by
Applicable Law. Company shall take all steps reasonably necessary to assure that
such privileges and immunities remain intact. TOC shall carry out a program to
monitor the quality of medical care practiced at the Practice Offices to promote
a high quality of medical care.
6.2. Medical Practice. TOC shall use and occupy the Practice Offices
exclusively for the practice of medicine and shall comply with all Applicable
Law and standards of medical care. It is expressly acknowledged by the parties
that the medical practice or practices conducted at the Main Office shall be
conducted solely by physicians or medical practitioner associated with TOC, and
no other physician or medical practitioner shall be permitted to use or occupy
the Main Office without the prior written consent of Company.
6.3. Employment of Physician Employees. TOC shall have complete control of
and responsibility for the hiring, compensation, supervision, evaluation and
termination of Physician Employees, although at the request of TOC, Company
shall consult with TOC respecting such matters. TOC shall be responsible,
subject to Section 8.4, for the payment of such Physician Employees' salaries
and wages, payroll taxes, Physician Employee benefits and all other taxes and
charges now or hereafter applicable to them. With respect to physicians, TOC
shall only employ and contract with licensed physicians meeting applicable
credentialing guidelines established by TOC.
6.4. Professional Dues and Education Expenses. Except to the extent
provided in Section 8.1.3(k), Physician Owners shall be solely responsible for
the cost of membership in professional associations and the cost of continuing
professional education. TOC shall ensure that
- 15 -
<PAGE>
each Physician Employee participates in such continuing medical education as is
necessary for such physician to remain licensed.
6.5. Professional Insurance Eligibility. TOC shall cooperate in the
obtaining and retaining of professional liability insurance by assuring that all
Physician Employees are insurable and participating in an on-going risk
management program.
6.6. Events Excusing Performance. TOC and Physician Owners shall not be
liable to Company for failure to perform any of the services required herein in
the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which TOC has no control for so long as such
events continue, and for a reasonable period of time thereafter.
6.7. Fees for Professional Services. TOC shall be solely responsible for
legal, accounting and other professional services fees (Excluded Expenses)
incurred by TOC, except for legal, accounting, and other professional service
fees incurred by TOC in the ordinary course of its business as determined by the
Policy Board.
6.8. Peer Review. TOC agrees to cooperate with Company in establishing a
system of peer review within and among the provider practices as necessary to
obtain provider contracts. In connection therewith, TOC agrees to assist in the
formulation of provider guidelines for each treatment or surgical modality, and
agrees to abide by said guidelines, and further agrees to submit to periodic
reviews by a third party to monitor compliance with said guidelines. TOC
acknowledges that the establishment of provider guidelines may be necessary to
obtain PPO, HMO, IPA and other similar provider contracts, both private and
government funded. To the extent that said provider guidelines must be filed or
registered with any Third-Party Payor, TOC agrees to cooperate with Company in
making such filings or registrations. It is agreed and acknowledged that all
such peer review guidelines shall be established and monitored by medical
personnel on the staff of TOC and other practices that are part of the peer
review process, and shall not be promulgated, established or enforced
independently by Company. To the extent possible, all information obtained
through the peer review process shall remain confidential and the parties shall
take all steps reasonably necessary to assure that all privileges and immunities
provided by Applicable Law remain intact.
6.9. TOC Employee Benefit Plans.
6.9.1. Effective as of the date of the closing under the Merger Agreement,
TOC shall assume the tax-qualified retirement plan(s) described on Exhibit 6.9.1
(the "TOC Plan") and amend the TOC Plan to provide that employees of Company who
are classified as "leased employees" (as defined in Code Section 414(n)) of TOC
shall be treated as TOC employees for purposes described in Code Section
414(n)(3). Not less often than annually, TOC and Company shall agree upon and
identify in writing those individuals to be classified as leased employees of
TOC (the "Designated Leased Employees"). TOC and Company shall establish
mutually agreeable procedures with respect to the participation of Designated
Leased Employees in the TOC Plan. Such procedures shall be designed
- 16 -
<PAGE>
to avoid the tax disqualification of the TOC Plan, similar plans of any other
practices managed by Company similarly situated and any plan adopted by Company
(collectively, the "Plans").
6.9.2. If the Policy Board determines that the relationship between
Company and TOC (and any other practices managed by Company similarly situated)
constitutes an "affiliated service group" (as defined in Code Section 414(m)),
Company and TOC shall take such actions as may be necessary to avoid the tax
disqualification of the Plans. Such actions may include the amendment, freeze,
termination or merger of the TOC Plan. Company and TOC intend that all possible
actions be taken by Company and TOC to retain the TOC Plan, including, but not
limited to, applying applicable tax qualification testing to the TOC Plan as
part of an affiliated service group including Company.
Company and TOC intend that all reasonable actions be taken by Company and
TOC to retain the TOC Plan as an active plan, including, but not limited to,
applying applicable tax qualification testing to the TOC Plan as part of an
affiliated service group including Company. Company agrees to explore such
options as may be suggested by TOC's advisors to retain the TOC Plan as an
active plan. The TOC Plan shall be converted to a non-active plan either by
amendment, freeze, termination or merger, only if no other reasonable option
exists for retaining the TOC Plan as an active plan. In the event Company and
TOC disagree with respect to any proposed action regarding the TOC Plan, the
Policy Board must approve such action before TOC shall be required to take such
action.
6.9.3. The Plans described on Exhibit 6.9.1 attached hereto are approved
by Company. TOC shall not enter into any new "employee benefit plan" (as defined
in Section 3(3) of the Employment Retirement Income Security Act of 1974, as
amended ("ERISA") without the consent of Company. In addition, TOC shall not
offer any retirement benefits or make any material retirement payments other
than under the TOC Plan to any stockholder of TOC without the express written
consent of Company. Except as otherwise required by law, TOC shall not
materially amend, freeze, terminate or merge the TOC Plan without the express
written consent of Company. In the event of either of the foregoing, Company's
consent shall not be withheld if such action would not jeopardize the
qualification of any of the Plans. TOC agrees to make such changes to the TOC
Plan, including the amendment freeze, termination or merger of the TOC Plan, as
may be approved by the Policy Board and Company but only if such changes are
necessary to prevent the disqualification of any of the Plans, and only if such
changes comply with Section 6.9.2 if TOC and Company are members of an
affiliated service group.
6.9.4. Expenses incurred in connection with the TOC Plan or other TOC
employee benefit plans, including, without limitation, the compensation of
counsel, accountants, corporate trustees, and other agents shall be included in
Clinic Expenses.
6.9.5. The contribution and administration expenses for the Designated
Leased Employees shall be included in TOC's operating budget. TOC and Company
shall not make employee benefit plan contributions or payments to TOC for their
respective employees in excess of such budgeted amounts unless required by law
or the terms of the TOC Plan. Company shall make contributions or payments with
respect to the TOC Plan or other TOC employee benefit plans, as a Clinic
Expense,
- 17 -
<PAGE>
on behalf of eligible Designated Leased Employees, and other eligible TOC
employees. In the event a TOC Plan or other TOC employee benefit plan is
terminated, Company shall be responsible, as a Clinic Expense, for any funding
liabilities related to eligible Designated Leased Employees; provided, however,
Company shall only be responsible for the funding of any liability accruing
after the date of the Merger Agreement.
6.9.6. Company shall have the sole and exclusive authority to adopt, amend
or terminate any employee benefit plan for the benefit of its employees,
regardless of whether such employees are Designated Leased Employees, unless
such actions would require the amendment, freeze or termination of the TOC Plan
to avoid disqualification of the TOC Plan, in which case any such action would
be subject to the express prior written consent of the Policy Board. Company
shall have the sole and exclusive authority to appoint the trustee, custodian
and administrator of any such plan.
6.9.7. In the event that any "employee welfare benefit plan" (as defined
in ERISA Section 3(l)) maintained or sponsored by TOC must be amended,
terminated, modified or changed as a result of TOC or Company being deemed to be
a part of an affiliated service group, the Policy Board will replace such plan
or plans with a plan or plans that provides those benefits approved by the
Policy Board. It shall be the goal of the Policy Board in such event to provide
substantially similar or comparable benefits if the same can be provided at a
substantially similar cost to the replaced plan.
6.10. Credentialing. To the extent permitted by applicable law, Company
shall assist TOC in the credentialing of each Physician Employee, each Technical
Employee and each Physician Extender Employee.
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
The parties recognize that the services to be provided by Company shall be
feasible only if TOC operates an active medical practice to which both TOC and
the physicians associated with TOC devote their full time and attention. To that
end:
7.1. Exclusive Arrangement. During the term of this Agreement, Company
shall be TOC's and Physician Owners' sole provider of the management services
described in this Agreement and neither TOC, Physician Owners nor any of TOC's
or Physician Owners' employees shall provide such management services during the
term of this Agreement. TOC and the Physician Owners agree that during the term
of this Agreement, neither TOC nor Physician Owners will enter into any similar
agreements with any physician practice management company or entity. TOC and the
Physician Owners further agree that during the term of this Agreement, they will
not engage, directly or indirectly, as a principal owner, shareholder (other
than a holder of fewer than 5% of the outstanding shares of a publicly-traded
company), partner, joint venturer, agent, equity owner, or in any other capacity
whatsoever, in any corporation, partnership, joint venture, or other business
association or
- 18 -
<PAGE>
entity that provides management services of the nature provided by Company
pursuant to this Agreement, within Leon County, Florida or contiguous counties
or any location within seventy-five (75) miles of the Main Clinic or any future
facility that replaces the Main Clinic (wherever located) or any Satellite
Office utilized by TOC at any time during the term of this Agreement.
7.2. Restrictive Covenants.
7.2.1. By Current Physician Employees. TOC shall obtain and enforce formal
agreements from current Physician Employees, other than Physician Extender
Employees and Technical Employees, pursuant to which the Physician Employees
agree not to establish, operate or provide professional medical services at any
medical office, clinic or outpatient and/or ambulatory treatment or diagnostic
facility providing services substantially similar to those provided by TOC,
except on TOC's behalf, within Leon County, Florida or contiguous counties or
any location within seventy-five (75) miles during the first five (5) years of
the term of this Agreement or fifty (50) miles thereafter of the Main Office or
any future facility that replaces the Main Office (wherever located at such
time) or any Satellite Office at the time of termination of employment with TOC
and for a period of twenty-four (24) months after any termination of employment
with TOC. Such agreements shall be a condition to employment and shall be in a
form satisfactory to Company and shall provide that Company is a third-party
beneficiary to such agreements and that such third-party beneficiary rights may
be assigned to Company's lender ("Lender"). This Section 7.2 shall relate solely
to Physician Employees who are not also Physician Owners.
7.2.2. By Current and Future Physician Owners. On the earlier of one
hundred eighty (180) days from the effective date of this Agreement, or on
thirty (30) days after written request by Company, which written request
includes a reasonable explanation or basis for the request, TOC shall obtain and
enforce formal restrictive covenants with current and future Physician Owners,
the terms of which shall be substantially similar to the provisions of Exhibit
11. Such agreements shall provide that Company is a third-party beneficiary to
such agreements. TOC agrees to enforce the restrictive covenants. The cost and
expense of such enforcement shall be a Clinic Expense, and all damages and other
amounts recovered thereby shall be included in Professional Services Revenue. In
the event that after a request by Company, TOC does not pursue any remedy that
may be available to it by reason of a breach or default of a restrictive
covenant, upon the request of Company, TOC shall assign to Company such causes
of action and/or other rights it has related to such breach or default and shall
cooperate with and provide reasonable assistance to Company with respect
thereto; in which case, all costs and expenses incurred in connection therewith
shall be borne by Company and shall be included in Company Expenses, and Company
shall be entitled to all damages and other amounts recovered thereby. The above
described restrictive covenants between TOC and Physician Owners shall be in
addition to and not in place of the restrictive covenants described in Exhibit
11 between Company and the Physician Owners.
7.2.3. Limitation on Restrictive Covenants. Neither the foregoing
restrictive covenants nor the restrictive covenants set forth in Exhibit 11
shall limit or prevent Physician Owners or Physician Employees from (i) teaching
at any educational institution and from attending patients as a part of
- 19 -
<PAGE>
Physician Owner's duties as are normal and customary for such faculty position;
provided, however, such services must be incident to the academic/teaching
aspects of the institution and not incident to the regular examination of
patients for a fee whether billed in the name of the institution or the name of
the Physician Owner; (ii) authoring text books, research papers, newspaper,
radio, television, or other medical advice; (iii) engaging in research and
development the material components of which do not constitute medical practice
management; (iv) providing medical services, other than surgery, on behalf of
and as an employee or agent of a qualified I.R.C. ss. 501(c)(3) nonprofit
organization, governmental agency or educational institution (other than a
hospital or health care provider of any type); (v) providing professional
medical services in fields other than neurology or orthopedics, and (vi) serving
as a medical director of any organization offering medical care, but not
providing clinical services involving surgery.
7.3. Restrictive Covenants By Future Physician Employees. TOC shall obtain
and enforce formal agreements from each future Physician Employee other than
Physician Extender Employees and Technical Employees, hired or contracted,
pursuant to which such physicians agree not to establish, operate or provide
professional medical services at any medical office, clinic or outpatient and/or
ambulatory treatment or diagnostic facility providing services substantially
similar to those provided by TOC except on TOC's behalf, within Leon County,
Florida or contiguous counties or any location within seventy-five (75) miles
during the first five (5) years of the term of this Agreement or fifty (50)
miles thereafter of the Main Office or any future facility that replaces the
Main Office (wherever located at such time) or any Satellite Office at the time
of termination of said Physician Employee's contract with TOC and for a period
of twenty-four (24) months thereafter. Such agreements shall be a condition to
employment and shall be in a form satisfactory to Company and shall provide that
Company is a third-party beneficiary to such agreements and that such
third-party beneficiary rights may be assigned to any Lender. This Section 7.3
shall relate solely to Physician Employees who are not also Physician Owners.
The terms and conditions of Exhibit 11 shall govern restrictive covenants
relating to Physician Owners.
7.4. Rights of Company. Except as limited below, Company shall at all
times during the term of this Agreement and thereafter have the right to enter
into additional service agreements with other physicians and practices
regardless of where such physicians and/or practices are located providing for
management services and facilities to such physicians and/or practices.
Notwithstanding the foregoing, and except as set forth in Section 11.9.3, in the
event that Company desires to enter into a Service Agreement with another
practice located within seventy-five (75) miles during the first five (5) years
of the term of this Agreement or fifty (50) miles thereafter of TOC's Main
Office or any Satellite Office or any new office established pursuant to Section
5.10 above, or develop, purchase, own or operate a surgery center or MRI
facility or new service established pursuant to Section 5.12 above within such
radius, then the Policy Board must first approve Company entering into such
agreement or developing a surgery center or MRI facility or new service
established pursuant to Section 5.12 above.
7.5. Enforcement. TOC and the Company acknowledge and agree that since a
remedy at law for any breach or attempted breach of the provisions of this
Article VII shall be inadequate, offended
- 20 -
<PAGE>
party shall be entitled to specific performance and injunctive or other
equitable relief in case of any such breach or attempted breach in addition to
whatever other remedies may exist by law. All parties hereto also waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such injunctive or other equitable relief. If any provision of
Article VII relating to the restrictive period, scope of activity restricted
and/or the territory described therein shall be declared by a court of competent
jurisdiction to exceed the maximum time period, scope of activity restricted or
geographical area such court deems reasonable and enforceable under Applicable
Law, the time period, scope of activity restricted and/or area of restriction
held reasonable and enforceable by the court shall thereafter be the restrictive
period, scope of activity restricted and/or the territory applicable to the
restrictive covenant provisions in this Article VII. In addition, breach of the
provisions of this Article VII may trigger certain rights of Company to redeem a
Physician Owner's Company common stock pursuant to the terms of Article VIII of
that certain stockholders agreement between Company and its stockholders (the
"Stockholders Agreement").
7.6. Modification of Restrictive Covenants. Upon the termination of
employment of a Physician Owner or Physician Employee, the Policy Board shall
have the authority to release or reduce in whole or in part the terms of the
restrictive covenants, including but not limited to the mileage radius
limitations set forth above in Sections 7.2 and 7.3. In the event that the
individuals representing TOC on the Policy Board can reasonably demonstrate that
a modification to the restrictive covenant will not have a material adverse
effect on Company's or TOC's practice operations, earnings or cash flow, then
the individuals representing Company shall consent to the proposed
modifications.
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees. During the first thirty-six (36) months of the term of
this Agreement, Company shall receive a service fee equal to the sum of (a) the
greater of (i) [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]or (ii) the Base
Service Fee, plus (b) the amount of Clinic Expenses. Upon the expiration of the
first thirty-six (36) months of the term of this Agreement, Company shall
receive a service fee equal to [xxxxxxxxxxxxxxxxxxx]of Practice Net Revenue plus
the amount of Clinic Expenses. In the event that a Physician Owner ceases to
practice medicine during the first thirty-six (36) months of the term of this
Agreement, such Physician Owner shall be personally liable for any reduction in
TOC's service fees payable as further described under Section 11.9.1 of this
Agreement. In the event that a Physician Owner either dies or becomes Disabled
during such thirty-six (36) month period, TOC, or the applicable Physician
Owner, as the case may be, shall be entitled to satisfy the amount owed by
transferring to Company an amount of Company common stock having a Fair Market
Value equal to the amount owed or pay to Company cash in the amount owed (or a
combination thereof).
8.1.1. "Practice Net Revenue" shall mean Professional Services Revenue,
less Clinic Expenses.
- 21 -
<PAGE>
8.1.2. "Professional Services Revenue" shall mean all fees actually
recorded each month (net of any amounts reimbursed to any patients or
Third-Party Payors during the applicable month and net of any adjustments for
contractual allowances, Medicaid, worker's compensation, employee/dependent
health care benefit programs, professional courtesies and other activities that
do not generate a collectible fee) by or on behalf of TOC as a result of
professional medical services personally furnished to patients and other fees or
income generated in their capacity as Physician Employees and Technical
Employees, other than MRI Revenue, and any revenue from the sale of any goods.
8.1.3. "Clinic Expenses" shall mean all operating and non-operating
expenses of TOC arising hereunder unless expressly provided otherwise,
including, without limitation:
(a) salaries, benefits and other direct costs of all Clinic
employees including Company's employees and Physician Extender Employees
as defined in Section 8.1.5 working at the Practice Offices and salaries,
payroll taxes and employee benefits paid to Physician Employees (other
than Physician Owners) under Section 6.3 and to Technical Employees as
defined in Section 8.1.4,
(b) obligations of Company under Leases provided for herein under
Article III,
(c) the expenses and charges incurred for the Practice Offices,
including without limitation utilities, telephone, etc.,
(d) personal property and intangible taxes assessed against
Company's assets utilized by TOC in the Practice Offices from and after
the date of this Agreement,
(e) interest expense on indebtedness incurred by Company to (i)
satisfy the obligations of TOC, if any, assumed under the Merger
Agreement, (ii) provide working capital for Company's performance of any
of its obligations to TOC hereunder, or (iii) purchase equipment,
(f) malpractice insurance premiums, disability insurance premiums to
cover accommodations to the Practice Offices under the definition of
"Disabled" or "Disability," and fire, workers compensation and general
liability insurance premiums, and life insurance premiums, during the
first three (3) years of this Agreement, for life insurance on the lives
of Physician Owners, with TOC as the death beneficiary,
(g) the cost of any goods purchased for resale,
(h) the depreciation, as determined under GAAP, for any equipment or
depreciable property owned by Company and used in TOC's Facility by TOC to
be billed to TOC on a monthly basis and paid to Company at the same time
Company pays for TOC's Accounts Receivable pursuant to Section 8.3,
- 22 -
<PAGE>
(i) direct costs of all employees or consultants of Company engaged
to provide services at or in connection with TOC or who actually provide
services at or in connection with the Clinic for improved performance,
such as quality assurance, reasonable expenses required for physician
accommodations under the definition of "Disabled" or "Disability,"
materials management, purchasing program, change in coding analysis,
physician recruitment; provided, however, only the portion of expenses
related to such employee or consultant, without mark-up, that is allocable
in a fair and reasonable manner to work approved by the Policy Board which
is performed at or for the benefit of TOC shall be included in Clinic
Expenses,
(j) expenses related to professional meetings, seminars, dues,
medical books and professional licensing fees for Physician Employees
(other than Physician Owners) provided, however, that such amount shall
not exceed $10,000 during any calendar year for any Physician Employee
(other than Physician Owners). If the cost incurred for such professional
meetings, seminars, dues, medical books and professional licensing fees
exceeds $10,000 during any calendar year, then the Physician Employee
incurring such cost shall be solely liable for the overage;
(k) expenses related to professional meetings, seminars, dues,
medical books and professional licensing fees for Physician Owners;
provided, however, that such amount shall not exceed $10,000 during any
calendar year for any Physician Owner. If the cost incurred for such
professional meetings, seminars, dues, medical books and professional
licensing fees exceeds $10,000 during any calendar year, then the
Physician Owner incurring such cost shall be solely liable for the
overage;
(l) any health, life, dental and accident premiums paid on behalf of
Physician Employees to the extent deductible under the Code and to the
extent comparable benefits are paid to Physician Extender Employees and
Technical Employees;
(m) the cost of administering retirement plans; and
(n) any and all other ordinary and necessary expenses incurred by
TOC or approved by the Policy Board and reasonably incurred by the Company
for the direct benefit of TOC in carrying out their respective obligations
under this Agreement.
Clinic Expenses shall not include Excluded Expenses or Company Expenses.
Excluded Expenses shall be the sole obligation of TOC. Company Expenses shall be
the sole obligation of Company.
8.1.4. "Technical Employees" shall mean individuals who provide diagnostic
services and who are required by Applicable Law or Third-Party Payors to be
employees of TOC. All Technical Employees shall be employed by TOC.
- 23 -
<PAGE>
8.1.5. "Physician Extender Employees" shall mean Physician Assistants,
Nurse Practitioners, and other such persons providing services under the
supervision of Physician Employees and who are employees of Company, but
excluding any Technical Employees.
8.1.6. "Physician Employees" shall mean only those individuals who are
doctors of medicine (including Physician Owners) and who are employed by TOC or
are otherwise under contract with TOC to provide professional services to
patients seen in the Main Office or Satellite Offices and are duly licensed to
provide professional medical services in the state or states in which he or she
renders professional services under this Agreement.
8.1.7. "Company Expenses" shall mean, pursuant to GAAP applied on a
consistent basis:
(a) Any corporate overhead charges of Company and other items
incurred by Company that are not incurred specifically for the purpose of
providing services to TOC or are not directly attributable to TOC, as
reasonably determined by Company, including, without limitation, salaries
and benefits of executive officers of Company, except as otherwise
provided for in the definition of Clinic Expenses;
(b) Any amortization of any intangible asset resulting from the
Merger;
(c) Any depreciation attributable to increases in the book value of
tangible depreciable assets resulting from the Merger;
(d) Any legal and accounting expenses incurred by Company in
connection with the Merger; and
(e) All taxes of Company, including, but not limited to, state and
federal income taxes and franchise taxes, but excluding state and federal
employee taxes related to employees who provide services for TOC, property
taxes on assets used by TOC and other taxes specifically included in
Clinic Expenses.
8.1.8. "Excluded Expenses" shall be the sole obligation of TOC and shall
mean, pursuant to GAAP applied on a consistent basis:
(a) Any salaries or other distributions made to Physician Owners
whether for professional fee income or otherwise;
(b) Any federal, state or other taxes associated therewith;
(c) Except as provided in Section 8.1.3(k), expenses of Physician
Owner's to maintain licensure or meet continuing education requirements,
including related travel expense; and
- 24 -
<PAGE>
(d) Any expenses directly related to MRI Revenue; and
(e) Any other items specifically designated as Excluded Expenses
elsewhere in this Agreement including but not limited to those items
listed on Exhibit 8.1.8(d).
8.2. Payment of Service Fee. The amounts to be paid to Company under this
Article VIII shall be payable monthly, at the time that Company pays TOC for the
Accounts Receivable previously purchased by Company as described in Section 8.3
below. The amount payable shall be estimated based upon the previous month's
operating results of TOC. Adjustments to the estimated payments shall be made to
reconcile actual cumulative amounts due under this Article VIII, by the end of
the following month during each calendar year. Upon preparation of annual
financial statements as provided in Section 5.3, final adjustments to the
service fee for the preceding year shall be made and any additional payments
owing to Company or TOC shall then be made to the party owed the additional sum
of money. The adjustment and any amount owed shall be calculated and paid within
ninety (90) days following the close of Company's fiscal year.
8.3. Purchase of Accounts Receivable.
8.3.1. TOC hereby agrees to sell and assign to Company and Company agrees
to buy, all of TOC's Accounts Receivable each month during which this Agreement
is in existence which are owing to TOC arising out of the delivery of medical,
surgical, diagnostic or other professional medical goods or services. Accounts
Receivable shall not include, and Company shall not purchase, any cash, checks
or receivables created by credit cards. Company shall bear the risk of
collection and any overage or underage resulting from any purchased Accounts
Receivable.
8.3.2. The purchase price for each Accounts Receivable (the "Purchase
Price") will be equal to the face amount of the Accounts Receivable recorded
each month, less any non-allowed contractual adjustments and net of any reserve
for uncollectible Accounts Receivables based on the historical experience of the
practice as determined by the Policy Board. It is the intent of the parties that
the Purchase Price reflect the actual net realizable value of the Accounts
Receivable.
8.3.3. TOC will sell all Accounts Receivable to Company, such purchase to
be deemed to be made on the fifteenth (15th) day of the month following the
month in which such Accounts Receivable are created. Company shall pay for the
Accounts Receivable not later than the fifteenth (15th) day of each month
following the month in which the Accounts Receivable is created (the "Settlement
Date"). Company shall pay to TOC for all Accounts Receivable purchased by check,
wire transfer or intrabank transfer to the TOC Operating Account described in
Section 5.11. The purchase of Accounts Receivable shall be evidenced by sending
Company (i) a copy of each invoice with respect to each Third-Party Payor on the
Accounts Receivable then being purchased; and (ii) any other information or
documentation (including all required Uniform Commercial Code releases or
financing statements) Company may reasonably need to identify the Accounts
Receivable and obtain payment from the Account Debtors; provided that such
failure to send such documents shall not affect the obligation of TOC to sell
such Accounts Receivable or Company to buy such Accounts
- 25 -
<PAGE>
Receivable. As consideration for the purchase of Accounts Receivable by Company
pursuant to this Section 8.3, Company promises to pay and shall be obligated to
pay for such Accounts Receivable at the time and in the manner provided below.
To the extent permissible by Applicable Law, TOC will be deemed to have sold to
Company all of TOC's right, title and interest in such Accounts Receivable and
in any proceeds thereof, and Company will be the sole and absolute owner thereof
and will own all of TOC's rights and remedies represented by such Accounts
Receivable (including, without limitation, rights to payment from the respective
Account Debtors on such Accounts Receivable), and Company will have obtained all
of TOC's rights under all guarantees, assignments and securities with respect to
each such Accounts Receivable.
8.3.4. Upon expiration or termination of this Agreement for any reason,
(i) all Accounts Receivable purchased by Company shall remain the property of
Company and (ii) all Accounts Receivable purchased and not paid for at such
expiration or termination shall be paid for by the 10th of the following month
but effective as of the effective date of such expiration or termination date,
less the amount of any service fee earned by Company pursuant to Section 8.1 of
this Agreement.
8.3.5. In connection with the initial purchase of Accounts Receivable by
Company, TOC will execute such financing statements or amendments under the UCC
(naming Company as secured party and Lender as assignee) as Company may
reasonably request with respect to any Accounts Receivable that may be purchased
pursuant to this Agreement.
8.3.6. TOC agrees to cooperate with Company in the collection of the
Accounts Receivable sold by TOC, transferred pursuant to Section 8.3. At the
option of and upon the request of Company, TOC shall execute any and all
documentation necessary for the transfer of amounts constituting Accounts
Receivables and/or the establishment of lockboxes in accordance with the
provisions of Exhibit 8.3.6 attached hereto.
8.3.7. All Accounts Receivable of TOC purchased by Company ("Purchased
A/R") pursuant to this Section 8.3 hereof will, as such Purchased A/R are
purchased, be treated as Professional Service Revenues for accounting and
financial purposes.
8.4. Payment of Clinic Expenses. All Clinic Expenses shall be incurred in
the name of Company, unless TOC is required by law to incur such expenses, in
which case Company shall indemnify TOC against any such expenses. Company shall
pay all Clinic Expenses as they become due; provided, however, that Company may,
in the name and on behalf of TOC, contest in good faith any claimed Clinic
Expense to which there is any dispute regarding the nature, existence or
validity of such claimed Clinic Expense. Upon receipt of TOC's service fee,
Company shall be required to deposit into the TOC Operating Account described in
Section 5.11 an amount of money necessary for TOC to pay the compensation and
benefits associated with the Technical Employees and Physician Employees (other
than Physician Owners) employed by TOC.
- 26 -
<PAGE>
ARTICLE IX.
RECORDS
9.1. Patient Records. Upon termination of this Agreement and unless
otherwise provided herein, TOC shall retain all patient medical records
maintained by TOC or Company in the name of TOC. TOC shall, at TOC's option, be
entitled to retain copies of financial and accounting records relating to all
services performed by TOC. All parties agree to maintain the confidentiality of
patient identifying information and not to disclose such information except as
may be required or permitted by Applicable Law.
9.2. Records Owned by Company. All records relating in any way to the
operation of the Practice Offices which are not the property of TOC under the
provisions of Section 9.1 above, shall at all times be the property of Company.
9.3. Access to Records. During the term of this Agreement, and thereafter,
TOC or TOC's designee shall have reasonable access during normal business hours
to TOC's and Company's financial records, which relate to the operation of TOC
including, but not limited to, records of collections, expenses and
disbursements as kept by Company in performing Company's obligations under this
Agreement, and TOC may copy at TOC's expense any or all such records.
9.4. Government Access to Records. To the extent required by Section
1861(v)(1)(I) of the Social Security Act, each party shall, upon proper request,
allow the United States Department of Health and Human Services, the Comptroller
General of the United States, and their duly authorized representatives access
to this Agreement and to all books, documents, and records necessary to verify
the nature and extent of the costs of services provided by either party under
this Agreement, at any time during the term of this Agreement and for an
additional period of four (4) years following the last date services are
furnished under this Agreement. If either party carries out any of its duties
under this Agreement through an agreement between it and an individual or
organization related to it or through a subcontract with an unrelated party,
that party to this Agreement shall require that a clause be included in such
agreement to the effect that until the expiration of four (4) years after the
furnishing of services pursuant to such agreement, the related organization
shall make available, upon request by the United States Department of Health and
Human Services, the Comptroller General of the United States, or any of their
duly authorized representatives, all agreements, books, documents, and records
of such related organization that are necessary to verify the nature and extent
of the costs of services provided under that agreement.
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by TOC. Throughout the term of this
Agreement, TOC shall maintain comprehensive professional liability and worker's
compensation insurance for TOC and
- 27 -
<PAGE>
all employees of TOC in amounts approved by the Policy Board. Not in limitation
of the foregoing, TOC shall maintain excess general liability umbrella coverage
with a One Million Dollars ($1,000,000) limit as currently maintained by TOC
(with deductible provisions not to exceed $25,000 per occurrence), the cost of
which shall be paid by Company as a Clinic Expense. In lieu of the foregoing,
Company may provide as a Clinic Expense group insurance for malpractice and/or
worker's compensation insurance. Notwithstanding the foregoing, in the event
that Company procures such group insurance for malpractice and/or worker's
compensation insurance, TOC must first approve the amount of coverage, the
carrier and the terms of any such coverage for TOC.
10.2. Insurance to be Maintained by Company. Throughout the term of this
Agreement, Company shall provide and maintain, as a Clinic Expense,
comprehensive professional liability insurance and worker's compensation
insurance as required by Applicable Law for all professional employees of
Company who work at the Practice Offices with limits as determined reasonable by
the Policy Board, comprehensive general liability and property insurance
covering the Practice Offices' premises and operations. The deductible
provisions on the personal liability shall not exceed $25,000 per occurrence and
the commercial general liability insurance shall be in amounts customarily
maintained by other businesses in the same or similar business as Company.
10.3. Additional Insureds. TOC and Company agree to use their best efforts
to have each other named as an additional insured on the other's respective
professional liability insurance programs at Company's expense. Further, on any
insurance where Company will be named as an additional insured, TOC will assist
Company to obtain appropriate riders to insure payment of any party indemnified
by Company.
10.4. Indemnification as to Third Party Claims. TOC shall indemnify, hold
harmless and defend Company, its officers, directors and employees, from and
against any and all liability, loss, damage, claim, causes of action, and
expenses (including reasonable attorneys' fees), caused or asserted to have been
caused, directly or indirectly, by or as a result of the performance of any
intentional acts, negligent acts or negligent omissions (other than for any
claims for (or in connection with) malpractice arising from the performance or
nonperformance of medical services) by TOC and/or TOC's Physician Owners,
agents, employees and/or subcontractors (other than Company) during the term
hereof. Company shall indemnify, hold harmless and defend TOC, the Physician
Owners, TOC's officers, directors and employees, from and against any and all
liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees), caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts or negligent omissions by Company and/or its shareholders,
agents, employees and/or subcontractors (other than TOC and the Physician
Owners) during the term of this Agreement. Neither Company nor TOC shall have
any obligation to indemnify the other party unless the claim for indemnification
is based upon a liability, loss or damages resulting in the indemnified party
making payments to a third party. Pursuant to the terms of the Stockholders
Agreement, Company may have the right to redeem a Physician Owner's Company
common stock to satisfy a Physician Owner's indemnification obligations.
- 28 -
<PAGE>
In the event that either party makes a claim for indemnification under
either the Merger Agreement or this Service Agreement, then the other party
shall have the right to pay the amount claimed under this Agreement into an
escrow account (established pursuant to an escrow agreement to be agreed upon by
the parties) to be held by the escrow agent in an interest bearing account until
a determination by either (i) the parties, (ii) a court of proper jurisdiction
or (iii) agreed upon panel of arbitrators, has been made regarding the claiming
party's right to indemnification. In the event that the claiming party is
entitled to indemnification, then such escrowed funds shall be paid to the
claiming party in partial or complete satisfaction of such indemnification
obligation. Any excess funds remaining in the escrow account after the payment
of the indemnification obligation or any funds held in the escrow account if it
is determined that no indemnification obligation is owed shall be paid to the
other party.
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement. This Service Agreement shall be effective upon
the closing of the Merger Agreement and shall expire on October 31, 2036, unless
earlier terminated pursuant to the terms hereof. Notwithstanding the foregoing,
for purposes of computing the Service Fee for the month of November of 1996
only, the Service Agreement shall be effective upon November 1, 1996.
11.2. Extended Term. Unless earlier terminated as provided for in this
Agreement, the term of this Agreement shall be automatically extended for
additional terms of five (5) years each, unless either party delivers to the
other party, at least one hundred eighty (180) days prior to the expiration of
the preceding term, written notice of such party's intention not to extend the
term of this Agreement.
11.3. Termination by TOC for Cause. TOC may terminate this Agreement
without breach as follows:
11.3.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by Company, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by Company, except for the filing of a petition in
involuntary bankruptcy against Company which is dismissed within thirty (30)
days thereafter, TOC may give notice of the immediate termination of this
Agreement.
11.3.2. In the event Company shall materially default in the performance
of any duty or obligation imposed upon it by this Agreement and such default
shall continue for a period of sixty (60) days after written notice thereof has
been given to Company by TOC; or Company shall fail to remit the payments due as
provided in Article VIII hereof and such failure to remit shall continue for a
period of thirty (30) days after written notice thereof, TOC may terminate this
Agreement.
- 29 -
<PAGE>
11.3.3. In the event Company shall, intentionally or in bad faith,
misapply funds or assets of TOC or commit a similar act which cause material
harm to TOC, TOC may terminate this Agreement.
11.3.4. In the event that Company shall intentionally or in bad faith
violate Applicable Law resulting in a direct, continuing material adverse effect
on the operations, earnings and cash flow of TOC, TOC may terminate this
Agreement.
11.4. Termination by Company for Cause. Company may terminate this
Agreement without breach as follows:
11.4.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by TOC, or upon other action taken
or suffered, voluntarily or involuntarily, under any federal or state law for
the benefit of debtors by TOC, except for the filing of a petition in
involuntary bankruptcy against TOC which is dismissed within thirty (30) days
thereafter, Company may give notice of the immediate termination of this
Agreement.
11.4.2. In the event TOC shall materially default in the performance of
any duty or obligation imposed upon it by this Agreement, and such default shall
continue for a period of ninety (90) days after written notice thereof has been
given to TOC by Company, Company may terminate this Agreement.
11.4.3. In the event TOC's Medicare or Medicaid Number shall be terminated
or suspended as a result of the action or inaction of TOC or a Physician
Employee, and such termination or suspension shall continue for thirty (30)
days, Company may give notice of the immediate termination of this Agreement,
unless TOC shall at that time be acting in good faith (and shall provide
reasonable evidence of the action being taken) to reverse such termination or
suspension. Notwithstanding any good faith effort on the part of TOC to reverse
such termination or suspension, if such termination or suspension shall not be
reversed within ninety (90) days after occurrence, Company shall have the right
to terminate this Agreement immediately.
11.4.4. In the event this Agreement is terminated by Company pursuant to
Section 11.4.1, Section 11.4.2, or Section 11.4.3, Company, at its option, may
require TOC to purchase from Company all assets, both tangible and intangible,
owned by Company and used or made available for TOC's use for the fair market
value of such assets on a going concern basis, without regard to this Agreement.
In addition thereto, TOC shall assume all debt (including any balance of any
remaining debt incurred by the Company to acquire the assets under the Merger
Agreement) and all contracts, payables and leases which are obligations of
Company which relate to the Company's obligations which are performed at the
Office Locations under this Agreement. The fair market value of the assets shall
be determined by an independent appraiser selected by two (2) independent
accountants practicing with "big six" accounting firms, one (1) selected by TOC
and one (1) selected by Company and neither of which is providing or has for a
period of two (2) years provided services to Company or TOC. In addition to the
payment for the practice assets, in the event Company terminates this Agreement
pursuant to Section 11.4.1, Section 11.4.2 or Section 11.4.3 within the first
five (5) years
- 30 -
<PAGE>
of the term of this Agreement, then TOC's Physician Owners shall (i) pay to
Company an amount of money equal to the Fair Market Value, as of the date of
termination, of one-third (1/3) of the shares of stock and cash consideration
issued by Company to TOC pursuant to the Merger Agreement or (ii) surrender to
Company for cancellation one-third (1/3) of the shares of stock and cash
consideration issued by Company to TOC pursuant to the Merger Agreement. All
expenses of any appraisal shall be paid by TOC. In the event that Company
terminates this Agreement pursuant to Sections 11.4.1 through 11.4.3, inclusive,
and Company requires TOC to purchase the practice assets, then upon the closing
of the purchase of the assets, TOC and its Physician Employees shall be released
from the restrictive covenants provided for under Exhibit 11 of this Agreement.
In addition, termination of this Agreement may trigger certain rights of Company
to redeem a Physician Owner's Company common stock pursuant to the terms of
Article VIII of the Stockholders Agreement.
11.5. Early Termination by TOC or Company Without Cause Upon Eighteenth
(18th) Month Anniversary of Agreement. Either party may terminate this Agreement
without cause upon written notice delivered to the other party not less than six
(6) months or more than nine (9) months or more prior to the end of the
eighteenth (18th) month anniversary of the date of this Agreement if the Company
has not filed a registration statement with the United States Securities and
Exchange Commission; provided, however, if the Company files a registration
statement, for an underwritten public offering, with the United States
Securities and Exchange Commission before the end of the date of the eighteenth
(18th) month anniversary of this Agreement, then such termination shall be
ineffective, and this Agreement shall continue in force unless otherwise
terminated pursuant to the other provisions of Article XI of this Agreement. In
the event that such registration statement is not effective within one hundred
twenty (120) days from filing, then the early termination rights described in
the first sentence of this Section 11.5 shall be again exercisable; provided,
further, that if such registration statement was filed during the above
described notice period for early termination, then such period shall be
extended for thirty (30) days from and after the date such early termination
rights again become exercisable. Notwithstanding any other provision of this
Agreement to the contrary, the termination rights set forth in this Section 11.5
shall immediately terminate and no longer be effective upon a Change in Control
of the Company. Upon a termination pursuant to this Section 11.5, TOC shall
tender to Company all of the stock issued to TOC by Company pursuant to the
Merger Agreement, and Company shall return to TOC the facilities and all assets,
both tangible and intangible, used or made available for TOC's use in the
Practice Office or acquired pursuant to the Merger Agreement. TOC shall assume
all debt secured by a purchase money security interest in assets or equipment
located at the TOC Office Locations and all contracts, payables and leases which
are obligations of Company and which relate to Company's obligations which are
performed at the Office Locations under this Agreement. For purposes of this
Section 11.5, the term purchase money security interest shall mean any debt, the
proceeds of which were used to acquire the asset secured by such indebtedness.
The Company and TOC shall cooperate to structure any exchange consummated
pursuant to this Section 11.5 in a manner designed to minimize the aggregate tax
consequences to the parties arising from the exchange. Closing of the exchange
pursuant to this Section 11.5 shall occur effective as of the third (3rd)
anniversary of this Agreement.
- 31 -
<PAGE>
11.6. Consequences of TOC Termination. In the event that this Agreement is
terminated by TOC under the terms of Section 11.3 or is terminated on any other
basis (other than (i) because of the normal expiration of its term set forth in
Section 11.1, (ii) by Company for cause as set forth in Section 11.4 or (iii) by
early termination as set forth in Section 11.5), then upon such termination, TOC
shall purchase from Company all assets, both tangible and intangible, owned by
Company and used or made available for TOC's use for the fair market value of
such assets on a going concern basis, without regard to this Agreement. The
purchase price shall be paid to TOC in cash, or in stock received under the
Merger Agreement, or in both, at the election of TOC. In addition thereto, TOC
shall assume all debt (including any balance of any remaining debt incurred by
the Company to acquire the assets under the Merger Agreement) and all contracts,
payables and leases which are obligations of Company which relate to the
performance of Company's obligations which are performed at the Office Locations
under this Agreement. The fair market value of the assets shall be determined by
an independent appraiser selected by two (2) independent accountants practicing
with "big six" accounting firms, one (1) selected by TOC and one (1) selected by
Company and neither of which is providing or has for a period of two (2) years
provided services to Company or TOC. Termination of this Agreement by TOC or a
Physician Owner may trigger Company's right to redeem all of Company common
stock owned by the Physician Owner as provided for in Section 8.1 (a) of the
Stockholders Agreement.
11.7. Closing of Purchase by TOC and Effective Date of Termination. TOC
shall, except as provided below in this Section 11.7 or in Sections 11.5 or 11.6
above, pay cash for the assets purchased pursuant to the provisions of this
Section 11. The amount of the purchase price shall be reduced, but not below
zero (0), by the amount of debt and liabilities of Company assumed by TOC and
shall also be reduced by any payment Company has failed to make under this
Agreement, provided that such payments or obligations are not otherwise
accounted for in the liabilities assumed by TOC in connection with the purchase
described herein. The closing date for the purchase shall be determined by TOC,
but shall in no event occur later than one hundred eighty (180) days from the
date of the notice of termination. The termination of this Agreement shall
become effective upon the closing of the sale of the assets and TOC and Company
shall be released from the restrictive covenants provided for in Article VII on
the closing date. Company shall give TOC credit towards the purchase price of
the assets for the Fair Market Value of any Company common stock tendered to the
Company in exchange for such assets. In the event that TOC terminates this
Agreement pursuant to Sections 11.3.1 through 11.3.4, inclusive, or Sections
11.5, 11.6 or 11.7, then upon the closing of the purchase of the assets, TOC and
its Physician Employees shall, except as TOC may so elect to limit through
separate agreements with Physician Owners and Physician Employees, be released
from the restrictive covenants provided for under Article VII or Exhibit 11 of
this Agreement.
11.8. Tail Policy. TOC shall obtain continuing liability insurance
coverage under either a "tail policy" or a "prior acts policy" with the same
limits and deductibles as set forth in Section 10.1 upon the termination of this
Agreement, or upon a physician's termination of his or her affiliation with TOC.
- 32 -
<PAGE>
11.9. Restrictions Applicable to Physician Owners. The Physician Owners
hereby acknowledge that the Merger and the terms and conditions of this
Agreement were determined based upon numerous factors, including the Physician
Owners continuing to practice medicine in the future. In connection therewith,
each Physician Owner agrees as follows:
11.9.1. Early Retirement. If at any time prior to the fifth (5th)
anniversary of this Agreement, a Physician Owner desires to retire from the
practice of medicine, such Physician Owner shall be obligated as follows:
(a) to give Company at least twelve (12) months prior written notice
of the intent to retire; provided, however, that once such retiring
physician has located a replacement physician satisfying the requirements
of Section 11.9.1(b), Company shall waive the remaining months of said
twelve (12) month notice period, and such retirement shall be effective
upon the earlier of twelve (12) months from the date of notice or
commencement of the replacement physician's employment;
(b) to locate a physician or physicians (which may be Physician
Employees), reasonably acceptable to the Policy Board, to replace such
Physician Owner under this Agreement (all costs of locating such
replacement physicians shall be paid by such Physician Owner (the
"Substitute Physician(s)");
(c) to pay to Company any loss of service fees payable under this
Agreement for the remainder of the first five (5) years of this Agreement.
Any loss for any periods of less than twelve (12) months shall be
calculated on an annualized and prorated basis. For purposes of this
Section 11.9.1(c), the amount of the loss shall be calculated as follows:
(i) The Policy Board shall calculate the retiring Physician
Owner's contribution to the payment of TOC's service fees
during the twelve (12) month period preceding the retiring
Physician Owner's notice of intent to retire.
(ii) In the event the Substitute Physician(s) were Physician
Employees prior to the date upon which notice of intent to
retire was given pursuant to Section 11.9.1(a), the Policy
Board shall calculate such Physician Employee(s) contribution
to the payment of TOC's service fees during the twelve month
period preceding the notice of intent to retire.
(iii) On each successive anniversary date of this Agreement (through
the fifth anniversary date) following the effective date of
such retirement, the Policy Board shall determine the amount
of service fees generated by the Substitute Physicians between
either (x) the effective date of retirement or (y) the
immediately preceding anniversary date, as applicable, and
such successive anniversary date.
- 33 -
<PAGE>
(iv) If the Substitute Physician(s) were Physician Employees prior
to date upon which the notice of intent to retire was given,
the amount of loss shall equal the difference between (i) the
amount calculated pursuant to Section 11.9.1(c)(i) plus the
amount calculated pursuant to Section 11.9.1(c)(ii) and (ii)
the amount calculated pursuant to Section 11.9.1(c)(iii).
(v) If the Substitute Physician(s) were not Physician Employees
prior to the date upon which the notice of intent to retire
was given, the amount of loss shall equal the difference
between (i) the amount calculated pursuant to Section
11.9.1(c)(i) and (ii) the amount calculated pursuant to
Section 11.9.1(c)(iii).
The Policy Board will provide the amount of the loss to the retiring Physician
Owner within thirty (30) days of the applicable anniversary date of this
Agreement and such amount shall be paid by such retiring Physician Owner to
Company within fifteen (15) days of the date of the delivery of the notice of
the amount of loss;
(d) to (i) pay to Company an amount of money equal to the Fair
Market Value, as of the date of retirement, of one-third (1/3) of the
shares of stock issued by the Company to the retiring Physician Owner
pursuant to the Merger Agreement or (ii) surrender to Company for
cancellation one-third (1/3) of the stock issued by Company to the
retiring Physician Owner pursuant to the Merger Agreement. (All expenses
of any appraisal shall be paid by such Physician Owner); and
(e) to honor and comply with the restrictive covenants for a period
of thirty-six (36) months, in accordance with the restrictions contained
in Exhibit 11.
11.9.2. Retirement. If at any time after the fifth (5th) anniversary of
this Agreement, a Physician Owner desires to retire, or assume full-time
teaching responsibilities, such Physician Owner shall notify Company in writing
at least twelve (12) months prior to the effective date of such retirement or
start of teaching position; provided, however, that no more than twenty percent
(20%) of the Physician Owners can retire or assume full time teaching
responsibilities within any twelve (12) month period; provided, further, that if
such retiring physician elects to, and has located a replacement physician,
Company shall waive the remaining months of said twelve (12) month notice
period, and such retirement shall be effective upon the earlier of twelve (12)
months from the date of notice or commencement of the replacement physician's
employment. Upon such retirement or start of teaching position, such Physician
Owner shall have no further obligations under this Agreement; provided, however,
the restrictive covenants provided for under Section 11.9.1(e) shall remain in
force. In fulfilling any such full-time teaching responsibilities, such
Physician Owner would be permitted to attend patients in a manner normal and
customary for such faculty position, provided, however, such services must be
incident to the academic/teaching aspects of the institution, and not incident
to the regular examination of patients for a fee whether billed in the name of
the institution or the name of the attending physician. It is not
- 34 -
<PAGE>
the intent of the Parties to permit a retired physician to conduct a medical
practice through an academic institution.
11.9.3. Physician Owner Change in Practice/Group Affiliation. In the event
that a Physician Owner leaves the employment of or terminates his or her
affiliation with TOC, then the terminating Physician Owner may, but shall not be
obligated to, join or establish another group/practice which has or will enter
into a Service Agreement with Company upon such terminating Physician Owner's
affiliation with such new group/practice. Upon entering into such new Service
Agreement, the terminating Physician Owner shall, except as limited by separate
employment agreements between TOC and Physician Owners, be released from any
obligation under this Service Agreement. Company shall have the right to enter
into such new Service Agreement without satisfying the requirements of paragraph
G of Exhibit 11. In the event that (i) TOC consents to the Company entering into
the new Service Agreement, (ii) entering into the new Service Agreement will not
adversely affect the operations and earnings of the Company, and (iii) the new
group/practice can satisfy the representations and warranties set forth in
Article XIII of this Agreement, then Company will not unreasonably withhold or
refrain from entering into a new Service Agreement with the terminating
Physician Owner's new group/practice. Except as set forth in the event that the
Physician Owner affiliates with a new group/practice that is not a party to a
Service Agreement with Company, then Company, at its option, may terminate this
Agreement solely with respect to the terminating Physician Owner, and the
provisions of Exhibit 11 shall apply. In the event that Company does not enter
into a new Service Agreement, then Company shall terminate this Agreement with
respect to such Physician Owner, and the terminating Physician Owner shall be
obligated as described in Sections 11.9.1 (a) and 11.9.1(e) of this Agreement;
provided, however, if such termination is within the first five (5) years of the
term of this Agreement, the terminating Physician Owner shall also be obligated
as described in Sections 11.9.1.(a), 11.9.1(b), 11.9.1(c), 11.9.1(d) and
11.9.1(e).
11.9.4. Death or Disability. In the event that a Physician Owner dies or
becomes disabled, then this Agreement shall be terminated with respect to such
Physician Owner; provided, however, in the event of disability, the restrictive
covenants described in Exhibit 11 shall remain in force for a period of
thirty-six (36) months from such termination.
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds. All insurance or condemnation proceeds
payable by reason of any physical loss of any of the improvements comprising the
facilities or the furniture, fixtures and equipment used by the Practice
Offices, shall be available for the reconstruction, repair or replacement, as
the case may be, of any damage, destruction or loss. The Policy Board, in
consultation with TOC, shall review and approve such reconstruction, repair or
replacement.
- 35 -
<PAGE>
12.2. Temporary Space. In the event of substantial damage to or the
condemnation of a significant portion of the facilities, Company shall use its
best efforts to provide temporary facilities until such time as the facilities
can be restored or replaced.
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF TOC AND PHYSICIAN OWNERS
TOC and Physician Owners represent, warrant, covenant and agree with
Company that:
13.1. Validity. TOC is a Florida corporation. TOC has the full power and
authority to own TOC's property, to carry on TOC's business as presently being
conducted, to enter into this Agreement, and to consummate the transactions
contemplated hereby. Each Physician Owner is an adult citizen and resident of
the State of Florida. Each Physician Owner has the full power and authority to
own his or her property, carry on his or her business as presently being
conducted, to enter into this Agreement, and to consummate the transactions
contemplated hereby.
13.2. Litigation. Except as disclosed pursuant to the Merger Agreement,
there is no suit, action, proceeding at law or in equity, arbitration,
administrative proceeding or other proceeding pending, or threatened against, or
affecting TOC or any Physician Employee, or to the best of TOC's and each
Physician Owner's knowledge, any provider or other health care professional
associated with or employed by TOC as pertains to any claim involving the
providing of health care related services, and to the best of TOC's and each
Physician Owner's knowledge there is no basis for any of the foregoing.
13.3. Permits. TOC and all health care professionals associated with or
employed by TOC have all permits and licenses and other Necessary Authorizations
required by all Applicable Law, except where failure to secure such licenses,
permits and other Necessary Authorizations does not have a material adverse
effect; have made all regulatory filings necessary for the conduct of TOC's
business; and are not in violation of any of said permitting or licensing
requirements.
13.4. Authority. The execution of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
action, and this Agreement is a valid and binding Agreement of TOC and each
Physician Owner, enforceable in accordance with its terms. TOC and each
Physician Owner have obtained all third-party consents necessary to enter into
and consummate the transaction contemplated by this Agreement. Neither the
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby, nor compliance by TOC or any Physician Owner with any of
the provisions hereof, will:
13.4.1. violate or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under any license, agreement or other
instrument or obligation to which either TOC or any Physician Owner is a party;
- 36 -
<PAGE>
13.4.2. violate any order, writ, injunction, decree, statute, rule or
regulation applicable to either TOC or any Physician Owner.
13.5. Compliance with Applicable Law. To the best of TOC's and each
Physician Owner's knowledge and belief, TOC and each Physician Owner has
operated in compliance with all federal, state, county and municipal laws,
ordinances and regulations applicable thereto and neither TOC nor any provider
associated with or employed by TOC has received payment or any remuneration
whatsoever to induce or encourage the referral of patients or the purchase of
goods and/or services as prohibited under 42 U.S.C. ss. 1320a-7b(b), or
otherwise perpetrated any Medicare or Medicaid fraud or abuse, nor has any fraud
or abuse been alleged within the last five (5) years by any Governmental
Authority, a carrier or a Third-Party Payor.
13.6. Health Care Compliance. TOC is presently participating in or
otherwise authorized to receive reimbursement from or is a party to Medicare,
Medicaid, and other Third-Party Payor Programs. All necessary certifications and
contracts required for participation in such programs are in full force and
effect and have not been amended or otherwise modified, rescinded, revoked or
assigned as of the date hereof, and no condition exists or to the knowledge of
TOC no event has occurred which in itself or with the giving of notice or the
lapse of time or both would result in the suspension, revocation, impairment,
forfeiture or non-renewal of any such Third-Party Payor Program. TOC is in full
compliance with the material requirements of all such Third-Party Payor Programs
applicable thereto.
13.7. Fraud and Abuse. TOC and persons and entities providing professional
services for TOC, have not, to the knowledge of TOC and each Physician Owner,
after due inquiry, engaged in any activities which are prohibited by or are in
violation of the rules, regulations, policies, contracts or laws pertaining to
any Third-Party Payor Program, or which are prohibited by rules of professional
conduct ("Governmental Rules and Regulations"), including but not limited to the
following: (a) 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; (b) 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; (c) failing to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on TOC's own behalf or on behalf of another, with
intent to fraudulently secure such benefit or payment; or (d) 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 (i) in return for referring
an individual to a person for the furnishing or arranging for the furnishing or
any item or service for which payment may be made in whole or in part by
Medicare or Medicaid, or (ii) in return for purchasing, leasing, or ordering or
arranging for or recommending purchasing, leasing, or ordering any good,
facility, service or item for which payment may be made in whole or in part by
Medicare or Medicaid.
13.8. TOC Compliance. TOC has all licenses necessary to operate the
Practice Offices in accordance with the requirements of all Applicable Law and
has all Necessary Authorizations for the
- 37 -
<PAGE>
use and operation, all of which are in full force and effect. There are no
outstanding notices of deficiencies relating to TOC issued by any Governmental
Authority or Third-Party Payor requiring conformity or compliance with any
Applicable Law or condition for participation of such Governmental Authority or
Third-Party Payor, and after reasonable and independent inquiry and due
diligence and investigation, TOC has neither received notice nor has any
knowledge or reason to believe that such Necessary Authorizations may be revoked
or not renewed in the ordinary course.
13.9. Rates and Reimbursement Policies. The jurisdiction in which TOC is
located does not currently impose any restrictions or limitations on rates which
may be charged to private pay patients receiving services provided by TOC. TOC
does not have any rate appeal currently pending before any Governmental
Authority or any administrator of any Third-Party Payor Program. TOC has no
knowledge of any Applicable Law which has been enacted, promulgated or issued
within the eighteen (18) months preceding the date of this Agreement or any such
legal requirement proposed or currently pending in the jurisdiction in which TOC
is located which could have a material adverse effect on TOC or may result in
the imposition of additional Medicaid, Medicare, charity, free care, welfare, or
other discounted or government assisted patients at TOC or require TOC to obtain
any necessary authorization which TOC does not currently possess.
13.10. Accounts Receivable. With respect to the Purchased A/R, as of the
date of purchase:
13.10.1. All documents and agreements relating to the Purchased A/R that
have been delivered to Company with respect to such Accounts Receivable are true
and correct; TOC has billed the applicable Account Debtor and TOC has delivered
or caused to be delivered to such Account Debtor all requested supporting claim
documents with respect to such Accounts Receivable; all information set forth in
the bill and supporting claim documents is true and correct, and, if any error
has been made, TOC will promptly correct the same and, if necessary, rebill or,
if requested by Company, cooperate with Company to rebill such Accounts
Receivable.
13.10.2. The Purchased A/R are exclusively owned by TOC and there is no
security interest or lien in favor of any third party, or the recording or
filing against TOC, as debtor, covering or purporting to cover any interest of
any kind in any Accounts Receivable, except as has been released by each party
holding such adverse interest in the Accounts Receivable. Upon payment of the
Purchase Price with respect to the Purchased A/R and with respect to
Governmental Receivables, to the extent permissible by law, all right, title and
interest of TOC with respect thereto shall be vested in Company, free and clear
of any lien, security interest, claim or encumbrance of any kind, and TOC agrees
to defend the same against the claims of all Persons.
13.10.3. The Purchased A/R (i) are payable, in an amount not less than
their face amount, as adjusted pursuant to the provisions of Section 8.3.2, by
the Account Debtor identified by TOC as being obligated to do so, (ii) are based
on an actual and bona fide rendition of services or sale of goods to the patient
by TOC in the ordinary course of business, (iii) are denominated and payable
only in lawful currency of the United States, and (iv) are accounts or general
intangibles within the meaning of the UCC of the state in which TOC has its
principal place of business, or are rights to
- 38 -
<PAGE>
payment under a policy of insurance or proceeds thereof, and are not evidenced
by any instrument or chattel paper. There are no payors other than the Account
Debtor identified by TOC as the payor primarily liable on any Purchased A/R.
13.10.4. The Purchased A/R are not (i) subject to any action, suit,
proceeding or dispute (pending or threatened), set-off, counterclaim, defense,
abatement, suspension, deferment, deductible, reduction or termination by the
Account Debtors other than routine adjustments and disallowances made in the
ordinary course of business, to the extent of such adjustments and
disallowances, (ii) past or within sixty (60) days of, the statutory limit for
collection applicable to the Account Debtor, (iii) subject to an invoice which
provides for payment more than forty-five (45) days from the date of such
invoice, (iv) an account which arises out of a sale or other transaction by or
between TOC to an Affiliate of TOC, (v) from an Account Debtor who is also a
creditor of TOC, (vi) an account in which the Account Debtor has commenced a
voluntary case, or an involuntary proceeding has been instituted, under the
federal bankruptcy laws, as now constituted or hereafter amended, or made an
assignment for the benefit or creditors, or if a decree or order for relief has
been entered by a court having jurisdiction in the premises in respect to the
Account Debtor, (vii) an account of which the goods giving rise to such Accounts
Receivable have not been shipped and delivered to and accepted by the Account
Debtor or the services giving rise to such Accounts Receivable have not been
performed by TOC and accepted by the Account Debtor or the Accounts Receivable
otherwise does not represent a final sale, (viii) is evidenced by an instrument
or chattel paper unless such instrument or chattel paper is delivered to Company
with all appropriate endorsements in favor of Company, or (ix) other than a
complete bona fide transaction which requires no further act under any
circumstances on the part of TOC to make the Accounts Receivable payable by the
Account Debtor.
13.10.5. TOC does not have any guaranty of, letter of credit providing
credit support for, or collateral security for, the Purchased A/R, other than
any such guaranty, letter of credit or collateral security as has been assigned
to Company, and any such guaranty, letter of credit or collateral security is
not subject to any lien in favor of any other person.
13.10.6. The goods or services provided and reflected by the Purchased A/R
were medically necessary for the patient in the opinion of TOC and the patient
received such goods or services.
13.10.7. The face amount of the Accounts Receivable for the services
constituting the basis for the Purchased A/R are consistent with the usual,
customary and reasonable fees charged by other similar medical service providers
in TOC's community for the same or similar service.
13.10.8. Each Account Debtor with respect to the Purchased A/R (i) is not
currently the subject of any bankruptcy, insolvency or receivership proceeding,
nor is it generally unable to make payments on its obligations when due, (ii) is
located in the United States, and (iii) is one of the following: (x) a party
which in the ordinary course of its business or activities agrees to pay for
healthcare services received by individuals, including, without limitation,
Medicare, Medicaid, governmental bodies, commercial insurance companies and
non-profit insurance companies (such as Blue Cross and Blue Shield entities)
issuing health, personal injury, workers compensation or other
- 39 -
<PAGE>
types of insurance; (y) employers or unions which self-insure for employee or
member health insurance, prepaid healthcare organizations, preferred provider
organizations, health maintenance organizations or any other similar person, or
(z) a Third-Party Payor of the type described in the definition of Governmental
Receivables.
13.10.9. The proceeds of the sale of the Purchased A/R will be used for
the business and commercial purposes of TOC. The sale of the Purchased A/R
hereunder is made in good faith and without actual intent to hinder, delay or
defraud present or future creditors of TOC.
13.10.10. Except with respect to Governmental Receivables, the insurance
policy, contract or other instrument obligating an Account Debtor to make
payment with respect to the Purchased A/R (i) does not contain any provision
prohibiting the transfer of such payment obligation from the patient to TOC, or
from TOC to Company, (ii) has been duly authorized by TOC and to the knowledge
of TOC has been duly authorized by the Account Debtor and, together, with the
Purchased A/R, constitutes the legal, valid and binding obligation of the
Account Debtor in accordance with its terms, (iii) together with the applicable
Purchased A/R, does not contravene in any material respect any requirement of
law applicable thereto, and (iv) was in full force and effect and applicable to
the patient at the time the services constituting the basis for the Purchased
A/R were performed.
The Purchased A/R are purchased without recourse, except for the
representations, warranties and covenants made by TOC and the Physician Owners
with respect thereto. None of the foregoing representations and warranties with
respect to the Purchased A/R shall be deemed to constitute a guaranty by TOC
that the Purchased A/R will be collected by Company. TOC shall not be
responsible for any damages for any breach of a representation or warranty under
this Section 13.10 until Company has suffered a loss on the purchase of TOC's
Accounts Receivable. Damages for such breach shall be limited to the amount of
Company's loss on the purchase of such Accounts Receivable.
13.11. Full Disclosure. When considered in the context of all information
contained herein, to the knowledge of TOC no representation or warranty made by
TOC in this Agreement contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading.
13.12. Exhibits. All the facts recited in Exhibits annexed hereto shall be
deemed to be representations of fact by TOC as though recited in this Article
XIII.
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents, warrants, covenants and agrees with TOC as follows:
- 40 -
<PAGE>
14.1. Organization. Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Company
has the full power to own its property, to carry on its business as presently
conducted, to enter into this Agreement and to consummate the transactions
contemplated hereby.
14.2. Authority. Company has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, as well as the
consummation of the transactions contemplated hereby. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
hereby will not, violate any provisions of the charter or the bylaws of Company
or any indenture, mortgage, deed of trust, lien, lease, agreement, arrangement,
contract, instrument, license, order, judgment or decree or result in the
acceleration of any obligation thereunder to which Company is a party or by
which it is bound.
14.3. Absence of Litigation. No action or proceeding by or before any
court or other Governmental Authority has been instituted or is, to the best of
Company's knowledge, threatened with respect to the transactions contemplated by
this Agreement.
14.4. Transactions with Affiliates. Company shall not enter into any
transaction or series of transactions, whether or not related or in the ordinary
course of business, with any Affiliate of TOC or Company, other than on terms
and conditions substantially as favorable to Company as would be obtainable by
Company at the time in a comparable arm's-length transaction with a person not
an Affiliate.
ARTICLE XV.
COVENANTS OF TOC AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements. TOC shall not
incorporate, merge or consolidate with any other entity or individual or
liquidate or dissolve or wind-up TOC's affairs or enter into any partnerships,
joint ventures or sale-leaseback transactions or purchase or otherwise acquire
(in one or a series of related transactions) any part of the property or assets
(other than purchases or other acquisitions of inventory, materials and
equipment in the ordinary course of business) of any other person or entity.
15.2. Necessary Authorizations/Assignment of Licenses and Permits. TOC and
each Physician Owner shall maintain all licenses, permits, certifications, or
other Necessary Authorizations and shall not assign or transfer any interest in
any license, permit, certificate or other Necessary Authorization granted to it
by any Governmental Authority, nor shall TOC or any Physician Owner assign,
transfer, or remove or permit any other individual or entity to assign, transfer
or remove any records of TOC or any Physician Owner, including without
limitation, patient records, medical and clinical records (except for removal of
such patient records as required under any Applicable Law).
- 41 -
<PAGE>
15.3. Transaction with Affiliates. Neither TOC nor any Physician Owner
shall enter into any transaction or series of transactions, whether or not
related or in the ordinary course of business, with any Affiliate of TOC or
Company, other than on terms and conditions substantially as favorable to TOC or
the Physician Owner, as would be obtainable by TOC or the Physician Owner at the
time in a comparable arms-length transaction with a person not an Affiliate.
15.4. Compliance with All Laws. TOC and each Physician Owner shall use
their best efforts to comply with all laws and regulations relating to TOC's
practice and the operation of any facility, including, but not limited to, all
state, federal and local laws relating to the acquisition or operation of a
health care practice. Furthermore, neither TOC nor any Physician Owner shall
intentionally violate any Governmental Rules and Regulations.
15.5. Third-Party Payor Programs. TOC shall maintain TOC's compliance with
the requirements of all Third-Party Payor Programs in which TOC is currently
participating or authorized to participate.
15.6. Change in Business or Credit and Collection Policy. TOC shall not
make any change in the character of TOC's business or in the credit and
collection policy, which change would, in either case, impair the collectibility
of any Purchased A/R or any Merger A/R or otherwise modify, amend or extend the
terms of any such account other than in the ordinary course of business.
15.7. Treatment of Accounts Receivable. TOC will (i) treat transfers to
Company of Accounts Receivable hereunder as a sale for all purposes, including
tax and accounting (and shall accurately reflect such sale in its financial
statements), and will advise all persons who inquire about the ownership of such
Accounts Receivable that they have been sold to Company; (ii) not treat any such
Accounts Receivable as an asset on TOC's books and records; (iii) record in
TOC's books, records and computer files pertaining thereto that such Accounts
Receivable have been sold to Company; (iv) pay all taxes, if any, relating to
the transfer of such Accounts Receivable after the same have been purchased by
Company; (v) not impede or interfere with Company's collection of such Accounts
Receivable; (vii) not amend, waive or otherwise permit or agree to any deviation
from the terms or conditions of such purchased Accounts Receivable; (viii) use
all reasonable efforts to obtain all consents from patients which are required
by law in order for Company, or any servicing entity retained by Company, to
secure information needed to obtain or to expedite payment from the respective
Account Debtors; and (ix) have billed such Accounts Receivable on the same bases
and using the same policies and practices that it has used in the past unless
Company has been advised in writing of a change prior to the purchase of such
Accounts Receivable. Company or its designated representatives from time to time
may verify the Accounts Receivable, inspect, check, take copies or extracts from
TOC's books, records and files, and TOC will make the same available to Company
or such representatives at any reasonable time for such purposes.
15.8. Security Interest. If, contrary to the mutual intent of TOC and
Company, any purchase of Purchased A/R is characterized as a loan and not as a
sale, TOC shall, effective as of the date hereof, be deemed to have granted (and
TOC does hereby grant) to Company a first priority security
- 42 -
<PAGE>
interest in and to any and all of the Purchased A/R and the proceeds thereof to
secure the repayment of all amounts advanced to TOC hereunder with accrued
interest thereon, and this Agreement shall be deemed to be a security agreement.
With respect to such grant of a security interest, Company may at its option
exercise from time to time any and all rights and remedies available to it under
the UCC or otherwise. TOC agrees that five (5) days shall be reasonable prior
notice of the date of any public or private sale or other disposition of all or
part of the Purchased A/R. TOC represents and warrants that the location of
TOC's principal place of business, and all locations where TOC maintains records
with respect to its accounts are set forth under its name in Section 16.3
hereof. TOC agrees to notify Company in writing thirty (30) days prior to any
change in any such location. The exact name of TOC is as set forth at the
beginning of this Agreement, and except as set forth on the signature page
hereof, TOC has not changed its name in the last five (5) years, and during such
period TOC did not use, nor does TOC now use, any fictitious or trade name other
than the former name of Company. TOC shall notify Company in writing thirty (30)
days prior to any change in any such name.
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment. Company shall have the right to assign its rights
hereunder to Specialty Care Network, Inc. and to any person, firm or corporation
under common control with Company and to any lending institution from which
Company obtains financing, including but not limiting the restrictive covenants
included in Article VII (covenant not to compete), for security purposes or as
collateral. TOC agrees to, and acknowledges, Company's right to assign Company's
rights under this Agreement to any Lender and further agrees that upon receipt
of written notice from such Lender, TOC shall pay to Lender or cause to be paid
to Lender all amounts which are otherwise payable to Company pursuant to the
terms of this Agreement, including, without limitation, all service fees, and
other Clinic Expenses and, until such amounts are delivered to Lender, hold
payments in trust for Lender. Except as set forth above, neither Company nor TOC
shall have the right to assign their respective rights and obligations hereunder
without the written consent of the other party. Without limiting the foregoing,
TOC acknowledges that, as collateral for certain obligations, Company has
assigned all of its rights hereunder to NationsBank of Tennessee, N.A. as Agent
(the "Agent") for itself and other banks and institutional lenders from time to
time (collectively the "Banks") and has granted the Agent for the benefit of the
Banks a lien and security interest upon all real and personal property used in
the operation of the Office Locations (the "Pledged Assets"). As an inducement
for the Banks to extend or continue the extension of credit to Company, TOC (i)
acknowledges that the collateral assignment to the Agent covers all rights of
Company hereunder, including, but not limited to, rights arising from warranties
and representations made by TOC, rights to enforce covenants made by TOC, and
rights to receive all payments due Company; (ii) agrees to regard the Agent as
the owner of any or all of the assigned rights upon written notice to TOC of
this election from the Agent; (iii) agrees that neither the Agent nor any of the
Banks has obligation for the performance of the duties of Company hereunder, and
shall not assume any such duty by the exercise of rights as a secured lender;
(iv) agrees to give the Agent written notice of any material default hereunder
on
- 43 -
<PAGE>
Company's part at the address of 1 NationsBank Plaza, Nashville, Tennessee
37239, Attn: David Dupuy, and to allow at least thirty (30) days thereafter for
the cure of such default before TOC terminates this Agreement; (v) agrees that
the rights of TOC under this Agreement, including, but not limited to, the right
to the use of the Pledged Assets, are and shall be junior to any security
interest that the Agent and the Banks, their successors or assigns may have in
the Pledged Assets at any time; (vi) agrees that the benefits of the above
undertakings in favor of the Agent and Banks shall further extend to all
successors and assigns of the Agents and Banks, provided that any notices given
by TOC under this Section shall be given to the Agent at the foregoing address
unless TOC has received written notice of a change thereof; and (vii) agrees
that this Section may not be modified, and no provision of this Section may be
waived, absent the written approval of the Agent.
16.2. Whole Agreement; Modification. This Agreement supersedes all prior
agreements between the parties and there are no other agreements or
understandings, written or oral, between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement.
16.3. Notices. All notices required or permitted by this Agreement shall
be in writing and shall be deemed to have been given (i) when received if given
in person, (ii) on the date of acknowledgment of receipt if sent by telex,
facsimile or other wire transmission, (iii) one business day after being sent by
overnight delivery service, or (iv) three days after being deposited in the
United States mail, certified or registered mail, postage prepaid, addressed as
follows:
To Company: TOC Services, Inc.
3334 Capital Medical Blvd., Suite 400
Tallahassee, Florida 32300
To TOC: TOC Specialists, L.C.
3334 Capital Medical Blvd., Suite 400
Tallahassee, Florida 32300
or to such other address as either party shall notify the other.
16.4. Binding on Successors. Subject to Section 16.1, this Agreement shall
be binding upon the parties hereto, and their successors, assigns, heirs and
beneficiaries.
16.5. Waiver of Provisions. Any waiver of any terms and conditions hereof
must be in writing, and signed by the parties hereto. The waiver of any of the
terms and conditions of this Agreement shall not be construed as a waiver of any
other terms and conditions hereof.
16.6. Governing Law. The validity, interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
State of Florida.
- 44 -
<PAGE>
16.7. No Practice of Medicine. The parties acknowledge that Company is not
authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or service
required of Company in this Agreement should be construed or deemed by any
Governmental Authority or court to constitute the practice of medicine, the
performance of said act or service by Company shall be deemed waived and
unenforceable to the minimum extent required to comply with Applicable Law.
16.8. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
16.9. Additional Documents. Each of the parties hereto agrees to execute
any document or documents that may be requested from time to time by any other
party to implement or complete such party's obligations pursuant to this
Agreement.
16.10. Attorneys' Fees. If legal action is commenced by any party to
enforce or defend its rights under this Agreement, the prevailing party in such
action shall be entitled to recover its costs and reasonable attorneys' fees in
addition to any other relief granted.
16.11. Time is of the Essence. Time is hereby expressly declared to be of
the essence in this Agreement.
16.12. Confidentiality. No party hereto shall disseminate or release to
any third party any information regarding any provision of this Agreement, or
any financial information regarding the other (past, present or future) that was
obtained by the other in the course of the negotiations of this Agreement or in
the course of the performance of this Agreement, including, but not limited to,
any information relating to the internal operations of TOC, TOC fees or the
terms of any of the managed care contracts, without the other party's written
approval; provided, however, the foregoing shall not apply to information which
(i) is generally available to the public other than as a result of a breach of
confidentiality provisions; (ii) becomes available on a non-confidential basis
from a source other than the other party or its affiliates or agents, which
source was not itself bound by a confidentiality agreement; (iii) which is
required to be disclosed by law or pursuant to court order; or (iv) except for
disclosure to its banks, underwriters or lenders, or its advisors to the extent
required by Section 9.4, or as required in connection with reports on filings
with the SEC or State Departments of Securities. Company shall provide TOC with
copies of any information regarding TOC provided by Company to any third party.
16.13. Contract Modifications for Prospective Legal Events. If any state
or federal laws or regulations, now existing or enacted or promulgated after the
effective date of this Agreement, are interpreted by judicial decision, a
regulatory agency or legal counsel in such a manner as to indicate that the
structure of this Agreement may be in violation of such laws or regulations, TOC
and Company shall amend this Agreement as necessary. To the maximum extent
possible, any such
- 45 -
<PAGE>
amendment shall preserve the underlying economic and financial arrangements
between and among TOC and Company.
16.14. Remedies Cumulative. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any party, but the same shall be distinct,
separate and cumulative and may be exercised from time to time as often as
occasion may arise or as may be deemed expedient.
16.15. Language Construction. The language in all parts of this Agreement
shall be construed, in all cases, according to TOC's fair meaning, and not for
or against either party hereto. The parties acknowledge that each party and its
counsel have reviewed and revised this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.
16.16. No Obligation to Third Parties. Except as provided in Section 16.1,
none of the obligations and duties of Company or TOC under this Agreement shall
in any way or in any manner be deemed to create any obligation of Company or of
TOC to, or any rights in, any person or entity not a party to this Agreement.
16.17. Communications. TOC and Company agree that good communication
between the parties is essential to the successful performance of this
Agreement, and each
- 46 -
<PAGE>
pledges to communicate fully and clearly with the other on matters relating to
the successful operation of TOC's practice at the Practice Offices.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
TOC:
TOC SPECIALISTS, P.L.
(d/b/a Tallahassee Orthopedic Clinic)
By:_________________________________________
Title:______________________________________
COMPANY:
TOC SERVICES, INC.
(f/k/a Tallahassee Orthopedic Clinic, P.A.)
By:_________________________________________
Title:______________________________________
- 47 -
<PAGE>
PHYSICIAN OWNERS:
________________________________________
Greg A. Alexander, M.D.
________________________________________
David C. Berg, M.D., M.D.
________________________________________
Richard E. Blackburn, M.D.
________________________________________
Donald Dewey, M.D.
________________________________________
Mark E. Fahey, M.D.
________________________________________
Tom C. Haney, M.D.
________________________________________
William D. Henderson, Jr., M.D.
________________________________________
Steve E. Jordan, M.D.
________________________________________
J. Rick Lyon, M.D.
________________________________________
Kris D. Stowers, M.D.
________________________________________
Robert L. Thornberry, M.D.
________________________________________
Billy C. Weinstein, M.D.
________________________________________
Charles H. Wingo, M.D.
- 48 -
<PAGE>
EXHIBIT 3.1
LEASE AGREEMENT
3.1-1
<PAGE>
EXHIBIT 4.1
POLICY BOARD GOVERNANCE RULES
A. Number, Tenure and Qualifications. The Policy Board shall consist of six (6)
members. Company shall designate, in its sole discretion, three (3) members of
the Policy Board. TOC shall designate, in TOC's sole discretion, three (3)
members of the Policy Board. The initial Policy board shall be chosen at the
time of the closing of the Exchange. Thereafter, the respective Policy Board
Members shall be chosen at such time and in such manner as shall be determined
by the respective party making the appointment.
B. Duties and Responsibilities of the Policy Board. The Policy Board shall
have the duties and responsibilities more particularly described in Section 4.2
of this Agreement.
C. Regular Meetings of the Policy Board. Regular meetings of the Policy
Board shall be held on the first Monday of each calendar quarter at such times
and places as the Policy Board by resolution may determine and specify, and if
so determined no notice thereof need be given.
D. Special Meetings. Special meetings of the Policy Board may be held at
any time or place whenever called by written request of at least two (2) Policy
Board Members, notice thereof being given to each Policy Board Member by the
Policy Board Members calling the meeting, or they may be held at any time
without formal notice provided all of the Policy Board Members are present or
those not present shall at any time waive or have waived notice thereof.
E. Notice. Notice of any special meeting shall be given at least ten (10)
days previously thereto by written notice delivered personally, by telegram, or
facsimile. If mailed, such notice shall be mailed to each Policy Board Member at
his business address no less than ten (10) days previously thereto, and shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. If notice be given by facsimile, such notice shall be deemed to be
delivered when information of the transmission is received.
F. Meetings by any Form of Communication. The Policy Board shall have the
power to permit any and all Policy Board Members to participate in a regular or
special meeting by, or conduct the meeting through the use of any means of
communication by which all Policy Board Members participating may simultaneously
hear each other during the meeting. A Policy Board Member participating in a
meeting by this means is deemed to be present in person at the meeting.
G. Quorum. All of the members of the Policy Board as constituted from time
to time shall constitute a quorum for the transaction of business, but a lesser
number may adjourn any meeting and the meeting may be held as adjourned without
further notice. When a quorum is present
4.1-1
<PAGE>
at any meeting, a majority of the members present thereat shall decide any
question brought before such meeting, except as otherwise provided by this
Agreement or by these Governance Rules. The fact that a Policy Board Member has
an interest in a matter to be voted on at the meeting shall not prevent his
being counted for purposes of a quorum.
H. Vacancies. Any vacancy occurring in the Policy Board shall be filled by
the Party which chose such vacated Policy Board Member(s).
I. Removal. Any Policy Board Member may be removed without cause by the
Party which chose such Policy Board Member.
J. Committees. The majority of the Policy Board may appoint an executive
committee or such other committees as it may deem advisable, composed of one (1)
or more Policy Board Members, and may delegate authority to such committees as
is not inconsistent with this Agreement. The members of such committee shall
serve at the pleasure of the Policy Board.
K. Presumption of Assent. A Policy Board Member who is present at a
meeting of the Policy Board at which action on any matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the secretaries of the Company and TOC immediately after the adjournment of
the meeting. Such right to dissent shall not apply to a Policy Board Member who
voted in favor of such action.
L. Informal Action by Board Members. Any action required to be taken at a
meeting of the Policy Board, or any other action which may be taken at a meeting
of the Policy Board, may be taken without a meeting if all Policy Board Members
consent to taking such action without a meeting. If all Policy Board Members
consent to taking such action without a meeting, the affirmative vote of a
majority of the Policy Board Members is the act of the Policy Board. The action
must be evidenced by one or more written consents describing the action taken,
signed by each Policy Board Member, indicating each signing Policy Board
Member's vote or abstention on the action, and shall be included in the minutes
or filed with the Policy Board records reflecting the action taken.
4.1-2
<PAGE>
EXHIBIT 6.9.1
TOC PLAN
6.9.1-1
<PAGE>
EXHIBIT 8.1.8(d)
EXCLUDED EXPENSES
Excluded Expenses include, but are not limited to the following items:
a. Accounting, legal and other professional fees attributed to TOC or
to Physician Employees; provided, however, legal and accounting
expenses incurred in the ordinary course of TOC's business, approved
by the Policy Board will be Clinic Expenses.
b. Contribution expenses, cash or non-cash, which include, but are not
limited to costs of sponsoring sports teams, political
contributions, unapproved marketing expenses, and contributions to
hospitals and staff.
c. Automobile expenses including payments, repairs and maintenance,
mileage, depreciation, etc.
d. Entertainment expenses of any kind.
e. Physician benefits for Physician Owners including insurance (health,
life [except to the extent allowed under Section 8.1.3(f)], dental,
disability [except to the extent allowed under Section 8.1.3(f)],
etc., but not including malpractice insurance), vacation time, sick
time, paid leave of absence, contributions to and administration of
physician retirement plans (pension, 401(k), IRA, others), etc.
f. Employment tax expenses including Federal and State Unemployment
taxes, FICA taxes, Medicare taxes, etc. of Physician Owners.
g. Home office expenses including the acquisition costs, depreciation,
repairs and maintenance, and ongoing operating expenses of:
computers, software, copying machines, fax machines, telephones and
telephone lines, cellular telephones, etc.; and the costs of having
an office in one's home including allocated rent, utility and
depreciation expenses.
h. Meal expenses of Physician Employees.
i. Medical supplies and drugs either used or distributed by a Physician
Employee without billing for such supplies and drugs at standard
rates.
j. Presentation expenses of any kind including professional services,
slide production, travel, meals, entertainment, etc.
k. Personal postage expenses.
l. Personal laundry expenses.
m. Personal assistant expenses (including the time staff spends on
personal errands for Physician Employees).
8.1.8.(d)-1
<PAGE>
EXHIBIT 8.3.6
1. ACCOUNTS RECEIVABLE COLLECTION
1.1 Collection of Accounts Receivable. TOC agrees to cooperate with
Company in the collection of the Accounts Receivables sold by TOC, transferred
pursuant to Section 8.3.
1.2 Definitions. In addition to the definitions contained in Article II of
the Agreement, for purposes of this Exhibit 8.3.6., the following terms shall be
applicable:
"Accounts" means, with respect to TOC, all Accounts Receivable including
any and all rights to payment of money or other forms of consideration of
any kind (whether classified under the Uniform Commercial Code as
accounts, chattel paper, general intangibles, or otherwise) for goods sold
or leased or for services rendered by TOC, including, but not limited to,
accounts receivable, proceeds of any letters of credit naming TOC as
beneficiary, chattel paper, insurance proceeds, contract rights, notes,
drafts, instruments, documents, acceptances, and all other debts,
obligations and liabilities in whatever form from any other Person, other
than MRI Receivables.
"Collecting Bank" means the main office of ______________________________
located at ___________________________________, or such other financial
institution agreed to by Company.
"Finance Charge Rate" means a rate of interest equal to the lesser of (i)
eighteen percent (18%) per annum or (ii) the maximum rate of interest
allowed by applicable law from time to time in effect.
"Governmental Lockbox Account" means an account established at the
Collecting Bank by TOC into which all proceeds of TOC's Governmental
Receivables are remitted.
"Lender" shall mean any lender to Company that has a security interest in
the Accounts from time to time.
"Lockbox Agreements" means that certain Lockbox Operating Procedural
Agreements -- Governmental Receivables to be entered into between the
Collecting Bank as to Governmental Receivables and that certain Lockbox
Operating Procedural Agreement -- Non-Governmental Receivables to be
entered between the Collecting Bank, Lender and TOC as to Accounts which
are not Governmental Receivables, in a form acceptable to counsel for
Company.
"Main Account" means Company's operating account established and
maintained at the Collecting Bank.
"Non-Governmental Lockbox Account" means the account established by the
Company with the Collecting Bank into which all proceeds from TOC's
Accounts under which a Third-Party Payor is the Account Debtor (other than
Governmental Receivables) are remitted.
8.3.6-1
<PAGE>
"Non-Governmental Receivables" means the Accounts which are not
Governmental Receivables.
"Notification Letter" means a written notification from TOC to Third-Party
Payors informing such Third-Party Payors that all proceeds due under TOC's
Accounts are to be remitted to the Non-Governmental Lockbox Account or the
Governmental Lockbox Account, as the case may be, substantially in a form
acceptable to counsel for Company.
1.3 Collection of Governmental Receivables. With respect to payments on
Governmental Receivables, at the request and option of Company, TOC agrees that
the following procedures shall apply:
(a) TOC shall enter into a Lockbox Agreement applicable to Governmental
Receivables in a form acceptable to counsel for Company and reasonably
acceptable to TOC and establish a Governmental Lockbox Account. Governmental
Lockbox Account shall be an account in the name of TOC. All payments in respect
of TOC's Governmental Receivables are to be made directly to such account. In
the event Company exercises this option, TOC shall instruct each Account Debtor
in respect of TOC's Governmental Receivables to remit all such payments directly
to such Governmental Lockbox Account pursuant to a Notification Letter. In
addition, TOC shall attach written instructions to each invoice representing
such Governmental Receivable generated subsequent to the date of this Agreement
instructing such Third-Party Payor or Account Debtor that payment under such
invoice is to be paid to the Governmental Lockbox Account. TOC agrees that it
shall not deposit any funds other than payments on Governmental Receivables
into, nor make any withdrawals from, the Governmental Lockbox Account without
the prior written consent of Company. TOC further agrees that it shall not
during the term of this Agreement terminate, modify or amend in any manner the
Lockbox Agreement applicable to the Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to Governmental
Receivables, TOC shall instruct the Collecting Bank to transfer automatically
all amounts deposited in Governmental Lockbox Account constituting good funds to
Company's Main Account. TOC shall have no right or interest in the Main Account.
TOC shall not, so long as any purchased Account remains unpaid, change or cancel
such automatic transfer order at any time, or, without the prior written consent
of Company, change either the identity of Governmental Lockbox Account or the
instructions to each Account Debtor on the related Governmental Receivable to
make its payments to such account. Any such action shall be considered a breach
of this Agreement for which Company shall be entitled to all remedies at law and
in equity, including obtaining an injunction.
(c) TOC will cooperate with Company and its agents in the identification
of sums deposited into Governmental Lockbox Account, which cooperation shall
continue until all purchased Accounts sold hereunder have been collected.
(d) TOC agrees to pay, on demand, a finance charge equal to the Finance
Charge Rate, on any payment on a Governmental Receivable received by TOC that is
not deposited in Governmental Lockbox Account within forty-eight (48) hours
after receipt by TOC, unless the failure to make such deposit is attributable to
Company.
8.3.6-2
<PAGE>
1.4 Collection of Non-Governmental Receivables. With respect to payments
on Non-Governmental Receivables, if requested by Company and at Company's
option, TOC agrees that the following procedures shall apply:
(a) Prior to the sale of any Non-Governmental Receivable hereunder,
Company, the Collecting Bank and Lender (if requested by Lender) shall enter
into a Lockbox Agreement applicable to Non-Governmental Receivables in a form
acceptable to counsel for Company and Company shall establish Non-Governmental
Lockbox Account. The Non-Governmental Lockbox Account shall be an account in the
name of Company. All payments in respect of TOC's Non-Governmental Receivables
are to be made directly to such account. If Company exercises its option herein,
at request of Company, TOC shall instruct each Account Debtor in respect of
TOC's Non-Governmental Receivables to remit all such payments directly to such
Non-Governmental Lockbox Account pursuant to a Notification Letter. In addition,
TOC shall attach written instructions to each invoice representing such
Non-Governmental Receivable generated subsequent to the date of this Agreement
instructing such Third-Party Payor or Account Debtor that payment under such
invoice is to be paid to the Non-Governmental Lockbox Account. TOC and Company
agree that neither of them shall deposit any funds other than Non-Governmental
Receivables into, nor make any withdrawals from, the Non-Governmental Lockbox
Account without the prior written consent of Company. TOC further agrees that it
shall not during the term of this Agreement terminate, modify or amend in any
manner the Lockbox Agreement applicable to the Non-Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to
Non-Governmental Receivables, Company shall instruct the Collecting Bank to
transfer automatically all amounts deposited in the Non-Governmental Lockbox
Account constituting good funds to Company's Main Account. TOC shall have no
right or interest in the Non-Governmental Lockbox Account nor to the Main
Account and such accounts shall be in the name of and under the control of
Company. TOC shall not, so long as any purchased Account remains unpaid, and in
any event, during the term of this Agreement, at any time, or, without the prior
written consent of Company, change the instructions to each Account Debtor on
the related Non-Governmental Receivable to make its payments to such account.
Any such action shall be considered a breach of this Agreement for which Company
shall be entitled to all remedies at law and in equity, including obtaining an
injunction.
(c) TOC will cooperate with Company and its agents in the identification
of sums deposited into Non-Governmental Lockbox Account, which cooperation shall
continue until all purchased Accounts sold hereunder have been collected.
(d) TOC agrees to pay, on demand, a finance charge equal to the Finance
Charge Rate, on any Non-Governmental Receivable received by TOC that is not
deposited in Non-Governmental Lockbox Account within forty-eight (48) hours
after receipt by TOC.
1.5 Procedures Without Lockbox. In the event that Company elects to forego
the procedures established in Sections 1.3 and 1.4, TOC shall instruct the
Collecting Bank to transfer automatically all amounts constituting good funds in
the account or accounts of TOC established for the collection of Governmental
Receivables and Non-Governmental Receivables to Company's Main Account at
_____________ __________, ____________________________, Account ______________
(the "Main Account") pursuant to a standing order in a form acceptable to
Company's legal counsel. TOC
8.3.6-3
<PAGE>
shall have no right or interest in Company's Main Account and such account shall
be in the name of and under the control of Company. TOC shall not, so long as
any purchased account remains unpaid, change or cancel such standing order at
any time, or, without the prior written consent of Company, change the
instructions to each Account Debtor on each Governmental Receivable and
Non-Governmental Receivable to make its payments to such account. Any such
action shall be considered a breach of this Agreement for which Company shall be
entitled to all remedies at law and in equity, including obtaining an
injunction.
1.6 Misdirected Payments. (a) If after the date of this Agreement, an
Account Debtor shall make payment of a purchased Account to a location other
than is provided in the Notification Letter or TOC otherwise receives payments
on Accounts that are purchased by Company under the terms of this Agreement
("Misdirected Payments"), TOC (at its own cost and expense) shall promptly take
all necessary steps to effect collection of such Misdirected Payment from any
other party claiming an interest therein or having possession thereof and (i)
hold such payment in trust for Company, (ii) segregate such payment, (iii) use
its best efforts not to commingle such payment with TOC's own funds or other
assets, and (iv) deliver such payment no later than forty-eight (48) hours from
the day of receipt to the Governmental Lockbox Account or the Non-Governmental
Lockbox Account, as applicable.
(b) TOC agrees to pay, on demand, the Finance Charge Rate on any
Misdirected Payment received by TOC that is not deposited in the Company Main
Account within forty-eight (48) hours after receipt by TOC, unless the failure
to make such deposit is attributable to Company.
8.3.6-4
<PAGE>
EXHIBIT 11
NON-COMPETITION
A. TOC and/or each of the Physician Owners agree and covenant that, during
the term of this Agreement and for a period of thirty-six (36) months after
termination of this Agreement (other than a termination pursuant to Section
11.3.1 through 11.3.4, inclusive, or Section 11.5, of the Service Agreement),
TOC and/or the Physician Owner(s), as applicable, shall not, either directly as
a partner, employer, agent, independent contractor, employee or indirectly
through a corporation, partnership, affiliate, subsidiary or otherwise:
(i) Subject to the provisions of paragraph G below, establish,
operate or provide professional medical services at any medical office,
clinic or other health care facility at any location within seventy-five
(75) miles of (i) the Main Office location; (ii) any of the Satellite
Offices; or (iii) any location at which Company provides services to any
practice at the time of such termination;
(ii) Subject to the provisions of paragraph G below, publicly
announce or offer (by any method) to provide professional medical services
at any medical office, clinic or other health care facility at any
location within seventy-five (75) miles during the first five (5) years of
the term of this Agreement or fifty (50) miles thereafter of (i) the Main
Office; (ii) any of the Satellite Offices; or (iii) any location at which
Company provides services to any practice at the time of such termination;
(iii) Solicit, induce or attempt to induce, in connection with any
business competitive with that being serviced by Company, patients of any
physician (including TOC and/or the Physician Owner(s)) associated or
affiliated with Company to leave the care of physicians associated or
affiliated with Company; or
(iv) Solicit, induce or attempt to induce any employee, consultant
or other persons associated or affiliated with Company or any Affiliate of
Company to leave the employment of, or to discontinue their association
with, Company or such Affiliate of Company.
B. If TOC and/or the Physician Owner(s) violate the covenants set forth in
paragraph A of this Exhibit 11, then the duration of the restrictions contained
in paragraph A shall be extended an additional month for each month during which
such violation occurred but was not discovered by Company, beginning upon the
date that Company learns of the violation and so notifies TOC and/or the
Physician Owners in writing. In addition, breach of the covenants set forth in
paragraph A above may trigger certain rights of Company to redeem a Physician
Owner's Company common stock pursuant to the terms of Article VIII of the
Stockholders Agreement.
C. TOC and/or the Physician Owner(s) acknowledge and agree that the
covenants contained in this Exhibit 11 are necessary to protect the business and
goodwill of Company and that a breach of these covenants will result in
irreparable harm and continuing damage to Company. As a result, TOC and/or the
Physician Owner(s) agree that if TOC and/or the Physician Owner(s) breach or
11-1
<PAGE>
threaten to breach these covenants, Company shall be entitled to specific
performance and/or injunctive or other equitable relief in order to prevent the
continuation of such harm, as well as money damages. TOC and/or the Physician
Owner(s) waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such equitable relief.
D. TOC and the Physician Owner(s) acknowledge and agree that if TOC and/or
the Physician Owner(s) breach the covenants contained in this Exhibit 11 and
Company is unable for any reason to obtain a restraining order from a court of
competent jurisdiction within thirty (30) days after application to enjoin the
breach by TOC and/or the Physician Owner(s), it will be difficult to calculate
the precise amount of Company's damages. As a result, the parties have
determined that, in the event of such a breach, Company's damages shall be equal
to 300% of the total amount of Professional Service Revenues attributable to TOC
and/or the applicable Physician Owner(s) during the twelve (12) months prior to
the termination of the Agreement.
E. The parties have attempted to limit the provisions of this Exhibit 11
only to the extent necessary to protect each party's interests. However, the
parties hereby agree that, in the event that any provision, section or
subsection of this Exhibit 11 is adjudged by any court of competent jurisdiction
to be void or unenforceable, in whole or part, such court shall modify and
enforce any such provision, section or subsection to the extent that it believes
to be reasonable under the circumstances.
F. In the event that the Service Agreement has been in effect for at least
five (5) years, a Physician Owner may buy-out the noncompetition restriction
applicable to him or her by paying to Company an amount equal to (A)(i) the
after tax amount (based upon the actual tax rate applied for any shares
previously sold and the long-term capital gains rate then in effect for any
shares held at the time of termination) of appreciation in value (from the date
of Merger to the earlier of the date of sale of any common stock sold or the
date of termination of affiliation with Company for any common stock then held)
of the Company common stock received by the applicable Physician Owner at the
time of the Merger, less (ii) the after tax amount (based upon the terminating
Physician Owner's effective federal income tax rate during the years in which
this Agreement was in effect) of the terminating Physician Owner's pro rata
share (based on the terminating Physician Owner's proportionate share of all
Professional Services Revenues collected by TOC during the term of the
Agreement) of service fees paid to Company during the period of the Service
Agreement (but not less than zero), plus (B) one-third of the Fair Market Value
of the Company common stock and cash consideration received by the terminating
Physician Owner at the time of the Merger (valued at the time of the Merger);
provided, however, in the event that at the time of termination, if the Fair
Market Value per share of the Company common stock is less than one-third (1/3)
of the value per share of the Company common stock at time of the Merger, then
the maximum amount payable to Company to buy out the noncompetition restriction
shall equal the total Fair Market Value of the Company common stock then held by
the terminating Physician Owner plus one-third (1/3) of the cash consideration
(acquired in the Merger) plus the amount of any gains realized by the
terminating Physician Owner from the prior sale of Company common stock. The
terminating Physician Owner may pay the amount owed by transferring to Company
an amount of Company common stock having a Fair Market Value equal to the amount
owed or pay to Company cash in the amount owed (or a combination of cash and
common stock). The above references to Company common stock (except
11-2
<PAGE>
for the immediately preceding sentence) shall not include any Company common
stock purchased for cash or acquired pursuant to the conversion of the Company's
convertible debentures.
G. Upon the termination of this Agreement, the Policy Board shall have the
authority to modify the terms of the restrictive covenants, including but not
limited to the mileage radius limitations set forth above in paragraph A. In the
event that the individuals representing TOC or Company, as the case may be, on
the Policy Board can reasonably demonstrate that a modification to the
restrictive covenant will not have a material adverse effect on Company's or
TOC's practice operations, earnings or cash flow, then the individuals
representing Company or TOC, as the case may be, shall consent to the proposed
modification.
H. Neither the foregoing restrictive covenants nor the restrictive
covenants set forth in Section 7.2 shall limit or prevent Physician Owners or
Physician Employees from (i) teaching at any educational institution and from
attending patients as a part of Physician Owner's duties as are normal and
customary for such faculty position; provided, however, such services must be
incident to the academic/teaching aspects of the institution and not incident to
the regular examination of patients for a fee whether billed in the name of the
institution or the name of the Physician Owner; (ii) authoring text books,
research papers, newspaper, radio, television, or other medical advice; (iii)
engaging in research and development the material components of which do not
constitute medical practice management; (iv) providing medical services, other
than surgery, on behalf of and as an employee or agent of a qualified I.R.C. ss.
501(c)(3) nonprofit organization, governmental agency or educational institution
(other than a hospital or health care provider of any type); (v) providing
professional medical services in fields other than neurology or orthopedics, and
(vi) serving as a medical director of any organization offering medical care,
but not providing clinical services involving surgery.
11-3
SERVICE AGREEMENT
BY AND BETWEEN
SPECIALTY CARE NETWORK, INC.,
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, L.L.C.,
Stuart D. Miller, M.D.
Leslie S. Matthews, M.D.
Paul L. Asdourian, M.D.
Frank R. Ebert, M.D.
Mark S. Myerson, M.D.
John B. O'Donnell, M.D.
and
Lew C. Schon, M.D.
Dated as of November 12, 1996
<PAGE>
TABLE OF CONTENTS
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship.....................................- 1 -
1.2. Responsibilities of the Parties..............................- 1 -
1.3. GCOA Matters.................................................- 1 -
1.4. Patient Referrals............................................- 2 -
1.5. Professional Judgment........................................- 2 -
ARTICLE II.
DEFINITIONS
2.1. Definitions..................................................- 2 -
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY COMPANY
3.1. Practice Offices.............................................- 6 -
3.2. Use of Practice Offices......................................- 6 -
ARTICLE IV.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board..................- 6 -
4.2. Duties and Responsibilities of the Policy Board..............- 7 -
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions..........................- 8 -
5.2. Financial Planning and Goals.................................- 8 -
5.3. Audits and Financial Statements..............................- 8 -
5.4. Inventory and Supplies.......................................- 8 -
5.5. Management Services and Administration.......................- 9 -
5.6. Personnel...................................................- 10 -
5.7. Events Excusing Performance.................................- 11 -
5.8. Compliance with Law and Business Standards..................- 11 -
5.9. Quality Assurance...........................................- 11 -
5.10. New Medical Services and Additional Practice Offices........- 11 -
5.11. Collection of Certain Patient Receipts and Payment
of Clinic Expenses........................................- 11 -
5.12. Other GCOA Accounts.........................................- 12 -
ARTICLE VI.
i
<PAGE>
OBLIGATIONS OF GCOA AND PHYSICIAN OWNERS
6.1. Professional Services.......................................- 12 -
6.2. Medical Practice............................................- 12 -
6.3. Employment of Physician Employees...........................- 12 -
6.4. Professional Dues and Education Expenses....................- 13 -
6.5. Professional Insurance Eligibility..........................- 13 -
6.6. Events Excusing Performance.................................- 13 -
6.7. Fees for Professional Services..............................- 13 -
6.8. Peer Review.................................................- 13 -
6.9. GCOA Employee Benefit Plans.................................- 13 -
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
7.1. Exclusive Arrangement.......................................- 15 -
7.2. Restrictive Covenants.......................................- 15 -
7.3. Restrictive Covenants By Future Physician Employees.........- 16 -
7.4. Rights of Company...........................................- 16 -
7.5. Enforcement.................................................- 16 -
7.6. Modification of Restrictive Covenants.......................- 16 -
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees................................................- 17 -
8.2. Payment of Service Fee......................................- 19 -
8.3. Purchase of Accounts Receivable.............................- 19 -
8.4. Payment of Clinic Expenses..................................- 20 -
ARTICLE IX.
RECORDS
9.1. Patient Records.............................................- 21 -
9.2. Records Owned by Company....................................- 21 -
9.3. Access to Records...........................................- 21 -
9.4. Government Access to Records................................- 21 -
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by GCOA..........................- 21 -
10.2. Insurance to be Maintained by Company.......................- 22 -
10.3. Additional Insureds.........................................- 22 -
10.4. Indemnification.............................................- 22 -
ii
<PAGE>
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement..........................................- 23 -
11.2. Extended Term..............................................- 23 -
11.3. Termination by GCOA for Cause..............................- 23 -
11.4. Termination by Company for Cause...........................- 23 -
11.5. Early Termination by GCOA or Company Without Cause Upon
Third (3rd) Anniversary of Agreement.....................- 24 -
11.6. Consequences of GCOA Termination...........................- 25 -
11.7. Closing of Purchase by GCOA and Effective Date of
Termination..............................................- 25 -
11.8. Tail Policy................................................- 25 -
11.9. Restrictions Applicable to Physician Owners................- 26 -
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds..................................- 28 -
12.2. Temporary Space............................................- 28 -
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF GCOA AND PHYSICIAN OWNERS
13.1. Validity...................................................- 28 -
13.2. Litigation.................................................- 28 -
13.3. Permits....................................................- 28 -
13.4. Authority..................................................- 28 -
13.5. Compliance with Applicable Law.............................- 29 -
13.6. Health Care Compliance.....................................- 29 -
13.7. Fraud and Abuse............................................- 29 -
13.8. GCOA Compliance............................................- 29 -
13.9. Rates and Reimbursement Policies...........................- 30 -
13.10. Accounts Receivable........................................- 30 -
13.11. Full Disclosure............................................- 32 -
13.12. Exhibits...................................................- 32 -
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
14.1. Organization...............................................- 32 -
14.2. Authority..................................................- 32 -
14.3. Absence of Litigation......................................- 32 -
14.4. Transactions with Affiliates...............................- 32 -
ARTICLE XV.
iii
<PAGE>
COVENANTS OF GCOA AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements...............- 32 -
15.2. Necessary Authorizations/Assignment of Licenses and Permit.- 33 -
15.3. Transaction with Affiliates................................- 33 -
15.4. Compliance with All Laws...................................- 33 -
15.5. Third-Party Payor Programs.................................- 33 -
15.6. Change in Business or Credit and Collection Policy.........- 33 -
15.7. Treatment of Accounts Receivable...........................- 33 -
15.8. Security Interest..........................................- 34 -
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment.................................................- 34 -
16.2. Whole Agreement; Modification..............................- 35 -
16.3. Notices....................................................- 35 -
16.4. Binding on Successors......................................- 35 -
16.5. Waiver of Provisions.......................................- 36 -
16.6. Governing Law..............................................- 36 -
16.7. No Practice of Medicine....................................- 36 -
16.8. Severability...............................................- 36 -
16.9. Additional Documents.......................................- 36 -
16.10. Attorneys' Fees............................................- 36 -
16.11. Time is of the Essence.....................................- 36 -
16.12. Confidentiality............................................- 36 -
16.13. Contract Modifications for Prospective Legal Events........- 36 -
16.14. Remedies Cumulative........................................- 37 -
16.15. Language Construction......................................- 37 -
16.16. No Obligation to Third Parties.............................- 37 -
16.17. Communications.............................................- 37 -
16.18. Arbitration................................................- 37 -
EXHIBIT 4.1 POLICY BOARD GOVERNANCE RULES..........................4.1-1
EXHIBIT 6.9.1 GCOA PLAN............................................6.9.1-1
EXHIBIT 8.1.8(d) EXCLUDED EXPENSES................................8.1.8.(d)-1
EXHIBIT 8.3.6 ACCOUNTS RECEIVABLE COLLECTION.......................8.3.6-1
EXHIBIT 11 NON-COMPETITION.........................................11-1
iv
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") dated as of November 12, 1996, and
effective as of November 1, 1996, by and between SPECIALTY CARE NETWORK, INC., a
Delaware corporation ("Company"), GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES,
L.L.C., a Maryland limited liability company, ("GCOA") and STUART D. MILLER,
LESLIE S. MATTHEWS, PAUL L. ASDOURIAN, FRANK R. EBERT, MARK S. MYERSON, JOHN B.
O'DONNELL, and LEW C. SCHON ("Physician Owners"), citizens and residents of
Maryland.
W I T N E S S E T H:
WHEREAS, Company is in the business of managing medical clinics and
providing support services to and furnishing orthopedic care medical practices
with the necessary equipment, personnel, supplies and support staff; and
WHEREAS, GCOA and Physician Owners desire to obtain the services of
Company in performing such management functions so as to permit GCOA and
Physician Owners to devote GCOA's and Physician Owners' efforts on a
concentrated and continuous basis to the rendering of medical services to
patients.
NOW THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements herein set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is agreed by the parties as follows:
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship. GCOA, Physician Owners and Company intend
to act and perform as independent contractors, and the provisions hereof are not
intended to create any partnership, joint venture, agency or employment
relationship between the parties. Notwithstanding the authority granted to
Company herein, Company, GCOA, and Physician Owners agree that GCOA and
Physician Owners shall retain all authority to direct the medical, professional,
and ethical aspects of GCOA's and Physician Owners' medical practice including
but not limited to the admission of new patients and providing care to indigent
patients. Each party shall be solely responsible for and shall comply with all
state and federal laws pertaining to employment taxes, income withholding,
unemployment compensation contributions and other employment related statutes
applicable to that party.
1.2. Responsibilities of the Parties. As more specifically set forth
herein, Company shall provide GCOA with offices and facilities, equipment,
supplies, certain support personnel, management and financial advisory services.
As more specifically set forth herein, GCOA shall be responsible for the
recruitment and hiring of physicians and all issues related to the professional
practice of medicine, medical practice patterns and documentation thereof.
Notwithstanding anything herein to the contrary, no "designated health service,"
as defined in 42 U.S.C. Section 1395nn, including any amendments or successors
thereto, shall be provided by Company under this Agreement.
1.3. GCOA Matters. Matters involving the internal agreements and finances
of GCOA, including the disposition of professional fee income, tax planning, and
investment planning (and expenses relating solely to these internal business
matters) shall remain the sole responsibility of GCOA.
1.4. Patient Referrals. The parties agree that the benefits to GCOA and
Physician Owners hereunder do not require, are not payment for, and are not in
any way contingent upon the admission, referral or any other arrangement for the
provision of any item or service offered by Company to any of GCOA's patients in
any facility operated by Company.
<PAGE>
1.5. Professional Judgment. Each of the parties acknowledges and agrees
that the terms and conditions of this Agreement pertain to and control the
business and financial relationship between and among the parties but do not
pertain to and do not control the professional and clinical relationship between
and among GCOA, Physician Employees, GCOA Employees, and GCOA's patients.
Nothing in this Agreement shall be construed to alter or in any way affect the
legal, ethical, and professional relationship between and among GCOA, Physician
Owners, Physician Employees, and GCOA's patients, nor shall anything contained
in this Agreement abrogate any right, privilege, or obligation arising out of or
applicable to the physician-patient relationship.
ARTICLE II.
DEFINITIONS
2.1. Definitions. For the purpose of this Agreement, the following
definitions shall apply:
"Account Debtor" means an account debtor or any other Person obligated in
respect of an Account Receivable.
"Accounts Receivable" means, with respect to GCOA, all accounts and any
and all rights to payment of money or other forms of consideration of any kind
now owned or hereafter acquired (whether classified under the Uniform Commercial
Code as accounts, chattel paper, general intangibles or otherwise) for goods
sold or leased or for services rendered by GCOA, including, but not limited to,
accounts receivable, proceeds of any letters of credit naming GCOA as
beneficiary, chattel paper, insurance proceeds, contract rights, notes, drafts,
instruments, documents, acceptances and all other debts, obligations and
liabilities in whatever form from any other Person; provided that, cash, checks
and credit card purchases are not included in the definition of Accounts
Receivable.
"Affiliate" means, with respect to any Person, any entity which directly
or indirectly controls, is controlled by, or is under common control with, such
Person or any Subsidiary of such Person or any Person who is a director, officer
or partner of such Person or any Subsidiary of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to (a) vote ten percent (10%) or more of the securities having ordinary voting
power for the election of directors of such Person, or (b) direct or cause the
direction of management and policies of a business, whether through the
ownership of voting securities, by contract or otherwise and either alone or in
conjunction with others or any group.
"Applicable Law" means all applicable provisions of constitutions,
statutes, rules, regulations, ordinances and orders of all Governmental
Authorities and all orders and decrees of all courts, tribunals and arbitrators,
and shall include, without limitation, Health Care Law.
"Asset Exchange" shall mean the acquisition of certain assets and
assumption of certain liabilities of GCOA pursuant to the Asset Exchange
Agreement.
"Asset Exchange Agreement" means that certain Asset Exchange Agreement,
dated of even date herewith, by and between Company, GCOA and Physician Owners.
"Assigned Lease" shall have the meaning as defined in Section 3.1.
"Base Service Fee" shall equal
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] per year, payable
in monthly payments of
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
"CHAMPUS" means the Civilian Health and Medical Program of the Uniformed
Services.
- 2 -
<PAGE>
"Change in Control" shall mean any transaction pursuant to which Company
(a) consummates the sale of substantially all of the assets of Company to an
entity which is publicly traded in exchange for voting stock in such publicly
traded entity or (b) merges with a publicly traded corporation, entity or
corporation or entity controlled by a publicly traded corporation or entity in a
transaction where unrelated persons own at least fifty-one percent (51%) of the
issued and outstanding securities of the surviving entity or corporation
controlling the merged entity.
"Clinic Expenses" shall have the meaning as defined in Section 8.1.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean Specialty Care Network, Inc., a Delaware corporation,
together with its successors and assigns.
"Company Expenses" shall have the meaning as defined in Section 8.1.7.
"Designated Leased Employees" shall have the meaning as defined in Section
6.9.1.
"Direct Lease" shall have the meaning as defined in Section 3.1.
"Disabled" or "Disability" shall mean that a Physician suffers from a
mental or physical condition resulting in such Physician Employee's inability to
perform the essential functions of his job as required by Section 6.1.1 (and as
may be described with greater specificity in written job descriptions prepared
and maintained by GCOA and approved by the Policy Board) without significant
risk to the health or safety of others, even with such reasonable accommodation
as may be available under the circumstances, and the Policy Board may reasonably
anticipate that such Physician Employee will remain disabled for at least two
years following the commencement of such disability.
"Exchange A/R" means the accounts receivable acquired from GCOA by Company
pursuant to the Asset Exchange Agreement.
"Excluded Expenses" shall have the meaning as defined in Section 8.1.8.
"Fair Market Value" with respect to Company common stock means (i) the
average closing price for the Company common stock as reported on a securities
exchange or quoted on a national quotation system, if any, upon which the
Company common stock is traded or quoted or (ii) in the event Company common
stock is not traded on any exchange or quoted on a national quotation system,
the fair market value of the Company common stock shall be determined by an
independent appraiser or investment banker selected by two (2) independent
appraisers or investment bankers (one (1) such firm selected by Company and one
(1) such firm selected by the Physician Owner or the Physician Owners as a group
(as the case may be)). Such valuation may include the consideration of discounts
for marketability, minority ownership and other discounts usual and customary in
the valuation process. Unless otherwise specified herein, the cost of any
appraisal shall be borne equally by Company and the Physician Owner or the
Physician Owners as a group (as the case may be).
"GAAP" shall mean generally accepted accounting principles as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession. For purposes of
this Agreement, GAAP shall be applied in a manner consistent with the historic
practices used by Company or GCOA as applicable.
- 3 -
<PAGE>
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, board, body, agency, bureau or entity or any arbitrator with
authority to bind a party at law.
"Governmental Receivables" means an Account Receivable of GCOA which (i)
arises in the ordinary course of business of GCOA, (ii) has as its Third-Party
Payor the United States of America or any state or any agency or instrumentality
of the United States of America or any state which makes any payments with
respect to Medicare or Medicaid or with respect to any other program (including
CHAMPUS) established by federal or state law, and (iii) is required by federal
or state law to be paid or to be made to GCOA as a healthcare provider.
Governmental Receivables shall not, however, refer to amounts payable by private
insurers under contract to provide benefits under the Federal Employee Health
Benefit Program.
"Governmental Rules and Regulations" shall have the meaning as defined in
Section 13.7.
"Health Care Law" means any Applicable Law regulating the acquisition,
construction, operation, maintenance or management of a health care practice,
facility, provider or payor, including without limitation, 42 U.S.C. ss.1395nn
and 42 U.S.C. ss. 1320a-7b.
"Lease" shall mean the Assigned Lease, Direct Leases, and the New Leases,
including all amendments thereto, described in Section 3.1 hereof.
"Leased Premises" shall mean the real property described in the Lease.
"Lender" shall have the meaning as defined in Section 7.2.
"Main Office" shall mean the Leased Premises and all equipment and
facilities owned or operated by Company and utilized by GCOA or any of its
employees within said Leased Premises.
"Medicaid" means any state program pursuant to which health care providers
are paid or reimbursed for care given or goods afforded to indigent persons and
administered pursuant to a plan approved by the Health Care Financing
Administration under Title XIX of the Social Security Act.
"Medicare" means any medical program established under Title XVIII of the
Social Security Act and administered by the Health Care Financing
Administration.
"Necessary Authorizations" means with respect to GCOA, all certificates of
need, authorization, certifications, consents, approvals, permits, licenses,
notices, accreditations and exemptions, filings and registrations, and reports
required by Applicable Law, including, without limitation, Health Care Law,
which are required, necessary or reasonably useful to the lawful ownership and
operation of GCOA's business.
"New Lease" shall have the meaning as defined in Section 3.1.
"Office Locations" shall have the meaning as defined in Section 3.1.
"Person" shall mean an individual, corporation, partnership, association,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof including, without limitation, Third-Party Payors.
"Physician Employees" shall mean the term as defined in Section 8.1.6.
"Physician Extender Employees" shall mean the term as defined in Section
8.1.5.
- 4 -
<PAGE>
"Physician Owners" shall mean those Physician Employees who own an
interest, directly or indirectly, in the equity of GCOA.
"Plans" shall have the meaning as defined in Section 6.9.1.
"Policy Board" shall mean a board established pursuant to Section 4.1.
"Practice Net Revenue" shall mean the term as defined in Section 8.1.1.
"Practice Offices" shall mean (i) the Main Office and (ii) all of the
Satellite Offices.
"Professional Services Revenues" shall mean the term as defined in Section
8.1.2.
"Purchase Price" shall mean the term as defined in Section 8.4.2.
"Purchased A/R" means, with respect to GCOA, the Accounts Receivable
purchased pursuant to Section 8.3 of this Agreement.
"GCOA Operating Account" shall mean that certain operating account
established by GCOA at a bank selected by GCOA in GCOA's sole discretion as more
fully described in Section 5.11.
"GCOA Plan" shall mean the term as defined in Section 6.9.1.
"Satellite Offices" shall mean each location at which one or more of
GCOA's employees provide services as described on Exhibit 2.1 and all equipment
and facilities owned or operated by Company and utilized by any of said persons
at such location.
"Settlement Date" shall mean the term as defined in Section 8.3.3.
"Service Agreement" means this Agreement.
"Subsidiary" means a Person of which an aggregate of 51% or more of the
voting stock of any class or classes or 51% or more of other voting or equity
interests is owned of record or beneficially by another Person, or by one or
more Subsidiaries of such Person.
"Substitute Physician(s)" shall mean the term as defined in Section
11.9.1(b).
"Technical Employees" shall mean the term as defined in Section 8.1.4.
"Third-Party Payors" means each Person which makes payment under a
Third-Party Payor Program, and each Person which administers a Third-Party Payor
Program.
"Third-Party Payor Programs" means Medicare, Medicaid, CHAMPUS, insurance
provided by Blue Cross and/or Blue Shield, managed care plans, and any other
private health care insurance programs and employee assistance programs as well
as any future similar programs.
- 5 -
<PAGE>
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY COMPANY
3.1. Practice Offices. (a) Company has received a leasehold interest in
certain offices and locations which comprise the Practice location ("Main
Office") and/or satellite offices ("Satellite Offices") as identified on Exhibit
3.1 (collectively the "Office Locations") through (i) an assignment of any
existing leases on said Office Locations (the "Assigned Leases") or (ii)
entering into a new lease with respect to one or more of the Office Locations
(the "Direct Leases") with a copy of the Assigned Leases and Direct Leases
attached hereto as Exhibit 3.1.
(b) Company agrees to provide offices and facilities at the Office
Locations (or at comparable facilities on the termination of the Assigned Leases
or Direct Leases) to GCOA. Such facilities shall include all personal property
necessary to operate the facility. If any Assigned Leases or Direct Leases are
terminated by their terms, Company shall enter into a lease of a new facility
comparable to the Office Location whose lease is terminated (the "New Lease")
with the consent of the Policy Board. Company shall not enter into a lease for a
new Main Office or Satellite Office for GCOA without the approval of the Policy
Board.
(c) GCOA agrees to comply with all terms and provisions of the Assigned
Leases, Direct Leases and New Leases.
3.2. Use of Practice Offices. GCOA shall not use or occupy the Main Office
or Satellite Offices for any purpose which is prohibited by the Assigned Leases,
Direct Leases or New Leases, by this Agreement or which is directly or
indirectly forbidden by law, ordinance, or governmental or municipal regulation
or order, or which may be dangerous to life, limb or property, or which would
increase the fire and extending coverage insurance rate in any Practice Office
or contents.
ARTICLE IV.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board. The parties shall
establish a Policy Board which shall be responsible for developing management
and administrative policies for the overall operation of any Practice Office.
The Policy Board shall consist of six (6) members. Company shall designate, in
its sole discretion, three (3) members of the Policy Board. GCOA shall
designate, in GCOA's sole discretion, three (3) members of the Policy Board. Any
matter decided by a majority of the members of the Policy Board shall constitute
the decision of the Policy Board with respect to the matter. In the event a
majority of the Policy Board does not vote in favor of any proposal presented to
the Policy Board, such proposal shall fail and shall not become a policy or
procedure of GCOA.
4.2. Duties and Responsibilities of the Policy Board. The Policy Board
shall have the following duties and obligations:
4.2.1. Capital Improvements and Expansion. The Policy Board shall review
all requests by GCOA for any renovations, capital improvements, expansions and
new equipment purchases or leases. The Policy Board shall determine whether such
expenditures are appropriate based upon economic feasibility, physician support,
productivity, market conditions, and the annual budget formulated pursuant to
this Agreement. If the Policy Board determines that the acquisition of
additional equipment or facilities is appropriate, then Company shall use its
best efforts to arrange for the financing and acquisition of the property.
Governance issues affecting the Policy Board shall be addressed in accordance
with the rules set forth in Exhibit 4.1.
4.2.2. Annual Budgets. All annual capital and operating budgets prepared
by Company in accordance with Section 5.2 of this Agreement, shall be subject to
the review of the Policy Board.
- 6 -
<PAGE>
4.2.3. Marketing. All advertising and other marketing of the services
performed at any Practice Office shall be subject to the prior review and
approval of the Policy Board.
4.2.4. Patient Fees; Collection Policies. As a part of the annual
operating budget in consultation with GCOA and Company, to the extent allowed by
Applicable Law, the Policy Board shall review and advise GCOA as to an
appropriate fee schedule for all physician and ancillary services rendered by
GCOA, which fee schedule shall ultimately be determined by GCOA in GCOA's sole
discretion. In addition, the Policy Board shall approve the credit collection
policies of GCOA.
4.2.5. GCOA and Payor Relationships. Decisions regarding the establishment
or maintenance of relationships with institutional health care providers and
payors, or with parties under arrangements for setting up new Satellite Offices
of GCOA in the future, shall be made by the Policy Board in consultation with
GCOA.
4.2.6. Strategic Planning. The Policy Board shall develop long-term
strategic planning objectives.
4.2.7. Capital Expenditures. The Policy Board shall determine the priority
of major capital expenditures including the procurement of any new or additional
office space for Practice Offices.
4.2.8. Restrictive Covenants for Physician. The approval of the Policy
Board shall be required for any variations to the restrictive covenants
prescribed for any physician employment contract as set forth in Article VII or
Exhibit 11 of this Agreement.
4.2.9. Grievance Referrals. The Policy Board shall consider and make final
decisions regarding grievances pertaining to matters not specifically addressed
in this Agreement as referred to it by the Physician Employees.
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions. Company shall use its best
efforts to manage the day-to-day operations of the Main Practice Office and any
Satellite Offices in a business-like manner. Company shall provide or arrange
for the services set forth in this Article V, the cost of all of which shall be
included in Clinic Expenses. Company is hereby expressly authorized to perform
its services hereunder in whatever manner it deems reasonably appropriate to
meet the day-to-day requirements of Practice Office operations in accordance
with the general standards approved by the Policy Board and to maintain the
lease agreements for each of the Practice Offices, including, without
limitation, performance of some of the business office functions at locations
other than the Main Practice Office. GCOA will not act in a manner which would
prevent Company from efficiently managing the day-to-day operations of the Main
Practice Office and maintaining the operations of the Satellite Offices in a
business-like manner.
5.2. Financial Planning and Goals. Subject to Section 4.2.2. of this
Agreement, Company shall prepare annual capital and operating budgets reflecting
in reasonable detail anticipated revenues and expenses, and sources and uses of
capital for growth in GCOA's practice and medical services rendered at the
Practice Office. Said budgets shall reflect amounts, if any, allocated for
capital purchases, improvements, expansion and any new leasing arrangements.
Thereafter, but no later than thirty (30) days prior to the end of the fiscal
year, the Policy Board and Company shall agree upon a budget for the upcoming
fiscal year. The budget, as described in Section 4.2.2., shall be binding upon
Company and GCOA. Company shall consult with GCOA and the Policy Board in the
preparation of all budgets. Company and GCOA acknowledge and agree that once a
budget has been approved, neither Company nor GCOA shall make expenditures or
incur expenses in excess of budgeted amounts without the prior approval of the
Policy Board.
5.3. Audits and Financial Statements. Company shall prepare annual
financial statements for the operations of GCOA and, in its sole discretion, may
cause the financial statements to be audited by a certified public accountant
selected
- 7 -
<PAGE>
by Company. GCOA shall cooperate fully in such audit. The cost of such audit
shall be included in Clinic Expenses. If Company elects to have the financial
statements audited by a certified public accountant with a big six accounting
firm, the resulting audited financial statements shall be binding on GCOA and
Company. If Company elects not to have GCOA's financial statements so audited,
GCOA shall have the option to obtain such an audit, by a certified public
accountant with a mutually acceptable accounting firm. Company shall fully
cooperate in such audit. The cost of such audit shall be included in Clinic
Expenses. In such event, Company and GCOA shall be bound by the resulting
audited financial statements. All parties shall be entitled to copies of any
information provided to or by the auditors by or to any party. Additionally,
Company shall prepare monthly unaudited financial statements containing a
balance sheet and statements of income from Practice Office operations, which
shall be delivered to GCOA within thirty (30) business days after the close of
each calendar month.
5.4. Inventory and Supplies. Except as limited by Section 5.11, Company
shall order and purchase inventory and supplies and such other ordinary,
necessary or appropriate materials which Company shall deem to be necessary in
the operation of the Practice Offices and which are requested by GCOA and are
within the budget for the applicable fiscal period. Company shall not purchase
inventory, goods or supplies from any Affiliate of Company without approval of
the Policy Board and after full disclosure of all terms to the Policy Board.
5.5. Management Services and Administration.
5.5.1. GCOA hereby appoints Company as GCOA's sole and exclusive manager
and administrator of all day-to-day business functions. GCOA agrees that the
purpose and intent of this Agreement is to relieve GCOA and Physician Employees
to the maximum extent possible of the administrative, accounting, personnel and
business aspects of their practice, with Company assuming responsibility and
being given all necessary authority to perform these functions. Company agrees
that GCOA and only GCOA will perform the medical functions of GCOA's practice.
Company will have no authority, directly or indirectly, to perform, and will not
perform, any medical function. Company may, however, advise GCOA as to the
relationship between GCOA's performance of medical functions and the overall
administrative and business functioning of GCOA's practice. To the extent that a
Company employee assists Physician Employees in performing medical functions,
such employees shall be subject to the professional direction and supervision of
Physician Employees and in the performance of such medical functions shall not
be subject to any direction or control by, or liability to, Company, except as
may be specifically authorized by Company.
5.5.2. Company shall, on behalf of GCOA, bill patients and collect the
professional fees for medical services rendered by GCOA or any Physician
Employee, regardless of when or where such services are rendered. The parties
acknowledge and agree that the Physician Owners will charge and collect,
individually, fees for services such as medical legal services, depositions,
consulting, teaching, and royalties and that any amounts collected by the
Physician Owners as a result of the provision of the foregoing services shall
not be considered a portion of Practice Net Revenue. Nothing in this Service
Agreement shall be construed to prevent Physician Owners from extending
professional courtesies, performing pro bono service, or providing family
discounts in accordance with the past practice and procedure of GCOA. All
billings for Physician Employee's services shall be made in the name of and
under the provider number of GCOA. GCOA hereby appoints Company to be GCOA's
true and lawful attorney-in-fact, for the following purposes: (i) to bill
patients in GCOA's name and on GCOA's behalf; (ii) to collect Accounts
Receivable resulting from such billing in GCOA's name and on GCOA's behalf;
(iii) to receive payments from insurance companies, prepayments from health care
plans, and all other Third-Party Payors; (iv) to take possession of and endorse
in the name of GCOA (and/or in the name of an individual physician, such payment
intended for purpose of payment of a physician's bill) any notes, checks, money
orders, insurance payments and other instruments received in payment of Accounts
Receivable; and (v) to initiate legal proceedings in the name of GCOA to collect
any accounts and monies owed to GCOA or any Physician Employee, to enforce the
rights of GCOA as creditors under any contract or in connection with the
rendering of any service, and to contest adjustments and denials by any
Governmental Authority (or its fiscal intermediaries) as Third-Party Payors.
Except for cash proceeds from the collection of Accounts Receivable purchased
from GCOA by Company, Company shall deposit any cash receipts collected on
behalf of GCOA into the GCOA Operating Account described in Section 5.11.
- 8 -
<PAGE>
5.5.3. Company shall design, supervise and maintain possession of all
files and records relating to the operation of GCOA, including but not limited
to accounting, billing, patient medical records, and collection records. While
Company shall maintain custody, patient medical records shall at all times be
and remain the property of GCOA and shall be located at the Practice Offices so
that they are readily accessible for patient care. The Physician Employees shall
have the obligation to oversee the preparation and maintenance of patient
medical records, and to provide such medical information as shall be necessary
and appropriate to the records' clinical function and to sustain and ensure the
availability of Third-Party Payor reimbursement for services rendered. The
management of all files and records shall comply with applicable state and
federal statutes. Company shall use its best efforts to preserve the
confidentiality of patient medical records and use information contained in such
records only as permitted by law, to the extent necessary to perform the
services set forth herein.
5.5.4. Company shall supply to GCOA necessary clerical, accounting,
bookkeeping and computer services, printing, postage and duplication services,
medical transcribing services and any other ordinary, necessary or appropriate
service for the operation of the Practice Offices.
5.5.5. Subject to the overall guidance of the Policy Board, Company shall
design and implement an adequate and appropriate public relations program on
behalf of GCOA, with appropriate emphasis on public awareness of the
availability of services at the Practice Offices. The public relations program
shall be conducted in compliance with Applicable Law and regulations governing
advertising by the medical profession and applicable canons of principles of
professional ethics of GCOA and Physician Employees of GCOA.
5.5.6. Company shall provide the data necessary for GCOA to prepare GCOA's
annual income tax returns. Company shall have no responsibility for the
preparation of GCOA's federal or state income tax returns or the payment of such
income taxes. Company shall prepare or cause to be prepared on GCOA's behalf,
necessary employment tax returns. GCOA shall be obligated to pay any taxes due
on such employment tax returns with respect to the Physician Owners.
5.5.7. Company shall assist GCOA in recruiting additional physicians,
carrying out such administrative functions as may be appropriate, such as
advertising for and identifying potential candidates, obtaining credentials, and
arranging interviews; provided, however, GCOA shall interview and make the
ultimate decision as to the suitability of any physician to become associated
with GCOA. All physicians recruited by Company and accepted by GCOA shall be the
sole employees of GCOA, to the extent such physicians are hired as employees.
5.5.8. Company shall negotiate managed care contracts on behalf of GCOA
and shall administer all managed care contracts in which GCOA participates.
5.5.9. Company shall arrange for legal and accounting services related to
operations of the Practice Offices and Physician Employee's practice at the
Practice Offices incurred traditionally in the ordinary course of business,
including the cost of enforcing any contract with a Physician Employee
containing restrictive covenants, provided such services shall be approved in
advance by the Policy Board. Notwithstanding the foregoing, GCOA shall have the
authority to arrange for legal and accounting services relating to matters other
than day-to-day management of GCOA; such other matters including but not limited
to issues relating to GCOA governance issues, compensation of Physician Owners,
and issues which arise between GCOA and Company; provided, however, such fees
shall be considered Excluded Expenses.
5.5.10. Company shall provide for the proper cleanliness of the premises,
and maintenance and cleanliness of the equipment, furniture and furnishings
located upon such premises.
5.5.11. Upon receipt of dues, statements or license notices from the
Physician Employees (other than Physician Owners), Company shall make payment
for the cost of professional licensure fees and board certification fees of
physicians associated with GCOA.
- 9 -
<PAGE>
5.5.12. Company shall negotiate for and cause premiums to be paid with
respect to the insurance provided for in Section 10.1.
5.6. Personnel. Company shall provide Physician Extender Employees and
other non-physician professional support (administrative personnel, clerical,
secretarial, bookkeeping and collection personnel) reasonably necessary for the
conduct of the operations at the Practice Offices. Company shall determine and
cause to be paid the salaries and fringe benefits of all such personnel. Such
personnel shall be employees of Company, with those personnel performing patient
care services subject to the professional direction and supervision of Physician
Employees. If GCOA is dissatisfied with the services of any person, GCOA shall
consult with Company. Company shall in good faith determine whether the
performance of that employee could be brought to acceptable levels through
counsel and assistance, or whether such employee should be terminated. All of
Company's obligations regarding staff shall be governed by the overriding
principle and goal of providing quality medical care. Employee assignments shall
be made to assure consistent and continued rendering of quality medical support
services and to ensure prompt availability and accessibility of individual
medical support staff to physicians in order to develop constant, familiar and
routine working relationships between individual physicians and individual
members of the medical support staff. If GCOA disagrees with an assignment, GCOA
may appeal such assignment to the Policy Board. Company shall maintain
established working relationships wherever possible and Company shall make every
effort consistent with sound business practices to honor the specific requests
of GCOA with regard to the assignment of Company's employees.
5.7. Events Excusing Performance. Company shall not be liable to GCOA or
Physician Owners for failure to perform any of the services required herein in
the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which Company has no control for so long as such
events continue, and for a reasonable period of time thereafter.
5.8. Compliance with Law and Business Standards. Company shall comply with
Applicable Law, including, without limitation, Health Care Law, and federal,
state, and local laws and regulations affecting billing and reimbursement,
referrals, patient privacy and confidentiality, and management of hazardous
materials and infectious waste. Company shall discharge its obligations under
this Agreement consistent with applicable business and industry standards and
practices.
5.9. Quality Assurance. Company shall assist GCOA in fulfilling GCOA's
obligations to patients to maintain professionally recognized quality of medical
and professional services.
5.10. New Medical Services and Additional Practice Offices. If GCOA
desires to have a new medical service provided at any of the Practice Offices or
desires to establish a new clinic, a proposal of such service or the
establishment of such new clinic shall be submitted to the Policy Board. Should
the Policy Board approve the expansion of service or the establishment of such
new clinic, Company, at its option, shall have the exclusive right to provide
services necessary to support GCOA in GCOA's delivery of such new medical
services at the Practice Office or new clinic, as applicable; provided, however,
if the type of service is an ancillary service that would be improper under any
rules, regulations or laws for Company to offer to GCOA patients, then Company
shall not have the option to provide such service. Should Company decline to
provide the necessary support service for the new service or new clinic, GCOA
shall be entitled to perform such service at GCOA's own expense and the revenues
therefrom shall not be included in the calculation of Company's service fees
under Article VIII of this Agreement; provided, however, that Company shall have
the option to assume performance of the necessary support services for providing
such new service or new clinic by buying out GCOA's investment in the service at
GCOA's Book Value at anytime within eighteen (18) months of the date such new
service is first provided, which Book Value shall be based on the price of the
assets purchased by GCOA less depreciation accrued to the date of acquisition of
such service by Company, as determined under GAAP.
5.11. Collection of Certain Patient Receipts and Payment of Clinic
Expenses. GCOA agrees to establish and maintain a bank account, which shall be
referred to as the GCOA Operating Account, for the purpose of (a) depositing
proceeds from the sale of GCOA's Accounts Receivable pursuant to Section 8.3 and
(b) paying (i) any Service
- 10 -
<PAGE>
Fees owed pursuant to Article VIII of this Agreement, (ii) expenses which are
solely the obligation of GCOA (Excluded Expenses), and (iii) compensation or
distributions to Physician Owners, and the distributions shall be made in that
order of payment. GCOA shall designate a Company employee as a signatory on the
GCOA Operating Account. After the payment of any Service Fees owed pursuant to
Article VIII of this Agreement, and expenses which are solely the obligation of
GCOA, GCOA may withdraw amounts for distributions to Physician Owners.
5.12. Other GCOA Accounts. GCOA shall have the right to open or create
bank accounts in addition to the GCOA Operating Account described in Section
5.11 of this Agreement.
ARTICLE VI.
OBLIGATIONS OF GCOA AND PHYSICIAN OWNERS
6.1. Professional Services.
6.1.1. GCOA, its Physician Owners and Physician Employees shall provide
professional services to patients.
6.1.2. GCOA, its Physician Owners and Physician Employees shall provide
the professional services to patients described in Section 6.1.1 above in
compliance at all times with ethical standards, laws and regulations applying to
GCOA's professional practice. GCOA shall also make all reports and inquiries to
the National Practitioners Data Bank and/or any state data bank required by
Applicable Law. GCOA shall use its best efforts to determine that each Physician
Employee and Technical Employee associated with GCOA who provides medical care
to patients of GCOA is licensed by the state or states in which he or she
renders professional services. If any disciplinary or medical malpractice action
is initiated against any such individual, GCOA shall immediately provide Company
with copies of any third-party documents (not otherwise privileged) served on
GCOA or letters delivered to GCOA. Such information shall be deemed confidential
information and shall, notwithstanding such disclosure, remain subject to all
privileges and immunities provided by Applicable Law. Company shall take all
steps reasonably necessary to assure that such privileges and immunities remain
intact. GCOA shall carry out a program to monitor the quality of medical care
practiced at the Practice Offices to promote a high quality of medical care.
6.2. Medical Practice. GCOA shall use and occupy the Practice Offices
exclusively for the practice of medicine and shall comply with all Applicable
Law and standards of medical care. It is expressly acknowledged by the parties
that the medical practice or practices conducted at the Main Office shall be
conducted solely by physicians or medical practitioner associated with GCOA, and
no other physician or medical practitioner shall be permitted to use or occupy
the Main Office without the prior written consent of Company.
6.3. Employment of Physician Employees. GCOA shall have complete control
of and responsibility for the hiring, compensation, supervision, evaluation and
termination of Physician Employees, although at the request of GCOA, Company
shall consult with GCOA respecting such matters. GCOA shall be responsible,
subject to Section 8.4, for the payment of such Physician Employees' salaries
and wages, payroll taxes, Physician Employee benefits and all other taxes and
charges now or hereafter applicable to them. With respect to physicians, GCOA
shall only employ and contract with licensed physicians meeting applicable
credentialing guidelines established by GCOA.
6.4. Professional Dues and Education Expenses. Except to the extent
provided in Section 8.1.3(k), Physician Owners shall be solely responsible for
the cost of membership in professional associations and the cost of continuing
professional education. GCOA shall ensure that each Physician Employee
participates in such continuing medical education as is necessary for such
physician to remain licensed.
- 11 -
<PAGE>
6.5. Professional Insurance Eligibility. GCOA shall cooperate in the
obtaining and retaining of professional liability insurance by assuring that all
Physician Employees are insurable and participating in an on-going risk
management program.
6.6. Events Excusing Performance. GCOA and Physician Owners shall not be
liable to Company for failure to perform any of the services required herein in
the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which GCOA has no control for so long as such
events continue, and for a reasonable period of time thereafter.
6.7. Fees for Professional Services. GCOA shall be solely responsible for
legal, accounting and other professional services fees (Excluded Expenses)
incurred by GCOA, except as otherwise determined by the Policy Board.
6.8. Peer Review. GCOA agrees to cooperate with Company in establishing a
system of peer review within and among the provider practices as necessary to
obtain provider contracts. In connection therewith, GCOA agrees to assist in the
formulation of provider guidelines for each treatment or surgical modality, and
agrees to abide by said guidelines, and further agrees to submit to periodic
reviews by a third party to monitor compliance with said guidelines. GCOA
acknowledges that the establishment of provider guidelines may be necessary to
obtain PPO, HMO, IPA and other similar provider contracts, both private and
government funded. To the extent that said provider guidelines must be filed or
registered with any Third-Party Payor, GCOA agrees to cooperate with Company in
making such filings or registrations. It is agreed and acknowledged that all
such peer review guidelines shall be established and monitored by medical
personnel on the staff of GCOA and other practices that are part of the peer
review process, and shall not be promulgated, established or enforced
independently by Company. To the extent possible, all information obtained
through the peer review process shall remain confidential and the parties shall
take all steps reasonably necessary to assure that all privileges and immunities
provided by Applicable Law remain intact.
6.9. GCOA Employee Benefit Plans.
6.9.1. Effective as of the date of the closing under the Asset Exchange
Agreement, GCOA shall amend the tax-qualified retirement plan(s) described on
Exhibit 6.9.1 (the "GCOA Plan") to provide that employees of Company who are
classified as "leased employees" (as defined in Code Section 414(n)) of GCOA
shall be treated as GCOA employees for purposes described in Code Section
414(n)(3). Not less often than annually, GCOA and Company shall agree upon and
identify in writing those individuals to be classified as leased employees of
GCOA (the "Designated Leased Employees"). GCOA and Company shall establish
mutually agreeable procedures with respect to the participation of Designated
Leased Employees in the GCOA Plan. Such procedures shall be designed to avoid
the tax disqualification of the GCOA Plan, similar plans of practices similarly
situated, (collectively, the "Plans").
6.9.2. If the Policy Board determines that the relationship between
Company and GCOA (and other practices similarly situated) constitutes an
"affiliated service group" (as defined in Code Section 414(m)), Company and GCOA
shall take such actions as may be necessary to avoid the tax disqualification of
the Plans. Such actions may include the amendment, freeze, termination or merger
of the GCOA Plan.
6.9.3. The Plans described on Exhibit 6.9.1 attached hereto are approved
by Company. GCOA shall not enter into any new "employee benefit plan" (as
defined in Section 3(3) of the Employment Retirement Income Security Act of
1974, as amended ("ERISA") without the consent of Company. In addition, GCOA
shall not offer any retirement benefits or make any material retirement payments
other than under the GCOA Plan to any stockholder of GCOA without the express
written consent of Company. Except as otherwise required by law, GCOA shall not
materially amend, freeze, terminate or merge the GCOA Plan without the express
written consent of Company. In the event of either of the foregoing, Company's
consent shall not be withheld if such action would not jeopardize the
qualification of any of the Plans. GCOA agrees to make such changes to the GCOA
Plan, including the amendment freeze, termination or merger of the GCOA Plan, as
may be
- 12 -
<PAGE>
approved by the Policy Board and Company but only if such changes are necessary
to prevent the disqualification of any of the Plans.
6.9.4. Expenses incurred in connection with the GCOA Plan or other GCOA
employee benefit plans, including, without limitation, the compensation of
counsel, accountants, corporate trustees, and other agents shall be included in
Clinic Expenses.
6.9.5. The contribution and administration expenses for the Designated
Leased Employees shall be included in GCOA's operating budget. GCOA and Company
shall not make employee benefit plan contributions or payments to GCOA for their
respective employees in excess of such budgeted amounts unless required by law
or the terms of the GCOA Plan. Company shall make contributions or payments with
respect to the GCOA Plan or other GCOA employee benefit plans, as a Clinic
Expense, on behalf of eligible Designated Leased Employees, and other eligible
GCOA employees. In the event a GCOA Plan or other GCOA employee benefit plan is
terminated, Company shall be responsible, as a Clinic Expense, for any funding
liabilities related to eligible Designated Leased Employees; provided, however,
Company shall only be responsible for the funding of any liability accruing
after the date of the Asset Exchange Agreement.
6.9.6. Company shall have the sole and exclusive authority to adopt, amend
or terminate any employee benefit plan for the benefit of its employees,
regardless of whether such employees are Designated Leased Employees, unless
such actions would require the amendment, freeze or termination of the GCOA Plan
to avoid disqualification of the GCOA Plan, in which case any such action would
be subject to the express prior written consent of the Policy Board. Company
shall have the sole and exclusive authority to appoint the trustee, custodian
and administrator of any such plan.
6.9.7. In the event that any "employee welfare benefit plan" (as defined
in ERISA Section 3(l)) maintained or sponsored by GCOA must be amended,
terminated, modified or changed as a result of GCOA or Company being deemed to
be a part of an affiliated service group, the Policy Board will replace such
plan or plans with a plan or plans that provides those benefits approved by the
Policy Board. It shall be the goal of the Policy Board in such event to provide
substantially similar or comparable benefits if the same can be provided at a
substantially similar cost to the replaced plan.
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
The parties recognize that the services to be provided by Company shall be
feasible only if GCOA operates an active medical practice to which both GCOA and
the physicians associated with GCOA devote their full time and attention.
To that end:
7.1. Exclusive Arrangement. During the term of this Agreement, Company
shall be GCOA's and Physician Owners' sole provider of the management services
described in this Agreement and neither GCOA, Physician Owners nor any of GCOA's
or Physician Owners' employees shall provide such management services during the
term of this Agreement. GCOA and the Physician Owners agree that during the term
of this Agreement, neither GCOA nor Physician Owners will enter into any similar
agreements with any physician practice management company or entity. GCOA and
the Physician Owners further agree that during the term of this Agreement, they
will not engage, directly or indirectly, as a principal owner, shareholder
(other than a holder of fewer than 5% of the outstanding shares of a
publicly-traded company), partner, joint venturer, agent, equity owner, or in
any other capacity whatsoever, in any corporation, partnership, joint venture,
or other business association or entity that operates ambulatory surgery centers
or provides management services of the nature provided by Company pursuant to
this Agreement, within the City of Baltimore, Maryland or contiguous counties or
any location within seventy-five (75) miles of the Main Clinic or any future
facility that replaces the Main Clinic (wherever located) or any Satellite
Office utilized by GCOA at any time during the term of this Agreement.
7.2. Restrictive Covenants.
- 13 -
<PAGE>
7.2.1. By Current Physician Employees. GCOA shall obtain and enforce
formal agreements from current Physician Employees, other than Technical
Employees, pursuant to which the Physician Employees agree not to establish,
operate or provide physician services at any medical office, clinic or
outpatient and/or ambulatory treatment or diagnostic facility providing services
substantially similar to those provided by GCOA, except on GCOA's behalf, within
the City of Baltimore, Maryland or contiguous counties or any location within
seventy-five (75) miles during the first five (5) years of the term of this
Agreement or fifty (50) miles thereafter of the Main Office or any future
facility that replaces the Main Office (wherever located at such time) or any
Satellite Office at the time of termination of employment with GCOA and for a
period of twenty-four (24) months after any termination of employment with GCOA.
Such agreements shall be a condition to employment and shall be in a form
satisfactory to Company and shall provide that Company is a third-party
beneficiary to such agreements and that such third-party beneficiary rights may
be assigned to Company's lender ("Lender"). This Section 7.2 shall relate solely
to Physician Employees who are not also Physician Owners.
7.2.2. By Current and Future Physician Owners. On the earlier of one
hundred eighty (180) days from the effective date of this Agreement, or on
thirty (30) days after written request by Company, which written request
includes a reasonable explanation or basis for the request, GCOA shall obtain
and enforce formal restrictive covenants with current and future Physician
Owners, the terms of which shall be substantially similar to the provisions of
Exhibit 11. Such agreements shall provide that Company is a third-party
beneficiary to such agreements. GCOA agrees to enforce the restrictive
covenants. The cost and expense of such enforcement shall be a Clinic Expense,
and all damages and other amounts recovered thereby shall be included in
Professional Services Revenue. In the event that after a request by Company,
GCOA does not pursue any remedy that may be available to it by reason of a
breach or default of a restrictive covenant, upon the request of Company, GCOA
shall assign to Company such causes of action and/or other rights it has related
to such breach or default and shall cooperate with and provide reasonable
assistance to Company with respect thereto; in which case, all costs and
expenses incurred in connection therewith shall be borne by Company and shall be
included in Company Expenses, and Company shall be entitled to all damages and
other amounts recovered thereby. The above described restrictive covenants
between GCOA and Physician Owners shall be in addition to and not in place of
the restrictive covenants described in Exhibit 11 between Company and the
Physician Owners.
7.2.3. Limitations on Restrictive Covenants. The foregoing restrictive
covenants shall not limit or prevent a Physician Employee or Physician Owner
from serving in part-time academic positions, working as expert witnesses, or
providing pro bono services in a manner consistent with past practices.
7.3. Restrictive Covenants By Future Physician Employees. GCOA shall
obtain and enforce formal agreements from each future Physician Employee other
than Technical Employees, hired or contracted, pursuant to which such physicians
agree not to establish, operate or provide physician services at any medical
office, clinic or outpatient and/or ambulatory treatment or diagnostic facility
providing services substantially similar to those provided by GCOA except on
GCOA's behalf, within the City of Baltimore, Maryland or contiguous counties or
any location within seventy-five (75) miles during the first five (5) years of
the term of this Agreement or fifty (50) miles thereafter of the Main Office or
any future facility that replaces the Main Office (wherever located at such
time) or any Satellite Office at the time of termination of said Physician
Employee's contract with GCOA and for a period of twenty-four (24) months
thereafter. Such agreements shall be a condition to employment and shall be in a
form satisfactory to Company and shall provide that Company is a third-party
beneficiary to such agreements and that such third-party beneficiary rights may
be assigned to any Lender. This Section 7.3 shall relate solely to Physician
Employees who are not also Physician Owners. The terms and conditions of Exhibit
11 shall govern restrictive covenants relating to Physician Owners.
7.4. Rights of Company. Except as limited below, Company shall at all
times during the term of this Agreement and thereafter have the right to enter
into additional service agreements with other physicians and practices
regardless of where such physicians and/or practices are located providing for
management services and facilities to such physicians and/or practices.
Notwithstanding the foregoing, and except as set forth in Section 11.9.3, in the
event that Company desires to enter into a Service Agreement with another
practice located within seventy-five (75) miles during the first five (5) years
of the term of this Agreement or fifty (50) miles thereafter of GCOA's Main
Office or any Satellite Office, then the Policy
- 14 -
<PAGE>
Board must first approve Company entering into such agreement. In the event that
the individuals representing Company on the Policy Board can reasonably
demonstrate that entering into such agreement will not have a material adverse
effect on GCOA's practice operations, earnings or cash flow, then the
individuals representing GCOA shall consent to Company entering into such
agreement.
7.5. Enforcement. GCOA acknowledges and agrees that since a remedy at law
for any breach or attempted breach of the provisions of this Article VII shall
be inadequate, Company shall be entitled to specific performance and injunctive
or other equitable relief in case of any such breach or attempted breach in
addition to whatever other remedies may exist by law. All parties hereto also
waive any requirement for the securing or posting of any bond in connection with
the obtaining of any such injunctive or other equitable relief. If any provision
of Article VII relating to the restrictive period, scope of activity restricted
and/or the territory described therein shall be declared by a court of competent
jurisdiction to exceed the maximum time period, scope of activity restricted or
geographical area such court deems reasonable and enforceable under Applicable
Law, the time period, scope of activity restricted and/or area of restriction
held reasonable and enforceable by the court shall thereafter be the restrictive
period, scope of activity restricted and/or the territory applicable to the
restrictive covenant provisions in this Article VII. In addition, breach of the
provisions of this Article VII may trigger certain rights of Company to redeem a
Physician Owner's Company common stock pursuant to the terms of Article VIII of
that certain stockholders agreement between Company and its stockholders (the
"Stockholders Agreement").
7.6. Modification of Restrictive Covenants. Upon the termination of
employment of a Physician Owner or Physician Employee, the Policy Board shall
have the authority to release or reduce in whole or in part the terms of the
restrictive covenants, including but not limited to the mileage radius
limitations set forth above in Sections 7.2 and 7.3. In the event that the
individuals representing GCOA on the Policy Board can reasonably demonstrate
that a modification to the restrictive covenant will not have a material adverse
effect on Company's or GCOA's practice operations, earnings or cash flow, then
the individuals representing Company shall consent to the proposed
modifications.
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees. During the first thirty-six (36) months of the term of
this Agreement, Company shall receive a service fee equal to (a) the greater of
(i) [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] or (ii) the Base Service
Fee, plus (b) the amount of Clinic Expenses. Upon the expiration of the first
thirty-six (36) months of the term of this Agreement, Company shall receive a
service fee equal to [xxxxxxxxxxxxxxxxxxxxxxx]of Practice Net Revenue plus the
amount of Clinic Expenses. In the event that a Physician Owner ceases to
practice medicine during the first thirty-six (36) months of the term of this
Agreement, such Physician Owner shall be personally liable for any reduction in
GCOA's service fees payable as further described under Section 11.9.1 of this
Agreement. In the event that a Physician Owner either dies or becomes Disabled
during such thirty-six (36) month period, GCOA or the applicable Physician
Owner, as the case may be, shall be entitled to satisfy the amount owed by
transferring to Company an amount of Company common stock having a Fair Market
Value equal to the amount owed or paying to Company cash in the amount owed (or
a combination thereof).
8.1.1. "Practice Net Revenue" shall mean Professional Services Revenues,
less Clinic Expenses.
8.1.2. "Professional Services Revenue" shall mean all fees actually
recorded each month (net of any amounts reimbursed to any patients or
Third-Party Payors during the applicable month and net of any adjustments for
contractual allowances, Medicaid, worker's compensation, employee/dependent
health care benefit programs, professional courtesies and other activities that
do not generate a collectible fee) by or on behalf of GCOA as a result of
professional medical services personally furnished to patients and other fees or
income generated in their capacity as Physician Employees and Technical
Employees, and any revenue from the sale of any goods.
- 15 -
<PAGE>
8.1.3. "Clinic Expenses" shall mean all operating and non-operating
expenses of GCOA arising hereunder unless expressly provided otherwise,
including, without limitation:
(a) salaries, benefits and other direct costs of all Clinic
employees including Company's employees and Physician Extender Employees
as defined in Section 8.1.5 working at the Practice Offices and salaries,
payroll taxes and employee benefits paid to Physician Employees (other
than Physician Owners) under Section 6.3 and to Technical Employees as
defined in Section 8.1.4,
(b) obligations of Company under Leases provided for herein under
Article III,
(c) the expenses and charges incurred for the Practice Offices,
including without limitation utilities, telephone, etc.,
(d) personal property and intangible taxes assessed against
Company's assets utilized by GCOA in the Practice Offices from and after
the date of this Agreement,
(e) interest expense on indebtedness incurred by Company to (i)
satisfy the obligations of GCOA, if any, assumed under the Asset Exchange
Agreement, (ii) provide working capital for Company's performance of any
of its obligations to GCOA hereunder, or (iii) purchase equipment,
(f) malpractice insurance premiums and disability insurance premiums
to cover accommodations to the Practice Offices under the definition of
"Disabled" or "Disability," and fire, workers compensation and general
liability insurance premiums, and life insurance premiums, during the
first three (3) years of this Agreement, for life insurance on the lives
of Physician Owners, with GCOA as the death beneficiary,
(g) the cost of any goods purchased for resale,
(h) the depreciation, as determined under GAAP, for any equipment or
depreciable property owned by Company and used by GCOA to be billed to
GCOA on a monthly basis and paid to Company at the same time Company pays
for GCOA's Accounts Receivable pursuant to Section 8.3,
(i) direct costs of all employees or consultants of Company engaged
to provide services at or in connection with GCOA or who actually provide
services at or in connection with the Clinic for improved performance,
such as quality assurance, reasonable expenses required for physician
accommodations under the definition of "Disabled" or "Disability,"
materials management, purchasing program, change in coding analysis,
physician recruitment; provided, however, only the portion of expenses
related to such employee or consultant, without mark-up, that is allocable
in a fair and reasonable manner to work approved by the Policy Board which
is performed at or for the benefit of GCOA shall be included in Clinic
Expenses, and
(j) any and all other ordinary and necessary expenses incurred by
GCOA or approved by the Policy Board and reasonably incurred by Company
for the direct benefit of GCOA in carrying out their respective
obligations under this Agreement.
Clinic Expenses shall not include Excluded Expenses or Company Expenses.
Excluded Expenses shall be the sole obligation of GCOA. Company Expenses shall
be the sole obligation of Company.
8.1.4. "Technical Employees" shall mean individuals who provide billable
services on behalf of GCOA and are employees of GCOA.
- 16 -
<PAGE>
8.1.5. "Physician Extender Employees" shall mean Physician Assistants,
Nurse Practitioners, and other such persons who are employees of Company, but
excluding any Technical Employees.
8.1.6. "Physician Employees" shall mean only those individuals who are
doctors of medicine (including Physician Owners) and who are employed by GCOA or
are otherwise under contract with GCOA to provide professional services to
patients seen in the Main Office or Satellite Offices and are duly licensed to
provide
- 17 -
<PAGE>
professional medical services in the state or states in which he or she renders
professional services under this Agreement.
8.1.7. "Company Expenses" shall mean, pursuant to GAAP applied on a
consistent basis:
(a) Any corporate overhead charges of Company and other items
incurred by Company that are not incurred specifically for the purpose of
providing services to GCOA or are not directly attributable to GCOA, as
reasonably determined by Company, including, without limitation, salaries
and benefits of executive officers of Company, except as otherwise
provided for in the definition of Clinic Expenses;
(b) Any amortization of any intangible asset resulting from the
Asset Exchange;
(c) Any depreciation attributable to increases in the book value of
tangible depreciable assets resulting from the Asset Exchange;
(d) Any legal and accounting expenses incurred by Company in
connection with the Asset Exchange; and
(e) All taxes of Company, including, but not limited to, state and
federal income taxes and franchise taxes, but excluding state and federal
employee taxes related to employees who provide services for GCOA,
property taxes on assets used by GCOA and other taxes specifically
included in Clinic Expenses.
8.1.8. "Excluded Expenses" shall be the sole obligation of GCOA and shall
mean, pursuant to GAAP applied on a consistent basis:
(a) Any salaries or other distributions made to Physician Owners
whether for professional fee income or otherwise;
(b) Any federal, state or other taxes associated therewith;
(c) Except as provided in Section 8.1.3(k), expenses of Physician
Owner's to maintain licensure or meet continuing education requirements,
including related travel expense; and
(d) Any other items specifically designated as Excluded Expenses
elsewhere in this Agreement including but not limited to those items
listed on Exhibit 8.1.8(d).
8.2. Payment of Service Fee. The amounts to be paid to Company under this
Article VIII shall be payable monthly, at the time that Company pays GCOA for
the Accounts Receivable previously purchased by Company as described in Section
8.3 below. The amount payable shall be estimated based upon the previous month's
operating results of GCOA. Adjustments to the estimated payments shall be made
to reconcile actual cumulative amounts due under this Article VIII, by the end
of the following month during each calendar year. Upon preparation of annual
financial statements as provided in Section 5.3, final adjustments to the
service fee for the preceding year shall be made and any additional payments
owing to Company or GCOA shall then be made to the party owed the additional sum
of money. The adjustment and any amount owed shall be calculated and paid within
ninety (90) days following the close of Company's fiscal year.
8.3. Purchase of Accounts Receivable.
8.3.1. GCOA hereby agrees to sell and assign to Company and Company agrees
to buy, all of GCOA's Accounts Receivable each month during which this Agreement
is in existence which are owing to GCOA arising out of the delivery of medical,
surgical, diagnostic or other professional medical goods or services. Accounts
Receivable shall not include, and Company shall not purchase, any cash, checks
or receivables created by credit cards. Company shall bear the risk of
collection and any overage or underage resulting from any purchased Accounts
Receivable.
- 18 -
<PAGE>
8.3.2. The purchase price for each Accounts Receivable (the "Purchase
Price") will be equal to the face amount of the Accounts Receivable recorded
each month, less any non-allowed contractual adjustments and net of any reserve
for uncollectible Accounts Receivables based on the historical experience of the
practice as determined by Company. It is the intent of the parties that the
Purchase Price reflect the actual net realizable value of the Accounts
Receivable.
8.3.3. GCOA will sell all Accounts Receivable to Company, such purchase to
be deemed to be made on the fifteenth (15th) day of the month following the
month in which such Accounts Receivable are created. Company shall pay for the
Accounts Receivable not later than the fifteenth (15th) day of each month
following the month in which the Accounts Receivable is created (the "Settlement
Date"). Company shall pay to GCOA for all Accounts Receivable purchased by
check, wire transfer or intrabank transfer to the GCOA Operating Account
described in Section 5.11. The purchase of Accounts Receivable shall be
evidenced by sending Company (i) a copy of each invoice with respect to each
Third-Party Payor on the Accounts Receivable then being purchased; and (ii) any
other information or documentation (including all required Uniform Commercial
Code releases or financing statements) Company may reasonably need to identify
the Accounts Receivable and obtain payment from the Account Debtors; provided
that such failure to send such documents shall not affect the obligation of GCOA
to sell such Accounts Receivable or Company to buy such Accounts Receivable. As
consideration for the purchase of Accounts Receivable by Company pursuant to
this Section 8.3, Company promises to pay and shall be obligated to pay for such
Accounts Receivable at the time and in the manner provided below. To the extent
permissible by Applicable Law, GCOA will be deemed to have sold to Company all
of GCOA's right, title and interest in such Accounts Receivable and in any
proceeds thereof, and Company will be the sole and absolute owner thereof and
will own all of GCOA's rights and remedies represented by such Accounts
Receivable (including, without limitation, rights to payment from the respective
Account Debtors on such Accounts Receivable), and Company will have obtained all
of GCOA's rights under all guarantees, assignments and securities with respect
to each such Accounts Receivable.
8.3.4. Upon expiration or termination of this Agreement for any reason,
(i) all Accounts Receivable purchased by Company shall remain the property of
Company and (ii) all Accounts Receivable purchased and not paid for at such
expiration or termination shall be paid for by the 10th of the following month
but effective as of the effective date of such expiration or termination date,
less the amount of any service fee earned by Company pursuant to Section 8.1 of
this Agreement.
8.3.5. In connection with the initial purchase of Accounts Receivable by
Company, GCOA will execute such financing statements or amendments under the UCC
(naming Company as secured party and Lender as assignee) as Company may
reasonably request with respect to any Accounts Receivable that may be purchased
pursuant to this Agreement.
8.3.6. GCOA agrees to cooperate with Company in the collection of the
Accounts Receivable sold by GCOA, transferred pursuant to Section 8.3. At the
option of and upon the request of Company, GCOA shall execute any and all
documentation necessary for the transfer of amounts constituting Accounts
Receivables and/or the establishment of lockboxes in accordance with the
provisions of Exhibit 8.3.6 attached hereto.
8.3.7. All Accounts Receivable of GCOA purchased by Company ("Purchased
A/R") pursuant to this Section 8.3 hereof will, as such Purchased A/R are
purchased, be treated as Professional Service Revenues for accounting and
financial purposes.
8.4. Payment of Clinic Expenses. All Clinic Expenses shall be incurred in
the name of Company, unless GCOA is required by law to incur such expenses, in
which case Company shall indemnify GCOA against any such expenses. Company shall
pay all Clinic Expenses as they become due; provided, however, that Company may,
in the name and on behalf of GCOA, contest in good faith any claimed Clinic
Expense to which there is any dispute regarding the nature, existence or
validity of such claimed Clinic Expense. Upon receipt of GCOA's service fee,
Company shall be required to deposit into the GCOA Operating Account described
in Section 5.11 an amount of money necessary for GCOA to pay the compensation
and benefits associated with the Technical Employees and Physician Employees
(other than Physician Owners) employed by GCOA.
- 19 -
<PAGE>
ARTICLE IX.
RECORDS
9.1. Patient Records. Upon termination of this Agreement and unless
otherwise provided herein, GCOA shall retain all patient medical records
maintained by GCOA or Company in the name of GCOA. GCOA shall, at GCOA's option,
be entitled to retain copies of financial and accounting records relating to all
services performed by GCOA. All parties agree to maintain the confidentiality of
patient identifying information and not to disclose such information except as
may be required or permitted by Applicable Law.
9.2. Records Owned by Company. All records relating in any way to the
operation of the Practice Offices which are not the property of GCOA under the
provisions of Section 9.1 above, shall at all times be the property of Company.
9.3. Access to Records. During the term of this Agreement, and thereafter,
GCOA or GCOA's designee shall have reasonable access during normal business
hours to GCOA's and Company's financial records, which relate to the operation
of GCOA including, but not limited to, records of collections, expenses and
disbursements as kept by Company in performing Company's obligations under this
Agreement, and GCOA may copy at GCOA's expense any or all such records.
9.4. Government Access to Records. To the extent required by Section
1861(v)(1)(I) of the Social Security Act, each party shall, upon proper request,
allow the United States Department of Health and Human Services, the Comptroller
General of the United States, and their duly authorized representatives access
to this Agreement and to all books, documents, and records necessary to verify
the nature and extent of the costs of services provided by either party under
this Agreement, at any time during the term of this Agreement and for an
additional period of four (4) years following the last date services are
furnished under this Agreement. If either party carries out any of its duties
under this Agreement through an agreement between it and an individual or
organization related to it or through a subcontract with an unrelated party,
that party to this Agreement shall require that a clause be included in such
agreement to the effect that until the expiration of four (4) years after the
furnishing of services pursuant to such agreement, the related organization
shall make available, upon request by the United States Department of Health and
Human Services, the Comptroller General of the United States, or any of their
duly authorized representatives, all agreements, books, documents, and records
of such related organization that are necessary to verify the nature and extent
of the costs of services provided under that agreement.
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by GCOA. Throughout the term of this
Agreement, GCOA shall maintain comprehensive professional liability and worker's
compensation insurance for GCOA and all employees of GCOA in amounts approved by
the Policy Board. Not in limitation of the foregoing, GCOA shall maintain excess
general liability umbrella coverage with a One Million Dollars ($1,000,000)
limit as currently maintained by GCOA (with deductible provisions not to exceed
$25,000 per occurrence), the cost of which shall be paid by Company as a Clinic
Expense. In lieu of the foregoing, Company may provide as a Clinic Expense group
insurance for malpractice and/or worker's compensation insurance.
Notwithstanding the foregoing, in the event that Company procures such group
insurance for malpractice and/or worker's compensation insurance, GCOA must
first approve the amount of coverage, the carrier and the terms of any such
coverage for GCOA.
10.2. Insurance to be Maintained by Company. Throughout the term of this
Agreement, Company shall provide and maintain, as a Clinic Expense,
comprehensive professional liability insurance and worker's compensation
insurance as required by Applicable Law for all professional employees of
Company who work at the Practice Offices with limits as determined reasonable by
Company, comprehensive general liability and property insurance covering the
Practice Offices' premises and operations. The deductible provisions on the
personal liability shall not exceed $25,000 per occurrence and
- 20 -
<PAGE>
the commercial general liability insurance shall be in amounts customarily
maintained by other businesses in the same or similar business as Company.
10.3. Additional Insureds. GCOA and Company agree to use their best
efforts to have each other named as an additional insured on the other's
respective professional liability insurance programs at Company's expense.
Further, on any insurance where Company will be named as an additional insured,
GCOA will assist Company to obtain appropriate riders to insure payment of any
party indemnified by Company.
10.4. Indemnification. GCOA shall indemnify, hold harmless and defend
Company, its officers, directors and employees, from and against any and all
liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees), caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts or negligent omissions (other than for any claims for (or in
connection with) malpractice arising from the performance or nonperformance of
medical services) by GCOA and/or GCOA's Physician Owners, agents, employees
and/or subcontractors (other than Company) during the term hereof. Company shall
indemnify, hold harmless and defend GCOA, the Physician Owners, GCOA's officers,
directors and employees, from and against any and all liability, loss, damage,
claim, causes of action, and expenses (including reasonable attorneys' fees),
caused or asserted to have been caused, directly or indirectly, by or as a
result of the performance of any intentional acts, negligent acts or negligent
omissions by Company and/or its shareholders, agents, employees and/or
subcontractors (other than GCOA and the Physician Owners) during the term of
this Agreement. Neither Company nor GCOA shall have any obligation to indemnify
the other party unless the claim for indemnification is based upon a liability,
loss or damage resulting in the indemnified party making payments to a third
party. Pursuant to the terms of the Stockholders Agreement, Company may have the
right to redeem a Physician Owner's Company common stock to satisfy a Physician
Owner's indemnification obligations.
In the event that either party makes a claim for indemnification under
either the Asset Exchange Agreement or this Service Agreement, then the claiming
party shall have the right, to the extent it is owed indemnifications, to pay
amounts owed to the other party under this Agreement into an escrow account
(established pursuant to an escrow agreement to be agreed upon by the parties)
to be held by the escrow agent in an interest bearing account until a
determination by either (i) the parties, (ii) a court of proper jurisdiction or
(iii) agreed upon panel of arbitrators, has been made regarding the claiming
party's right to indemnification. In the event that the claiming party is
entitled to indemnification, then such escrowed funds shall be paid to the
claiming party in partial or complete satisfaction of such indemnification
obligation. Any excess funds remaining in the escrow account after the payment
of the indemnification obligation or any funds held in the escrow account if it
is determined that no indemnification obligation is owed shall be paid to the
other party.
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement. This Service Agreement shall be effective upon
the closing of the Asset Exchange Agreement and shall expire on October 31, 2036
unless earlier terminated pursuant to the terms hereof. Notwithstanding the
foregoing, for purposes of computing the Service Fee for the month of November
1996 only, the Service Agreement shall be effective upon November 1, 1996.
11.2. Extended Term. Unless earlier terminated as provided for in this
Agreement, the term of this Agreement shall be automatically extended for
additional terms of five (5) years each, unless either party delivers to the
other party, not less than one hundred eighty (180) days prior to the expiration
of the preceding term, written notice of such party's intention not to extend
the term of this Agreement.
11.3. Termination by GCOA for Cause. GCOA may terminate this Agreement
without breach as follows:
- 21 -
<PAGE>
11.3.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by Company, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by Company, except for the filing of a petition in
involuntary bankruptcy against Company which is dismissed within thirty (30)
days thereafter, GCOA may give notice of the immediate termination of this
Agreement.
11.3.2. In the event Company shall materially default in the performance
of any duty or obligation imposed upon it by this Agreement and such default
shall continue for a period of sixty (60) days after written notice thereof has
been given to Company by GCOA; or Company shall fail to remit the payments due
as provided in Article VIII hereof and such failure to remit shall continue for
a period of thirty (30) days after written notice thereof, GCOA may terminate
this Agreement.
11.3.3. In the event Company shall, intentionally or in bad faith,
misapply funds or assets of GCOA or commit a similar act which cause material
harm to GCOA, GCOA may terminate this Agreement.
11.3.4. In the event that Company shall intentionally or in bad faith
violate Applicable Law resulting in a direct, continuing material adverse effect
on the operations, earnings and cash flow of GCOA, GCOA may terminate this
Agreement.
11.4. Termination by Company for Cause. Company may terminate this
Agreement without breach as follows:
11.4.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by GCOA, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by GCOA, except for the filing of a petition in
involuntary bankruptcy against GCOA which is dismissed within thirty (30) days
thereafter, Company may give notice of the immediate termination of this
Agreement.
11.4.2. In the event GCOA shall materially default in the performance of
any duty or obligation imposed upon it by this Agreement, and such default shall
continue for a period of ninety (90) days after written notice thereof has been
given to GCOA by Company, Company may terminate this Agreement.
11.4.3. In the event GCOA's Medicare or Medicaid Number shall be
terminated or suspended as a result of the action or inaction of GCOA or a
Physician Employee, and such termination or suspension shall continue for thirty
(30) days, Company may give notice of the immediate termination of this
Agreement, unless GCOA shall at that time be acting in good faith (and shall
provide reasonable evidence of the action being taken) to reverse such
termination or suspension. Notwithstanding any good faith effort on the part of
GCOA to reverse such termination or suspension, if such termination or
suspension shall not be reversed within ninety (90) days after occurrence,
Company shall have the right to terminate this Agreement immediately.
11.4.4. In the event this Agreement is terminated by Company pursuant to
Section 11.4.1, Section 11.4.2, or Section 11.4.3, Company, at its option,
may require GCOA to purchase from Company all assets, both tangible and
intangible, owned by Company and used or made available for GCOA's use for the
fair market value of such assets on a going concern basis, without regard to
this Agreement. In addition thereto, GCOA shall assume all debt (including any
balance of any remaining debt incurred by Company to acquire the assets under
the Asset Exchange Agreement) and all contracts, payables and leases which are
obligations of Company which relate to Company's obligations which are performed
at the Office Locations under this Agreement. The fair market value of the
assets shall be determined by an independent appraiser selected by two (2)
independent accountants practicing with "big six" accounting firms, one (1)
selected by GCOA and one (1) selected by Company and neither of which is
providing or has for a period of two (2) years provided services to Company or
GCOA. In addition to the payment for the practice assets, in the event Company
terminates this Agreement pursuant to Section 11.4.1, Section 11.4.2 or Section
11.4.3 within the first five (5) years of the term of this Agreement, then
GCOA's Physician Owners shall (i) pay to Company an amount of money equal to the
Fair Market Value, as of the date of termination, of one-third (1/3) of the
shares of stock and any cash consideration issued by Company to GCOA pursuant to
the Asset Exchange Agreement or (ii) surrender to Company for cancellation
- 22 -
<PAGE>
one-third (1/3) of the shares of stock and cash consideration issued by
Company to GCOA pursuant to the Asset Exchange Agreement. All expenses of any
appraisal shall be paid by GCOA. In the event that Company terminates this
Agreement pursuant to Sections 11.4.1 through 11.4.3, inclusive, and Company
requires GCOA to purchase the practice assets, then upon the closing of the
purchase of the assets, GCOA and its Physician Employees shall be released from
the restrictive covenants provided for under Exhibit 11 of this Agreement. In
addition, termination of the Agreement may trigger certain rights of Company to
redeem a Physician Owner's Company common stock pursuant to the terms of Article
VIII of the Stockholders Agreement.
11.5. Early Termination by GCOA or Company Without Cause Upon Third (3rd)
Anniversary of Agreement. Either party may terminate this Agreement without
cause upon written notice delivered to the other party not less than nine (9)
months or more than ten (10) months or more prior to the end of the third (3rd)
anniversary of the date of this Agreement if Company has not filed a
registration statement with the United States Securities and Exchange
Commission; provided, however, if Company files a registration statement, for an
underwritten public offering, with the United States Securities and Exchange
Commission before the end of the date of the third (3rd) anniversary of this
Agreement, then such termination shall be ineffective, and this Agreement shall
continue in force unless otherwise terminated pursuant to the other provisions
of Article XI of this Agreement. In the event that such registration statement
is not effective within one hundred twenty (120) days from filing, then the
early termination rights described in the first sentence of this Section 11.5
shall be again exercisable; provided, further, that if such registration
statement was filed during the above described notice period for early
termination, then such period shall be extended for thirty (30) days from and
after the date such early termination rights again become exercisable.
Notwithstanding any other provision of this Agreement to the contrary, the
termination rights set forth in this Section 11.5 shall immediately terminate
and no longer be effective upon a Change in Control of Company. Upon a
termination pursuant to this Section 11.5, GCOA shall tender to Company all of
the stock issued to GCOA by Company pursuant to the Asset Exchange Agreement,
and Company shall return to GCOA the facilities and all assets, both tangible
and intangible, used or made available for GCOA's use in the Practice Office.
GCOA shall assume all debt (including any balance of any remaining debt incurred
by Company to acquire the assets under the Asset Exchange Agreement) and all
contracts, payables and leases which are obligations of Company and which relate
to Company's obligations which are performed at the Office Locations under this
Agreement. Company and GCOA shall cooperate to structure any exchange
consummated pursuant to this Section 11.5 in a manner designed to minimize the
aggregate tax consequences to the parties arising from the exchange. Closing of
the exchange pursuant to this Section 11.5 shall occur effective as of the third
(3rd) anniversary of this Agreement.
11.6. Consequences of GCOA Termination. In the event that this Agreement
is terminated by GCOA under the terms of Section 11.3 or is terminated on any
other basis (other than (i) because of the normal expiration of its term set
forth in Section 11.1, (ii) by Company for cause as set forth in Section 11.4 or
(iii) by early termination as set forth in Section 11.5), then upon such
termination, GCOA shall purchase from Company all assets, both tangible and
intangible, owned by Company and used or made available for GCOA's use for the
fair market value of such assets on a going concern basis, without regard to
this Agreement. In addition thereto, GCOA shall assume all debt (including any
balance of any remaining debt incurred by Company to acquire the assets under
the Asset Exchange Agreement) and all contracts, payables and leases which are
obligations of Company which relate to Company's obligations which are performed
at the Office Locations under this Agreement. The fair market value of the
assets shall be determined by an independent appraiser selected by two (2)
independent accountants practicing with "big six" accounting firms, one (1)
selected by GCOA and one (1) selected by Company and neither of which is
providing or has for a period of two (2) years provided services to Company or
GCOA. Termination of this Agreement by GCOA or a Physician Owner may trigger
Company's right to redeem all of Company common stock owned by the Physician
Owner as provided for in Section 8.1 (a) of the Stockholders Agreement.
11.7. Closing of Purchase by GCOA and Effective Date of Termination. GCOA
shall, except as provided below in this Section 11.7, pay cash for the practice
assets purchased pursuant to the provisions of this Section 11. The amount of
the purchase price shall be reduced, but not below zero (0), by the amount of
debt and liabilities of Company assumed by GCOA and shall also be reduced by any
payment Company has failed to make under this Agreement, provided that such
payments or obligations are not otherwise accounted for in the liabilities
assumed by GCOA in connection with the purchase
- 23 -
<PAGE>
described herein. The closing date for the purchase shall be determined by GCOA,
but shall in no event occur later than one hundred eighty (180) days from the
date of the notice of termination. The termination of this Agreement shall
become effective upon the closing of the sale of the assets and GCOA and Company
shall be released from the restrictive covenants provided for in Article VII on
the closing date. Company shall give GCOA credit towards the purchase price of
the assets for the Fair Market Value of any Company common stock tendered to
Company in exchange for such assets. In the event that GCOA terminates this
Agreement pursuant to Sections 11.3.1 through 11.3.4, inclusive, or Sections
11.5, 11.6 or 11.7, then upon the closing of the purchase of the assets, GCOA
and its Physician Employees shall, except as GCOA may so elect to limit through
separate agreements with Physician Owners and Physician Employees, be released
from the restrictive covenants provided for under Article VII or Exhibit 11 of
this Agreement.
11.8. Tail Policy. GCOA shall obtain continuing liability insurance
coverage under either a "tail policy" or a "prior acts policy" with the same
limits and deductibles as set forth in Section 10.1 upon the termination of this
Agreement, or upon a physician's termination of his or her affiliation with
GCOA.
11.9. Restrictions Applicable to Physician Owners. The Physician Owners
hereby acknowledge that the Asset Exchange and the terms and conditions of this
Agreement were determined based upon numerous factors, including the Physician
Owners continuing to practice medicine in the future. In connection therewith,
each Physician Owner agrees as follows:
11.9.1. Early Retirement. If at any time prior to the fifth (5th)
anniversary of this Agreement, a Physician Owner desires to retire from the
practice of medicine, such Physician Owner shall be obligated as follows:
(a) to give Company at least twelve (12) months prior written notice
of the intent to retire; provided, however, that once such retiring
physician has located a replacement physician satisfying the requirements
of Section 11.9.1(b), Company shall waive the remaining months of said
twelve (12) month notice period, and such retirement shall be effective
upon the earlier of twelve (12) months from the date of notice or
commencement of the replacement physician's employment;
(b) to locate a physician or physicians (which may be Physician
Employees), reasonably acceptable to the Policy Board, to replace such
Physician Owner under this Agreement (all costs of locating such
replacement physicians shall be paid by such Physician Owner (the
"Substitute Physician(s)");
(c) to pay to Company any loss of service fees payable under this
Agreement for the remainder of the first five (5) years of this Agreement.
Any loss for any periods of less than twelve (12) months shall be
calculated on an annualized and prorated basis. For purposes of this
Section 11.9.1(c), the amount of the loss shall be calculated as follows:
(i) The Policy Board shall calculate the retiring Physician
Owner's contribution to the payment of GCOA's service fees
during the twelve (12) month period preceding the retiring
Physician Owner's notice of intent to retire.
(ii) In the event the Substitute Physician(s) were Physician
Employees prior to the date upon which notice of intent to
retire was given pursuant to Section 11.9.1(a), the Policy
Board shall calculate such Physician Employee(s) contribution
to the payment of GCOA's service fees during the twelve month
period preceding the notice of intent to retire.
(iii) On each successive anniversary date of this Agreement (through
the fifth anniversary date) following the effective date of
such retirement, the Policy Board shall determine the amount
of service fees generated by the Substitute Physicians between
either (x) the effective date of
- 24 -
<PAGE>
retirement or (y) the immediately preceding anniversary date,
as applicable, and such successive anniversary date.
(iv) If the Substitute Physician(s) were Physician Employees prior
to date upon which the notice of intent to retire was given,
the amount of loss shall equal the difference between (i) the
amount calculated pursuant to Section 11.9.1(c)(i) plus the
amount calculated pursuant to Section 11.9.1(c)(ii) and (ii)
the amount calculated pursuant to Section 11.9.1(c)(iii).
(v) If the Substitute Physician(s) were not Physician Employees
prior to the date upon which the notice of intent to retire
was given, the amount of loss shall equal the difference
between (i) the amount calculated pursuant to Section
11.9.1(c)(i) and (ii) the amount calculated pursuant to
Section 11.9.1(c)(iii).
The Policy Board will provide the amount of the loss to the retiring Physician
Owner within thirty (30) days of the applicable anniversary date of this
Agreement and such amount shall be paid by such retiring Physician Owner to
Company within fifteen (15) days of the date of the delivery of the notice of
the amount of loss;
(d) to (i) pay to Company an amount of money equal to the Fair
Market Value, as of the date of retirement, of one-third (1/3) of the
shares of stock issued by Company to the retiring Physician Owner pursuant
to the Asset Exchange Agreement or (ii) surrender to Company for
cancellation one-third (1/3) of the stock issued by Company to the
retiring Physician Owner pursuant to the Asset Exchange Agreement. (All
expenses of any appraisal shall be paid by such Physician Owner.); and
(e) to honor and comply with the restrictive covenants provided for
under Exhibit 11.
11.9.2. Retirement. If at any time after the fifth (5th) anniversary of
this Agreement, a Physician Owner desires to retire, or assume full-time
teaching responsibilities, such Physician Owner shall notify Company in writing
at least twelve (12) months prior to the effective date of such retirement or
start of teaching position; provided, however, that no more than twenty percent
(20%) of the Physician Owners can retire or assume full time teaching
responsibilities within any twelve (12) month period; provided, further, that if
such retiring physician elects to, and has located a replacement physician,
Company shall waive the remaining months of said twelve (12) month notice
period, and such retirement shall be effective upon the earlier of twelve (12)
months from the date of notice or commencement of the replacement physician's
employment. Upon such retirement or start of teaching position, such Physician
Owner shall have no further obligations under this Agreement; provided, however,
the restrictive covenants provided for under Exhibit II shall remain in force.
In fulfilling any such full-time teaching responsibilities, such Physician Owner
would be permitted to attend patients in a manner normal and customary for such
faculty position, provided, however, such services must be incident to the
academic/teaching aspects of the institution, and not incident to the regular
examination of patients for a fee whether billed in the name of the institution
or the name of the attending physician. It is not the intent of the Parties to
permit a retired physician to conduct a medical practice through an academic
institution.
11.9.3. Physician Owner Change in Practice/Group Affiliation. In the event
that a Physician Owner leaves the employment of or terminates his or her
affiliation with GCOA, then the terminating Physician Owner may join or
establish another group/practice which has or will enter into a Service
Agreement with Company upon such terminating Physician Owner's affiliation with
such new group/practice. Upon entering into such new Service Agreement, the
terminating Physician Owner shall, except as limited by separate employment
agreements between GCOA and Physician Owners, be released from any obligation
under this Service Agreement. Company shall have the right to enter into such
new Service Agreement without satisfying the requirements of paragraph G of
Exhibit 11. In the event that (i) GCOA consents to Company entering into the new
Service Agreement, (ii) entering into the new Service Agreement will not
adversely affect the operations and earnings of Company, and (iii) the new
group/practice can satisfy the representations and warranties set forth in
Article XIII of this Agreement, then Company will not unreasonably withhold or
refrain from entering into a new
- 25 -
<PAGE>
Service Agreement with the terminating Physician Owner's new group/practice.
Except as set forth herein, in the event that the Physician Owner affiliates
with a new group/practice that is not a party to a Service Agreement with
Company, then Company, at its option, may terminate this Agreement solely with
respect to the terminating Physician Owner, and the provisions of Exhibit 11
shall apply. In the event that Company does not enter into a new Service
Agreement, then Company shall terminate this Agreement with respect to such
Physician Owner, and the terminating Physician Owner shall be obligated as
described in Sections 11.9.1 (a) and 11.9.1(e) of this Agreement; provided,
however, if such termination is within the first five (5) years of the term of
this Agreement, the terminating Physician Owner shall also be obligated as
described in Sections 11.9.1.(a), 11.9.1(b), 11.9.1(c), 11.9.1(d) and 11.9.1(e).
11.9.4. Death or Disability. In the event that a Physician Owner dies or
becomes disabled, then the Physician Owner shall have no continuing obligations
under this Agreement; provided, however, in the event of disability, the
restrictive covenants described in Exhibit 11 shall remain in force.
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds. All insurance or condemnation proceeds
payable by reason of any physical loss of any of the improvements comprising the
facilities or the furniture, fixtures and equipment used by the Practice
Offices, shall be available for the reconstruction, repair or replacement, as
the case may be, of any damage, destruction or loss. The Policy Board, in
consultation with GCOA, shall review and approve such reconstruction, repair or
replacement.
12.2. Temporary Space. In the event of substantial damage to or the
condemnation of a significant portion of the facilities, Company shall use its
best efforts to provide temporary facilities until such time as the facilities
can be restored or replaced.
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF GCOA AND PHYSICIAN OWNERS
GCOA and Physician Owners represent, warrant, covenant and agree with
Company that:
13.1. Validity. GCOA is a Maryland limited liability company. GCOA has the
full power and authority to own GCOA's property, to carry on GCOA's business as
presently being conducted, to enter into this Agreement, and to consummate the
transactions contemplated hereby. Each Physician Owner is an adult citizen and
resident of the State of Maryland. Each Physician Owner has the full power and
authority to own his or her property, carry on his or her business as presently
being conducted, to enter into this Agreement, and to consummate the
transactions contemplated hereby.
13.2. Litigation. Except as disclosed pursuant to the Asset Exchange
Agreement, there is no suit, action, proceeding at law or in equity,
arbitration, administrative proceeding or other proceeding pending, or
threatened against, or affecting GCOA or any Physician Employee, or to the best
of GCOA's and each Physician Owner's knowledge, any provider or other health
care professional associated with or employed by GCOA as pertains to any claim
involving the providing of health care related services, and to the best of
GCOA's and each Physician Owner's knowledge there is no basis for any of the
foregoing.
13.3. Permits. GCOA and all health care professionals associated with or
employed by GCOA have all permits and licenses and other Necessary
Authorizations required by all Applicable Law, except where failure to secure
such licenses, permits and other Necessary Authorizations does not have a
material adverse effect; have made all regulatory filings necessary for the
conduct of GCOA's business; and are not in violation of any of said permitting
or licensing requirements.
13.4. Authority. The execution of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
action, and this Agreement is a valid and binding Agreement of GCOA and each
Physician Owner, enforceable in accordance with its terms. GCOA and each
Physician Owner have obtained all third-party
- 26 -
<PAGE>
consents necessary to enter into and consummate the transaction contemplated by
this Agreement. Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby, nor compliance by GCOA or
any Physician Owner with any of the provisions hereof, will:
13.4.1. violate or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under any license, agreement or other
instrument or obligation to which either GCOA or any Physician Owner is a party;
13.4.2. violate any order, writ, injunction, decree, statute, rule or
regulation applicable to either GCOA or any Physician Owner.
13.5. Compliance with Applicable Law. To the best of GCOA's and each
Physician Owner's knowledge and belief, GCOA and each Physician Owner has
operated in compliance with all federal, state, county and municipal laws,
ordinances and regulations applicable thereto and neither GCOA nor any provider
associated with or employed by GCOA has received payment or any remuneration
whatsoever to induce or encourage the referral of patients or the purchase of
goods and/or services as prohibited under 42 U.S.C. ss. 1320a-7b(b), or
otherwise perpetrated any Medicare or Medicaid fraud or abuse, nor has any fraud
or abuse been alleged within the last five (5) years by any Governmental
Authority, a carrier or a Third-Party Payor.
13.6. Health Care Compliance. GCOA is presently participating in or
otherwise authorized to receive reimbursement from or is a party to Medicare,
Medicaid, and other Third-Party Payor Programs. All necessary certifications and
contracts required for participation in such programs are in full force and
effect and have not been amended or otherwise modified, rescinded, revoked or
assigned as of the date hereof, and no condition exists or to the knowledge of
GCOA no event has occurred which in itself or with the giving of notice or the
lapse of time or both would result in the suspension, revocation, impairment,
forfeiture or non-renewal of any such Third-Party Payor Program. GCOA is in full
compliance with the material requirements of all such Third-Party Payor Programs
applicable thereto.
13.7. Fraud and Abuse. GCOA and persons and entities providing
professional services for GCOA, have not, to the knowledge of GCOA and each
Physician Owner, after due inquiry, engaged in any activities which are
prohibited by or are in violation of the rules, regulations, policies, contracts
or laws pertaining to any Third-Party Payor Program, or which are prohibited by
rules of professional conduct ("Governmental Rules and Regulations"), including
but not limited to the following: (a) 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; (b) 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; (c) failing to disclose
knowledge by a claimant of the occurrence of any event affecting the initial or
continued right to any benefit or payment on GCOA's own behalf or on behalf of
another, with intent to fraudulently secure such benefit or payment; or (d)
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 (i) in return
for referring an individual to a person for the furnishing or arranging for the
furnishing or any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (ii) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service or item for which payment may be made in whole or in
part by Medicare or Medicaid.
13.8. GCOA Compliance. GCOA has all licenses necessary to operate the
Practice Offices in accordance with the requirements of all Applicable Law and
has all Necessary Authorizations for the use and operation, all of which are in
full force and effect. There are no outstanding notices of deficiencies relating
to GCOA issued by any Governmental Authority or Third-Party Payor requiring
conformity or compliance with any Applicable Law or condition for participation
of such Governmental Authority or Third-Party Payor, and after reasonable and
independent inquiry and due diligence and investigation, GCOA has neither
received notice nor has any knowledge or reason to believe that such Necessary
Authorizations may be revoked or not renewed in the ordinary course.
- 27 -
<PAGE>
13.9. Rates and Reimbursement Policies. The jurisdiction in which GCOA is
located does not currently impose any restrictions or limitations on rates which
may be charged to private pay patients receiving services provided by GCOA. GCOA
does not have any rate appeal currently pending before any Governmental
Authority or any administrator of any Third-Party Payor Program. GCOA has no
knowledge of any Applicable Law which has been enacted, promulgated or issued
within the eighteen (18) months preceding the date of this Agreement or any such
legal requirement proposed or currently pending in the jurisdiction in which
GCOA is located which could have a material adverse effect on GCOA or may result
in the imposition of additional Medicaid, Medicare, charity, free care, welfare,
or other discounted or government assisted patients at GCOA or require GCOA to
obtain any necessary authorization which GCOA does not currently possess.
13.10. Accounts Receivable. With respect to the Purchased A/R, as of the
date of purchase:
13.10.1. All documents and agreements relating to the Purchased A/R that
have been delivered to Company with respect to such Accounts Receivable are true
and correct; GCOA has billed the applicable Account Debtor and GCOA has
delivered or caused to be delivered to such Account Debtor all requested
supporting claim documents with respect to such Accounts Receivable; all
information set forth in the bill and supporting claim documents is true and
correct, and, if any error has been made, GCOA will promptly correct the same
and, if necessary, rebill or, if requested by Company, cooperate with Company to
rebill such Accounts Receivable.
13.10.2. The Purchased A/R are exclusively owned by GCOA and there is no
security interest or lien in favor of any third party, or the recording or
filing against GCOA, as debtor, covering or purporting to cover any interest of
any kind in any Accounts Receivable, except as has been released by each party
holding such adverse interest in the Accounts Receivable. Upon payment of the
Purchase Price with respect to the Purchased A/R and with respect to
Governmental Receivables, to the extent permissible by law, all right, title and
interest of GCOA with respect thereto shall be vested in Company, free and clear
of any lien, security interest, claim or encumbrance of any kind, and GCOA
agrees to defend the same against the claims of all Persons.
13.10.3. The Purchased A/R (i) are payable, in an amount not less than
their face amount, as adjusted pursuant to the provisions of Section 8.3.2, by
the Account Debtor identified by GCOA as being obligated to do so, (ii) are
based on an actual and bona fide rendition of services or sale of goods to the
patient by GCOA in the ordinary course of business, (iii) are denominated and
payable only in lawful currency of the United States, and (iv) are accounts or
general intangibles within the meaning of the UCC of the state in which GCOA has
its principal place of business, or are rights to payment under a policy of
insurance or proceeds thereof, and are not evidenced by any instrument or
chattel paper. There are no payors other than the Account Debtor identified by
GCOA as the payor primarily liable on any Purchased A/R.
13.10.4. The Purchased A/R are not (i) subject to any action, suit,
proceeding or dispute (pending or threatened), set-off, counterclaim, defense,
abatement, suspension, deferment, deductible, reduction or termination by the
Account Debtors other than routine adjustments and disallowances made in the
ordinary course of business, to the extent of such adjustments and
disallowances, (ii) past or within sixty (60) days of, the statutory limit for
collection applicable to the Account Debtor, (iii) subject to an invoice which
provides for payment more than forty-five (45) days from the date of such
invoice, (iv) an account which arises out of a sale or other transaction by or
between GCOA to an Affiliate of GCOA, (v) from an Account Debtor who is also a
creditor of GCOA, (vi) an account in which the Account Debtor has commenced a
voluntary case, or an involuntary proceeding has been instituted, under the
federal bankruptcy laws, as now constituted or hereafter amended, or made an
assignment for the benefit or creditors, or if a decree or order for relief has
been entered by a court having jurisdiction in the premises in respect to the
Account Debtor, (vii) an account of which the goods giving rise to such Accounts
Receivable have not been shipped and delivered to and accepted by the Account
Debtor or the services giving rise to such Accounts Receivable have not been
performed by GCOA and accepted by the Account Debtor or the Accounts Receivable
otherwise does not represent a final sale, (viii) is evidenced by an instrument
or chattel paper unless such instrument or chattel paper is delivered to Company
with all appropriate endorsements in favor of Company, or (ix) other than a
complete bona fide transaction which requires no further act under any
circumstances on the part of GCOA to make the Accounts Receivable payable by the
Account Debtor.
- 28 -
<PAGE>
13.10.5. GCOA does not have any guaranty of, letter of credit providing
credit support for, or collateral security for, the Purchased A/R, other than
any such guaranty, letter of credit or collateral security as has been assigned
to Company, and any such guaranty, letter of credit or collateral security is
not subject to any lien in favor of any other person.
13.10.6. The goods or services provided and reflected by the Purchased A/R
were medically necessary for the patient in the opinion of GCOA and the patient
received such goods or services.
13.10.7. The face amount of the Accounts Receivable for the services
constituting the basis for the Purchased A/R are consistent with the usual,
customary and reasonable fees charged by other similar medical service providers
in GCOA's community for the same or similar service.
13.10.8. Each Account Debtor with respect to the Purchased A/R (i) is not
currently the subject of any bankruptcy, insolvency or receivership proceeding,
nor is it generally unable to make payments on its obligations when due, (ii) is
located in the United States, and (iii) is one of the following: (x) a party
which in the ordinary course of its business or activities agrees to pay for
healthcare services received by individuals, including, without limitation,
Medicare, Medicaid, governmental bodies, commercial insurance companies and
non-profit insurance companies (such as Blue Cross and Blue Shield entities)
issuing health, personal injury, workers compensation or other types of
insurance; (y) employers or unions which self-insure for employee or member
health insurance, prepaid healthcare organizations, preferred provider
organizations, health maintenance organizations or any other similar person, or
(z) a Third-Party Payor of the type described in the definition of Governmental
Receivables.
13.10.9. The proceeds of the sale of the Purchased A/R will be used for
the business and commercial purposes of GCOA. The sale of the Purchased A/R
hereunder is made in good faith and without actual intent to hinder, delay or
defraud present or future creditors of GCOA.
13.10.10. Except with respect to Governmental Receivables, the insurance
policy, contract or other instrument obligating an Account Debtor to make
payment with respect to the Purchased A/R (i) does not contain any provision
prohibiting the transfer of such payment obligation from the patient to GCOA, or
from GCOA to Company, (ii) has been duly authorized by GCOA and to the knowledge
of GCOA has been duly authorized by the Account Debtor and, together, with the
Purchased A/R, constitutes the legal, valid and binding obligation of the
Account Debtor in accordance with its terms, (iii) together with the applicable
Purchased A/R, does not contravene in any material respect any requirement of
law applicable thereto, and (iv) was in full force and effect and applicable to
the patient at the time the services constituting the basis for the Purchased
A/R were performed.
None of the foregoing representations and warranties shall be deemed to
constitute a guaranty by GCOA that the Purchased A/R will be collected by
Company. GCOA shall not be responsible for any damages for any breach of a
representation or warranty under this Section 13.10 until Company has suffered a
loss on the purchase of GCOA's Accounts Receivable. Damages for such breach
shall be limited to the amount of Company's loss on the purchase of such
Accounts Receivable.
13.11. Full Disclosure. When considered in the context of all information
contained herein, to the knowledge of GCOA no representation or warranty made by
GCOA in this Agreement contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading.
13.12. Exhibits. All the facts recited in Exhibits annexed hereto shall be
deemed to be representations of fact by GCOA as though recited in this Article
XIII.
- 29 -
<PAGE>
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents, warrants, covenants and agrees with GCOA as follows:
14.1. Organization. Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Company
has the full power to own its property, to carry on its business as presently
conducted, to enter into this Agreement and to consummate the transactions
contemplated hereby.
14.2. Authority. Company has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, as well as the
consummation of the transactions contemplated hereby. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
hereby will not, violate any provisions of the charter or the bylaws of Company
or any indenture, mortgage, deed of trust, lien, lease, agreement, arrangement,
contract, instrument, license, order, judgment or decree or result in the
acceleration of any obligation thereunder to which Company is a party or by
which it is bound.
14.3. Absence of Litigation. No action or proceeding by or before any
court or other Governmental Authority has been instituted or is, to the best of
Company's knowledge, threatened with respect to the transactions contemplated by
this Agreement.
14.4. Transactions with Affiliates. Company shall not enter into any
transaction or series of transactions, whether or not related or in the ordinary
course of business, with any Affiliate of GCOA or Company, other than on terms
and conditions substantially as favorable to Company as would be obtainable by
Company at the time in a comparable arm's-length transaction with a person not
an Affiliate.
ARTICLE XV.
COVENANTS OF GCOA AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements. GCOA shall not
incorporate, merge or consolidate with any other entity or individual or
liquidate or dissolve or wind-up GCOA's affairs or enter into any partnerships,
joint ventures or sale-leaseback transactions or purchase or otherwise acquire
(in one or a series of related transactions) any part of the property or assets
(other than purchases or other acquisitions of inventory, materials and
equipment in the ordinary course of business) of any other person or entity.
15.2. Necessary Authorizations/Assignment of Licenses and Permits. GCOA
and each Physician Owner shall maintain all licenses, permits, certifications,
or other Necessary Authorizations and shall not assign or transfer any interest
in any license, permit, certificate or other Necessary Authorization granted to
it by any Governmental Authority, nor shall GCOA or any Physician Owner assign,
transfer, or remove or permit any other individual or entity to assign, transfer
or remove any records of GCOA or any Physician Owner, including without
limitation, patient records, medical and clinical records (except for removal of
such patient records as required under any Applicable Law).
15.3. Transaction with Affiliates. Neither GCOA nor any Physician Owner
shall enter into any transaction or series of transactions, whether or not
related or in the ordinary course of business, with any Affiliate of GCOA or
Company, other than on terms and conditions substantially as favorable to GCOA
or the Physician Owner, as would be obtainable by GCOA or the Physician Owner at
the time in a comparable arms-length transaction with a person not an Affiliate.
15.4. Compliance with All Laws. GCOA and each Physician Owner shall use
their best efforts to comply with all laws and regulations relating to GCOA's
practice and the operation of any facility, including, but not limited to, all
state,
- 30 -
<PAGE>
federal and local laws relating to the acquisition or operation of a health care
practice. Furthermore, neither GCOA nor any Physician Owner shall intentionally
violate any Governmental Rules and Regulations.
15.5. Third-Party Payor Programs. GCOA shall maintain GCOA's compliance
with the requirements of all Third- Party Payor Programs in which GCOA is
currently participating or authorized to participate.
15.6. Change in Business or Credit and Collection Policy. GCOA shall not
make any change in the character of GCOA's business or in the credit and
collection policy, which change would, in either case, impair the collectibility
of any Purchased A/R or any Exchange A/R or otherwise modify, amend or extend
the terms of any such account other than in the ordinary course of business.
15.7. Treatment of Accounts Receivable. GCOA will (i) treat transfers to
Company of Accounts Receivable hereunder as a sale for all purposes, including
tax and accounting (and shall accurately reflect such sale in its financial
statements), and will advise all persons who inquire about the ownership of such
Accounts Receivable that they have been sold to Company; (ii) not treat any such
Accounts Receivable as an asset on GCOA's books and records; (iii) record in
GCOA's books, records and computer files pertaining thereto that such Accounts
Receivable have been sold to Company; (iv) pay all taxes, if any, relating to
the transfer of such Accounts Receivable after the same have been purchased by
Company; (v) not impede or interfere with Company's collection of such Accounts
Receivable; (vii) not amend, waive or otherwise permit or agree to any deviation
from the terms or conditions of such Accounts Receivable; (viii) use all
reasonable efforts to obtain all consents from patients which are required by
law in order for Company, or any servicing entity retained by Company, to secure
information needed to obtain or to expedite payment from the respective Account
Debtors; and (ix) have billed such Accounts Receivable on the same bases and
using the same policies and practices that it has used in the past unless
Company has been advised in writing of a change prior to the purchase of such
Accounts Receivable. Company or its designated representatives from time to time
may verify the Accounts Receivable, inspect, check, take copies or extracts from
GCOA's books, records and files, and GCOA will make the same available to
Company or such representatives at any reasonable time for such purposes.
15.8. Security Interest. If, contrary to the mutual intent of GCOA and
Company, any purchase of Purchased A/R is not characterized as a sale, GCOA
shall, effective as of the date hereof, be deemed to have granted (and GCOA does
hereby grant) to Company a first priority security interest in and to any and
all of the Purchased A/R and the proceeds thereof to secure the repayment of all
amounts advanced to GCOA hereunder with accrued interest thereon, and this
Agreement shall be deemed to be a security agreement. With respect to such grant
of a security interest, Company may at its option exercise from time to time any
and all rights and remedies available to it under the UCC or otherwise. GCOA
agrees that five (5) days shall be reasonable prior notice of the date of any
public or private sale or other disposition of all or part of the Purchased A/R.
GCOA represents and warrants that the location of GCOA's principal place of
business, and all locations where GCOA maintains records with respect to its
accounts are set forth under its name in Section 16.3 hereof. GCOA agrees to
notify Company in writing thirty (30) days prior to any change in any such
location. The exact name of GCOA is as set forth at the beginning of this
Agreement, and except as set forth on the signature page hereof, GCOA has not
changed its name in the last five (5) years, and during such period GCOA did not
use, nor does GCOA now use, any fictitious or trade name. GCOA shall notify
Company in writing thirty (30) days prior to any change in any such name.
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment. Company shall have the right to assign its rights
hereunder to any person, firm or corporation under common control with Company
and to any lending institution from which Company obtains financing, including
but not limiting the restrictive covenants included in Article VII (covenant not
to compete), for security purposes or as collateral. GCOA agrees to, and
acknowledges, Company's right to assign Company's rights under this Agreement to
any Lender and further agrees that upon receipt of written notice from such
Lender, GCOA shall pay to Lender or cause to be
- 31 -
<PAGE>
paid to Lender all amounts which are otherwise payable to Company pursuant to
the terms of this Agreement, including, without limitation, all service fees,
and other Clinic Expenses and, until such amounts are delivered to Lender, hold
payments in trust for Lender. Except as set forth above, neither Company nor
GCOA shall have the right to assign their respective rights and obligations
hereunder without the written consent of the other party. Without limiting the
foregoing, GCOA acknowledges that, as collateral for certain obligations,
Company has assigned all of its rights hereunder to NationsBank of Tennessee,
N.A. as Agent (the "Agent") for itself and other banks and institutional lenders
from time to time (collectively the "Banks") and has granted the Agent for the
benefit of the Banks a lien and security interest upon all real and personal
property used in the operation of the Office Locations (the "Pledged Assets").
As an inducement for the Banks to extend or continue the extension of credit to
Company, GCOA (i) acknowledges that the collateral assignment to the Agent
covers all rights of Company hereunder, including, but not limited to, rights
arising from warranties and representations made by GCOA, rights to enforce
covenants made by GCOA, and rights to receive all payments due Company; (ii)
agrees to regard the Agent as the owner of any or all of the assigned rights
upon written notice to GCOA of this election from the Agent; (iii) agrees that
neither the Agent nor any of the Banks has obligation for the performance of the
duties of Company hereunder, and shall not assume any such duty by the exercise
of rights as a secured lender; (iv) agrees to give the Agent written notice of
any material default hereunder on Company's part at the address of 1 NationsBank
Plaza, Nashville, Tennessee 37239, Attn: David Dupuy, and to allow at least
thirty (30) days thereafter for the cure of such default before GCOA terminates
this Agreement; (v) agrees that the rights of GCOA under this Agreement,
including, but not limited to, the right to the use of the Pledged Assets, are
and shall be junior to any security interest that the Agent and the Banks, their
successors or assigns may have in the Pledged Assets at any time; (vi) agrees
that the benefits of the above undertakings in favor of the Agent and Banks
shall further extend to all successors and assigns of the Agent and Banks,
provided that any notices given by GCOA under this Section shall be given to the
Agent at the foregoing address unless GCOA has received written notice of a
change thereof; and (vii) agrees that this Section may not be modified, and no
provision of this Section may be waived, absent the written approval of the
Agent.
16.2. Whole Agreement; Modification. This Agreement supersedes all prior
agreements between the parties and there are no other agreements or
understandings, written or oral, between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement.
16.3. Notices. All notices required or permitted by this Agreement shall
be in writing and shall be deemed to have been given (i) when received if given
in person, (ii) on the date of acknowledgment of receipt if sent by telex,
facsimile or other wire transmission, (iii) one business day after being sent by
overnight delivery service, or (iv) three days after being deposited in the
United States mail, certified or registered mail, postage prepaid, addressed as
follows:
To Company: Specialty Care Network, Inc.
44 Union Boulevard
Suite 600
Lakewood, Colorado 80228
Attention: Kerry Hicks
With a copy to: Baker, Donelson, Bearman & Caldwell
165 Madison Avenue
Suite 2000
Memphis, Tennessee 38103
Attention: David T. Popwell, Esq.
To GCOA: Greater Chesapeake Orthopaedic
Associates, L.L.C.
3333 North Calvert Street
- 32 -
<PAGE>
Suite 400
Baltimore, Maryland 21218
Attention: Leslie Matthews, M.D.
With a copy to: Michener, Larimore, Swindle,
Whitaker, Flowers, Sawyer,
Reynolds & Chalk, L.L.P.
301 Commerce Street
3500 City Tower II
Fort Worth, Texas 76102-4186
Attention: John W. Michener, Jr.
or to such other address as either party shall notify the other.
16.4. Binding on Successors. Subject to Section 16.1, this Agreement shall
be binding upon the parties hereto, and their successors, assigns, heirs and
beneficiaries.
16.5. Waiver of Provisions. Any waiver of any terms and conditions hereof
must be in writing, and signed by the parties hereto. The waiver of any of the
terms and conditions of this Agreement shall not be construed as a waiver of any
other terms and conditions hereof.
16.6. Governing Law. The validity, interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
State of Maryland.
16.7. No Practice of Medicine. The parties acknowledge that Company is not
authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or service
required of Company in this Agreement should be construed or deemed by any
Governmental Authority or court to constitute the practice of medicine, the
performance of said act or service by Company shall be deemed waived and
unenforceable to the minimum extent required to comply with Applicable Law.
16.8. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
16.9. Additional Documents. Each of the parties hereto agrees to execute
any document or documents that may be requested from time to time by any other
party to implement or complete such party's obligations pursuant to this
Agreement.
16.10. Attorneys' Fees. If legal action is commenced by any party to
enforce or defend its rights under this Agreement, the prevailing party in such
action shall be entitled to recover its costs and reasonable attorneys' fees in
addition to any other relief granted.
16.11. Time is of the Essence. Time is hereby expressly declared to be of
the essence in this Agreement.
16.12. Confidentiality. No party hereto shall disseminate or release to
any third party any information regarding any provision of this Agreement, or
any financial information regarding the other (past, present or future) that was
obtained by the other in the course of the negotiations of this Agreement or in
the course of the performance of this Agreement, including, but not limited to,
any information relating to the internal operations of GCOA, GCOA fees or the
terms of any of the managed care contracts, without the other party's written
approval; provided, however, the foregoing shall not apply to information which
(i) is generally available to the public other than as a result of a breach of
confidentiality provisions;
- 33 -
<PAGE>
(ii) becomes available on a non-confidential basis from a source other than the
other party or its affiliates or agents, which source was not itself bound by a
confidentiality agreement; (iii) which is required to be disclosed by law or
pursuant to court order; (Company shall provide GCOA with copies of any
information regarding GCOA provided by Company to any third party); or (iv)
except for disclosure to its banks, underwriters or lenders, or its advisors to
the extent required by Section 9.4, or as required in connection with reports on
filings with the SEC or State Departments of Securities.
16.13. Contract Modifications for Prospective Legal Events. If any state
or federal laws or regulations, now existing or enacted or promulgated after the
effective date of this Agreement, are interpreted by judicial decision, a
regulatory agency or legal counsel in such a manner as to indicate that the
structure of this Agreement may be in violation of such laws or regulations,
GCOA and Company shall amend this Agreement as necessary. To the maximum extent
possible, any such amendment shall preserve the underlying economic and
financial arrangements between and among GCOA and Company.
16.14. Remedies Cumulative. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any party, but the same shall be distinct,
separate and cumulative and may be exercised from time to time as often as
occasion may arise or as may be deemed expedient.
16.15. Language Construction. The language in all parts of this Agreement
shall be construed, in all cases, according to GCOA's fair meaning, and not for
or against either party hereto. The parties acknowledge that each party and its
counsel have reviewed and revised this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.
16.16. No Obligation to Third Parties. Except as provided in Section 16.1,
none of the obligations and duties of Company or GCOA under this Agreement shall
in any way or in any manner be deemed to create any obligation of Company or of
GCOA to, or any rights in, any person or entity not a party to this Agreement.
16.17. Communications. GCOA and Company agree that good communication
between the parties is essential to the successful performance of this
Agreement, and each pledges to communicate fully and clearly with the other on
matters relating to the successful operation of GCOA's practice at the Practice
Offices.
16.18. Arbitration. Each of the parties agrees to submit any dispute
arising out of or relating to the execution, delivery or performance of this
Agreement to binding arbitration before a panel of three (3) arbitrators
selected from a pool of arbitrators made available by the American Arbitration
Association. Such arbitrators shall be selected by the parties and such
arbitration shall be conducted pursuant to the rules of the American Arbitration
Association and in a manner consistent with the Uniform Arbitration Act as
adopted by the State of Delaware. Each Party agrees that a final award in any
arbitration so brought shall be conclusive and judgment thereon may be entered
and enforced by any court of competent jurisdiction.
- 34 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COMPANY:
SPECIALTY CARE NETWORK, INC.
By:________________________________________
Title:_____________________________________
GCOA:
GREATER CHESAPEAKE ORTHOPAEDIC
ASSOCIATES, L.L.C.
By:________________________________________
Title:_____________________________________
PHYSICIAN OWNERS:
____________________________________________
Stuart D. Miller, M.D.
____________________________________________
Leslie S. Matthews, M.D.
____________________________________________
Paul L. Asdourian, M.D.
____________________________________________
Frank R. Ebert, M.D.
____________________________________________
Mark S. Myerson, M.D.
____________________________________________
John B. O'Donnell, M.D.
____________________________________________
Lew C. Schon, M.D.
- 35 -
<PAGE>
EXHIBIT 3.1
LEASE AGREEMENT
Real Property Lease - Main Office Location - Suite 400, Johnston Professional
Building, 3333 North Calvert, Baltimore, Maryland.
3.1-1
<PAGE>
EXHIBIT 4.1
POLICY BOARD GOVERNANCE RULES
A. Number, Tenure and Qualifications. The Policy Board shall consist of
six (6) members. Company shall designate, in its sole discretion, three (3)
members of the Policy Board. GCOA shall designate, in GCOA's sole discretion,
three (3) members of the Policy Board. The initial Policy board shall be chosen
at the time of the closing of the Exchange. Thereafter, the respective Policy
Board Members shall be chosen at such time and in such manner as shall be
determined by the respective party making the appointment.
B. Duties and Responsibilities of the Policy Board. The Policy Board shall
have the duties and responsibilities more particularly described in Section 4.2
of this Agreement.
C. Regular Meetings of the Policy Board. Regular meetings of the Policy
Board shall be held on the first Monday of each calendar quarter at such times
and places as the Policy Board by resolution may determine and specify, and if
so determined no notice thereof need be given.
D. Special Meetings. Special meetings of the Policy Board may be held at
any time or place whenever called by written request of at least two (2) Policy
Board Members, notice thereof being given to each Policy Board Member by the
Policy Board Members calling the meeting, or they may be held at any time
without formal notice provided all of the Policy Board Members are present or
those not present shall at any time waive or have waived notice thereof.
E. Notice. Notice of any special meeting shall be given at least ten (10)
days previously thereto by written notice delivered personally, by telegram, or
facsimile. If mailed, such notice shall be mailed to each Policy Board Member at
his business address no less than ten (10) days previously thereto, and shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. If notice be given by facsimile, such notice shall be deemed to be
delivered when information of the transmission is received.
F. Meetings by any Form of Communication. The Policy Board shall have the
power to permit any and all Policy Board Members to participate in a regular or
special meeting by, or conduct the meeting through the use of any means of
communication by which all Policy Board Members participating may simultaneously
hear each other during the meeting. A Policy Board Member participating in a
meeting by this means is deemed to be present in person at the meeting.
G. Quorum. All of the members of the Policy Board as constituted from time
to time shall constitute a quorum for the transaction of business, but a lesser
number may adjourn any meeting and the meeting may be held as adjourned without
further notice. When a quorum is present at any meeting, a majority of the
members present thereat shall decide any question brought before such meeting,
except as otherwise provided by this Agreement or by these Governance Rules. The
fact that a Policy Board Member has an interest in a matter to be voted on at
the meeting shall not prevent his being counted for purposes of a quorum.
H. Vacancies. Any vacancy occurring in the Policy Board shall be filled by
the Party which chose such vacated Policy Board Member(s).
I. Removal. Any Policy Board Member may be removed without cause by the
Party which chose such Policy Board Member.
4.1-1
<PAGE>
J. Committees. The majority of the Policy Board may appoint an executive
committee or such other committees as it may deem advisable, composed of one (1)
or more Policy Board Members, and may delegate authority to such committees as
is not inconsistent with this Agreement. The members of such committee shall
serve at the pleasure of the Policy Board.
K. Presumption of Assent. A Policy Board Member who is present at a
meeting of the Policy Board at which action on any matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the secretaries of Company and GCOA immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a Policy Board Member who
voted in favor of such action.
L. Informal Action by Board Members. Any action required to be taken at a
meeting of the Policy Board, or any other action which may be taken at a meeting
of the Policy Board, may be taken without a meeting if all Policy Board Members
consent to taking such action without a meeting. If all Policy Board Members
consent to taking such action without a meeting, the affirmative vote of a
majority of the Policy Board Members is the act of the Policy Board. The action
must be evidenced by one or more written consents describing the action taken,
signed by each Policy Board Member, indicating each signing Policy Board
Member's vote or abstention on the action, and shall be included in the minutes
or filed with the Policy Board records reflecting the action taken.
4.1-2
<PAGE>
EXHIBIT 6.9.1
GCOA PLAN
6.9.1-1
<PAGE>
EXHIBIT 8.1.8(d)
EXCLUDED EXPENSES
Excluded Expenses include, but are not limited to the following items:
a. Accounting, legal and other professional fees attributed to GCOA or
to Physician Employees.
b. Contribution expenses, cash or non-cash, which include, but are not
limited to costs of sponsoring sports teams, political
contributions, unapproved marketing expenses, and contributions to
hospitals and staff.
c. Automobile expenses including payments, repairs and maintenance,
mileage, depreciation, etc.
d. Entertainment expenses of any kind.
e. Physician benefits including insurance (health, life (except to the
extent allowed under Section 8.1.3(f)), dental, disability (except
to the extent allowed under Section 8.1.3(f)), etc., but not
including malpractice insurance), vacation time, sick time, paid
leave of absence, contributions to and administration of physician
retirement plans (pension, 401(k), IRA, others), etc.
f. Employment tax expenses including Federal and State Unemployment
taxes, FICA taxes, Medicare taxes, etc.
g. Home office expenses including the acquisition costs, depreciation,
repairs and maintenance, and ongoing operating expenses of:
computers, software, copying machines, fax machines, telephones and
telephone lines, cellular telephones, etc.; and the costs of having
an office in one's home including allocated rent, utility and
depreciation expenses.
h. Meal expenses.
i. Medical supplies and drugs either used or distributed by a Physician
Employee without billing for such supplies and drugs at standard
rates.
j. Presentation expenses of any kind including professional services,
slide production, travel, meals, entertainment, etc.
k. Personal postage expenses.
l. Personal laundry expenses.
m. Personal assistant expenses (including the time staff spends on
personal errands for Physician Employees).
8.1.8.(d)-1
<PAGE>
EXHIBIT 8.3.6
ACCOUNTS RECEIVABLE COLLECTION
1.1 Collection of Accounts Receivable. GCOA agrees to cooperate with
Company in the collection of the Accounts Receivables sold by GCOA, transferred
pursuant to Section 8.3.
1.2 Definitions. In addition to the definitions contained in Article II of
the Agreement, for purposes of this Exhibit 8.3.6., the following terms shall be
applicable:
"Accounts" means, with respect to GCOA, all Accounts Receivable including
any and all rights to payment of money or other forms of consideration of
any kind (whether classified under the Uniform Commercial Code as
accounts, chattel paper, general intangibles, or otherwise) for goods sold
or leased or for services rendered by GCOA, including, but not limited to,
accounts receivable, proceeds of any letters of credit naming GCOA as
beneficiary, chattel paper, insurance proceeds, contract rights, notes,
drafts, instruments, documents, acceptances, and all other debts,
obligations and liabilities in whatever form from any other Person.
"Collecting Bank" means the main office of ______________________________
located at ___________________________________, or such other financial
institution agreed to by Company.
"Finance Charge Rate" means a rate of interest equal to the lesser of (i)
eighteen percent (18%) per annum or (ii) the maximum rate of interest
allowed by applicable law from time to time in effect.
"Governmental Lockbox Account" means an account established at the
Collecting Bank by GCOA into which all proceeds of GCOA's Governmental
Receivables are remitted.
"Lender" shall mean any lender to Company that has a security interest in
the Accounts from time to time.
"Lockbox Agreements" means that certain Lockbox Operating Procedural
Agreements -- Governmental Receivables to be entered into between the
Collecting Bank as to Governmental Receivables and that certain Lockbox
Operating Procedural Agreement -- Non-Governmental Receivables to be
entered between the Collecting Bank, Lender and GCOA as to Accounts which
are not Governmental Receivables, in a form acceptable to counsel for
Company.
"Main Account" means Company's operating account established and
maintained at the Collecting Bank.
"Non-Governmental Lockbox Account" means the account established by
Company with the Collecting Bank into which all proceeds from GCOA's
Accounts under which a Third-Party Payor is the Account Debtor (other than
Governmental Receivables) are remitted.
"Non-Governmental Receivables" means the Accounts which are not
Governmental Receivables.
"Notification Letter" means a written notification from GCOA to
Third-Party Payors informing such Third-Party Payors that all proceeds due
under GCOA's Accounts are to be remitted to the Non-Governmental Lockbox
Account or the Governmental Lockbox Account, as the case may be,
substantially in a form acceptable to counsel for Company.
1.3 Collection of Governmental Receivables. With respect to payments on
Governmental Receivables, at the request and option of Company, GCOA agrees that
the following procedures shall apply:
(a) GCOA shall enter into a Lockbox Agreement applicable to Governmental
Receivables in a form acceptable to counsel for Company and reasonably
acceptable to GCOA and establish a Governmental Lockbox Account. Governmental
Lockbox Account shall be an account in the name of GCOA. All payments in respect
of GCOA's Governmental Receivables are to be made directly to such account. In
the event Company exercises this option, GCOA shall instruct each Account Debtor
in respect of GCOA's Governmental Receivables to remit all such payments
directly to such Governmental Lockbox Account pursuant to a Notification Letter.
In addition, GCOA shall attach written instructions to
8.3.6-1
<PAGE>
each invoice representing such Governmental Receivable generated subsequent to
the date of this Agreement instructing such Third-Party Payor or Account Debtor
that payment under such invoice is to be paid to the Governmental Lockbox
Account. GCOA agrees that it shall not deposit any funds other than payments on
Governmental Receivables into, nor make any withdrawals from, the Governmental
Lockbox Account without the prior written consent of Company. GCOA further
agrees that it shall not during the term of this Agreement terminate, modify or
amend in any manner the Lockbox Agreement applicable to the Governmental Lockbox
Account.
(b) In accordance with the Lockbox Agreement pertaining to Governmental
Receivables, GCOA shall instruct the Collecting Bank to transfer automatically
all amounts deposited in Governmental Lockbox Account constituting good funds to
Company's Main Account. GCOA shall have no right or interest in the Main
Account. GCOA shall not, so long as any purchased Account remains unpaid, change
or cancel such automatic transfer order at any time, or, without the prior
written consent of Company, change either the identity of Governmental Lockbox
Account or the instructions to each Account Debtor on the related Governmental
Receivable to make its payments to such account. Any such action shall be
considered a breach of this Agreement for which Company shall be entitled to all
remedies at law and in equity, including obtaining an injunction.
(c) GCOA will cooperate with Company and its agents in the identification
of sums deposited into Governmental Lockbox Account, which cooperation shall
continue until all purchased Accounts sold hereunder have been collected.
(d) GCOA agrees to pay, on demand, a finance charge equal to the Finance
Charge Rate, on any payment on a Governmental Receivable received by GCOA that
is not deposited in Governmental Lockbox Account within forty-eight (48) hours
after receipt by GCOA.
1.4 Collection of Non-Governmental Receivables. With respect to payments
on Non-Governmental Receivables, if requested by Company and at Company's
option, GCOA agrees that the following procedures shall apply:
(a) Prior to the sale of any Non-Governmental Receivable hereunder,
Company, the Collecting Bank and Lender (if requested by Lender) shall enter
into a Lockbox Agreement applicable to Non-Governmental Receivables in a form
acceptable to counsel for Company and Company shall establish Non-Governmental
Lockbox Account. The NonGovernmental Lockbox Account shall be an account in the
name of Company. All payments in respect of GCOA's Non-Governmental Receivables
are to be made directly to such account. If Company exercises its option herein,
at request of Company, GCOA shall instruct each Account Debtor in respect of
GCOA's Non-Governmental Receivables to remit all such payments directly to such
Non-Governmental Lockbox Account pursuant to a Notification Letter. In addition,
GCOA shall attach written instructions to each invoice representing such
Non-Governmental Receivable generated subsequent to the date of this Agreement
instructing such Third-Party Payor or Account Debtor that payment under such
invoice is to be paid to the Non-Governmental Lockbox Account. GCOA agrees that
it shall not deposit any funds other than Non-Governmental Receivables into, nor
make any withdrawals from, the Non-Governmental Lockbox Account without the
prior written consent of Company. GCOA further agrees that it shall not during
the term of this Agreement terminate, modify or amend in any manner the Lockbox
Agreement applicable to the Non-Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to
Non-Governmental Receivables, Company shall instruct the Collecting Bank to
transfer automatically all amounts deposited in the Non-Governmental Lockbox
Account constituting good funds to Company's Main Account. GCOA shall have no
right or interest in the Non-Governmental Lockbox Account nor to the Main
Account and such accounts shall be in the name of and under the control of
Company. GCOA shall not, so long as any purchased Account remains unpaid, and in
any event, during the term of this Agreement, at any time, or, without the prior
written consent of Company, change the instructions to each Account Debtor on
the related Non-Governmental Receivable to make its payments to such account.
Any such action shall be considered a breach of this Agreement for which Company
shall be entitled to all remedies at law and in equity, including obtaining an
injunction.
(c) GCOA will cooperate with Company and its agents in the identification
of sums deposited into NonGovernmental Lockbox Account, which cooperation shall
continue until all purchased Accounts sold hereunder have been collected.
(d) GCOA agrees to pay, on demand, a finance charge equal to the Finance
Charge Rate, on any Non-Governmental Receivable received by GCOA that is not
deposited in Non-Governmental Lockbox Account within forty-eight (48) hours
after receipt by GCOA.
8.3.6-2
<PAGE>
1.5 Procedures Without Lockbox. In the event that Company elects to forego
the procedures established in Sections 1.3 and 1.4, GCOA shall instruct the
Collecting Bank to transfer automatically all amounts constituting good funds in
the account or accounts of GCOA established for the collection of Governmental
Receivables and Non-Governmental Receivables to Company's Main Account at
_____________ __________, ____________________________, Account ______________
(the "Main Account") pursuant to a standing order in a form acceptable to
Company's legal counsel. GCOA shall have no right or interest in Company's Main
Account and such account shall be in the name of and under the control of
Company. GCOA shall not, so long as any purchased account remains unpaid, change
or cancel such standing order at any time, or, without the prior written consent
of Company, change the instructions to each Account Debtor on each Governmental
Receivable and Non-Governmental Receivable to make its payments to such account.
Any such action shall be considered a breach of this Agreement for which Company
shall be entitled to all remedies at law and in equity, including obtaining an
injunction.
1.6 Misdirected Payments. (a) If after the date of this Agreement, an
Account Debtor shall make payment of a purchased Account to a location other
than is provided in the Notification Letter or GCOA otherwise receives payments
on Accounts that are purchased by Company under the terms of this Agreement
("Misdirected Payments"), GCOA (at its own cost and expense) shall promptly take
all necessary steps to effect collection of such Misdirected Payment from any
other party claiming an interest therein or having possession thereof and (i)
hold such payment in trust for Company, (ii) segregate such payment, (iii) use
its best efforts not to commingle such payment with GCOA's own funds or other
assets, and (iv) deliver such payment no later than forty-eight (48) hours from
the day of receipt to the Governmental Lockbox Account or the Non-Governmental
Lockbox Account, as applicable.
(b) GCOA agrees to pay, on demand, the Finance Charge Rate on any
Misdirected Payment received by GCOA that is not deposited in Company Main
Account within forty-eight (48) hours after receipt by GCOA.
8.3.6-3
<PAGE>
EXHIBIT 11
NON-COMPETITION
A. GCOA and each of the Physician Owners agree and covenant that, during
the term of this Agreement and for a period of thirty-six (36) months after
termination of this Agreement (other than a termination pursuant to Section
11.3.1 through 11.3.4, inclusive, or Section 11.5, of the Service Agreement),
GCOA and/or the Physician Owner(s), as applicable, shall not, either directly as
a partner, employer, agent, independent contractor, employee or indirectly
through a corporation, partnership, affiliate, subsidiary or otherwise:
(i) Subject to the provisions of paragraph G below, establish,
operate or provide professional medical services at any medical office,
clinic or other health care facility at any location within seventy-five
(75) miles of (i) the Main Office location; (ii) any of the Satellite
Offices; or (iii) any location at which Company provides services to any
practice at the time of such termination;
(ii) Subject to the provisions of paragraph G below, publicly
announce or offer (by any method) to provide professional medical services
at any medical office, clinic or other health care facility at any
location within seventy-five (75) miles during the first five (5) years of
the term of this Agreement or fifty (50) miles thereafter of (i) the Main
Office; (ii) any of the Satellite Offices; or (iii) any location at which
Company provides services to any practice at the time of such termination;
(iii) Solicit, induce or attempt to induce, in connection with any
business competitive with that being serviced by Company, patients of any
physician (including GCOA and/or the Physician Owner(s)) associated or
affiliated with Company to leave the care of physicians associated or
affiliated with Company; or
(iv) Solicit, induce or attempt to induce any employee, consultant
or other persons associated or affiliated with Company or any Affiliate of
Company to leave the employment of, or to discontinue their association
with, Company or such Affiliate of Company.
B. If GCOA and/or the Physician Owner(s) violate the covenants set forth
in paragraph A of this Exhibit 11, then the duration of the restrictions
contained in paragraph A shall be extended an additional month for each month
during which such violation occurred but was not discovered by Company,
beginning upon the date that Company learns of the violation and so notifies
GCOA and/or the Physician Owners in writing. In addition, breach of the
covenants set forth in paragraph A above may trigger certain rights of Company
to redeem a Physician Owner's Company common stock pursuant to the terms of
Article VIII of the Stockholders Agreement.
C. GCOA and/or the Physician Owner(s) acknowledge and agree that the
covenants contained in this Exhibit 11 are necessary to protect the business and
goodwill of Company and that a breach of these covenants will result in
irreparable harm and continuing damage to Company. As a result, GCOA and/or the
Physician Owner(s) agree that if GCOA and/or the Physician Owner(s) breach or
threaten to breach these covenants, Company shall be entitled to specific
performance and/or injunctive or other equitable relief in order to prevent the
continuation of such harm, as well as money damages. GCOA and/or the Physician
Owner(s) waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such equitable relief.
D. GCOA and the Physician Owner(s) acknowledge and agree that if GCOA
and/or the Physician Owner(s) breach the covenants contained in this Exhibit 11
and Company is unable for any reason to obtain a restraining order from a court
of competent jurisdiction within thirty (30) days after application to enjoin
the breach by GCOA and/or the Physician Owner(s), it will be difficult to
calculate the precise amount of Company's damages. As a result, the parties have
determined that, in the event of such a breach, Company's damages shall be equal
to 300% of the total amount of Professional Service Revenues attributable to
GCOA and/or the applicable Physician Owner(s) during the twelve (12) months
prior to the termination of the Agreement.
E. The parties have attempted to limit the provisions of this Exhibit 11
only to the extent necessary to protect each party's interests. However, the
parties hereby agree that, in the event that any provision, section or
subsection of this Exhibit
11-1
<PAGE>
11 is adjudged by any court of competent jurisdiction to be void or
unenforceable, in whole or part, such court shall modify and enforce any such
provision, section or subsection to the extent that it believes to be reasonable
under the circumstances.
F. In the event that the Service Agreement has been in effect for at least
five (5) years, a Physician Owner may buy-out the noncompetition restriction
applicable to him or her by paying to Company an amount equal to (A)(i) the
after tax amount (based upon the actual tax rate applied for any shares
previously sold and the long-term capital gains rate then in effect for any
shares held at the time of termination) of appreciation in value (from the date
of Asset Exchange to earlier of the date of sale of any common stock sold or the
date of termination of affiliation with Company for any common stock then held)
of Company common stock (as of the date of termination) received by the
applicable Physician Owner at the time of the Asset Exchange, less (ii) the
after tax amount (based upon the terminating Physician Owner's effective federal
income tax rate during the years in which this Agreement was in effect) of the
terminating Physician Owner's pro rata share (based on the terminating Physician
Owner's proportionate share of all Professional Services Revenues collected by
GCOA during the term of the Agreement) of service fees paid to Company during
the period of the Service Agreement (but not less than zero), plus (B) one-third
of the Fair Market Value of Company common stock and any cash consideration
received by the terminating Physician Owner at the time of the Asset Exchange
(valued at the time of the Asset Exchange); provided, however, in the event that
at the time of termination, if the Fair Market Value per share of Company common
stock is less than one-third (1/3) of the value per share of Company common
stock at the time of the Asset Exchange, then the maximum amount payable to
Company to buy out the noncompetition restriction shall equal the total Fair
Market Value of Company common stock then held by the terminating Physician
Owner plus one-third (1/3) of the cash consideration (acquired in the Asset
Exchange) plus the amount of any gains realized by the terminating Physician
Owner from the prior sale of Company common stock. The terminating Physician
Owner may pay the amount owed by transferring to Company an amount of Company
common stock having a Fair Market Value equal to the amount owed or pay to
Company cash in the amount owed (or a combination of cash and common stock). The
above references to Company common stock (except for the immediately preceding
sentence) shall not include any Company common stock purchased for cash or
acquired pursuant to the conversion of Company's convertible debentures.
G. Upon the termination of this Agreement, the Policy Board shall have the
authority to modify the terms of the restrictive covenants, including but not
limited to the mileage radius limitations set forth above in paragraph A. In the
event that the individuals representing GCOA or Company, as the case may be, on
the Policy Board can reasonably demonstrate that a modification to the
restrictive covenant will not have a material adverse effect on Company's or
GCOA's practice operations, earnings or cash flow, then the individuals
representing Company or GCOA, as the case may be, shall consent to the proposed
modification.
11-2
<PAGE>
SERVICE AGREEMENT
BY AND BETWEEN
SPECIALTY CARE NETWORK, INC.,
VERO ORTHOPAEDICS II, P.A.
AND
JAMES L. CAIN, M.D.
DAVID W. GRIFFIN, M.D.
GEORGE K. NICHOLS, M.D.
PETER G. WERNICKI, M.D.
CHARLENE WILSON, M.D.
Dated as of November 12, 1996
<PAGE>
TABLE OF CONTENTS Page
----
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship.........................................1
1.2. Responsibilities of the Parties..................................1
1.3. VERO II Matters..................................................1
1.4. Patient Referrals................................................1
1.5. Professional Judgment............................................2
ARTICLE II.
DEFINITIONS
2.1. Definitions......................................................2
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY COMPANY
3.1. Practice Offices.................................................6
3.2. Use of Practice Offices..........................................6
ARTICLE IV.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board......................6
4.2. Duties and Responsibilities of the Policy Board..................6
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions..............................7
5.2. Financial Planning and Goals.....................................7
5.3. Audits and Financial Statements..................................8
5.4. Inventory and Supplies...........................................8
5.5. Management Services and Administration...........................8
5.6. Personnel.......................................................10
5.7. Events Excusing Performance.....................................10
5.8. Compliance with Law and Business Standards......................10
5.9. Quality Assurance...............................................10
5.10. New Medical Services and Additional Practice Offices............10
5.11. Collection of Certain Patient Receipts and Payment of
Clinic Expenses...............................................11
5.12. Other VERO II Accounts..........................................11
5.13. Discounts.......................................................11
ARTICLE VI.
OBLIGATIONS OF VERO II AND PHYSICIAN OWNERS
6.1. Professional Services...........................................11
6.2. Medical Practice................................................11
i
<PAGE>
6.3. Employment of Physician Employees...............................12
6.4. Professional Dues and Education Expenses........................12
6.5. Professional Insurance Eligibility..............................12
6.6. Events Excusing Performance.....................................12
6.7. Fees for Professional Services..................................12
6.8. Peer Review.....................................................12
6.9. VERO II Employee Benefit Plans..................................12
6.10. Credentialing..................................................13
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
7.1. Exclusive Arrangement...........................................14
7.2. Restrictive Covenants...........................................14
7.3. Restrictive Covenants By Future Physician Employees.............15
7.4. Rights of Company...............................................15
7.5. Enforcement.....................................................15
7.6. Modification of Restrictive Covenants...........................15
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees....................................................16
8.2. Payment of Service Fee..........................................18
8.3. Purchase of Accounts Receivable.................................18
8.4. Payment of Clinic Expenses......................................19
ARTICLE IX.
RECORDS
9.1. Patient Records.................................................20
9.2. Records Owned by Company........................................20
9.3. Access to Records...............................................20
9.4. Government Access to Records....................................20
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by VERO II..........................20
10.2. Insurance to be Maintained by Company..........................20
10.3. Additional Insureds............................................21
10.4. Indemnification................................................21
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement..............................................21
11.2. Extended Term..................................................21
11.3. Termination by VERO II for Cause...............................22
ii
<PAGE>
11.4. Termination by Company for Cause...............................22
11.5. Early Termination by VERO II or Company Without Cause
Upon Third (3rd) Anniversary of Agreement....................23
11.6. Consequences of VERO II Termination............................23
11.7. Closing of Purchase by VERO II and Effective
Date of Termination..........................................24
11.8. Tail Policy....................................................24
11.9. Restrictions Applicable to Physician Owners....................24
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds......................................26
12.2. Temporary Space................................................26
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF VERO II AND PHYSICIAN OWNERS
13.1. Validity.......................................................26
13.2. Litigation.....................................................27
13.3. Permits........................................................27
13.4. Authority......................................................27
13.5. Compliance with Applicable Law.................................27
13.6. Health Care Compliance.........................................27
13.7. Fraud and Abuse................................................27
13.8. VERO II Compliance.............................................28
13.9. Rates and Reimbursement Policies...............................28
13.10. Accounts Receivable...........................................28
13.11. Full Disclosure...............................................30
13.12. Exhibits......................................................30
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
14.1. Organization...................................................30
14.2. Authority......................................................30
14.3. Absence of Litigation..........................................30
14.4. Transactions with Affiliates...................................30
ARTICLE XV.
COVENANTS OF VERO II AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements....................31
15.2. Necessary Authorizations/Assignment of Licenses and Permit......31
15.3. Transaction with Affiliates.....................................31
15.4. Compliance with All Laws........................................31
15.5. Third-Party Payor Programs......................................31
15.6. Change in Business or Credit and Collection Policy..............31
15.7. Treatment of Accounts Receivable................................31
15.8. Security Interest...............................................32
iii
<PAGE>
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment.....................................................32
16.2. Whole Agreement; Modification..................................33
16.3. Notices........................................................33
16.4. Binding on Successors..........................................33
16.5. Waiver of Provisions...........................................33
16.6. Governing Law..................................................33
16.7. No Practice of Medicine........................................33
16.8. Severability...................................................34
16.9. Additional Documents...........................................34
16.10. Attorneys' Fees................................................34
16.11. Time is of the Essence.........................................34
16.12. Confidentiality................................................34
16.13. Contract Modifications for Prospective Legal Events............34
16.14. Remedies Cumulative............................................34
16.15. Language Construction..........................................34
16.16. No Obligation to Third Parties.................................35
16.17. Communications.................................................35
EXHIBIT 3.1 LEASE AGREEMENT.......................................3.1-1
EXHIBIT 4.1 POLICY BOARD GOVERNANCE RULES.........................4.1-1
EXHIBIT 6.9.1 VERO II PLAN......................................6.9.1-1
EXHIBIT 8.1.8(d) EXCLUDED EXPENSES..........................8.1.8.(d)-1
EXHIBIT 8.3.6 ACCOUNTS RECEIVABLE COLLECTION....................8.3.6-1
EXHIBIT 11 NON-COMPETITION.........................................11-1
iv
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") dated as of November 12, 1996, by and
between SPECIALTY CARE NETWORK, INC., a Delaware corporation ("Company"), VERO
ORTHOPAEDICS II, P.A., a Florida corporation, ("VERO II") and JAMES L. CAIN,
M.D., DAVID W. GRIFFIN, M.D., GEORGE K. NICHOLS, M.D., PETER G. WERNICKI, M.D.
and CHARLENE WILSON, M.D. ("Physician Owner[s]"), citizens and residents of
Florida.
W I T N E S S E T H:
WHEREAS, Company is in the business of managing medical clinics and
providing support services to and furnishing orthopedic care medical practices
with the necessary equipment, personnel, supplies and support staff; and
WHEREAS, VERO II and Physician Owners desire to obtain the services of
Company in performing such management functions so as to permit VERO II and
Physician Owners to devote VERO II's and Physician Owners' efforts on a
concentrated and continuous basis to the rendering of medical services to
patients.
NOW THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements herein set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is agreed by the parties as follows:
ARTICLE I.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship. VERO II, Physician Owners and Company
intend to act and perform as independent contractors, and the provisions hereof
are not intended to create any partnership, joint venture, agency or employment
relationship between the parties. Notwithstanding the authority granted to
Company herein, Company, VERO II, and Physician Owners agree that VERO II and
Physician Owners shall retain all authority to direct the medical, professional,
and ethical aspects of VERO II's and Physician Owners' medical practice
including but not limited to the admission of new patients and providing care to
indigent patients. Each party shall be solely responsible for and shall comply
with all state and federal laws pertaining to employment taxes, income
withholding, unemployment compensation contributions and other employment
related statutes applicable to that party.
1.2. Responsibilities of the Parties. As more specifically set forth
herein, Company shall provide VERO II with offices and facilities, equipment,
supplies, certain support personnel, management and financial advisory services.
As more specifically set forth herein, VERO II shall be responsible for the
recruitment and hiring of physicians and all issues related to the professional
practice of medicine, medical practice patterns and documentation thereof.
Notwithstanding anything herein to the contrary, no "designated health service,"
as defined in 42 U.S.C. ss. 1395nn, including any amendments or successors
thereto, shall be provided by Company under this Agreement.
1.3. VERO II Matters. Matters involving the internal agreements and
finances of VERO II, including the disposition of professional fee income, tax
planning, and investment planning (and expenses relating solely to these
internal business matters) shall remain the sole responsibility of VERO II.
1.4. Patient Referrals. The parties agree that the benefits to VERO II and
Physician Owners hereunder do not require, are not payment for, and are not in
any way contingent upon the admission, referral or any other arrangement for the
provision of any item or service offered by Company to any of VERO II's patients
in any facility operated by Company.
1.5. Professional Judgment. Each of the parties acknowledges and agrees
that the terms and conditions of this Agreement pertain to and control the
business and financial relationship between and among the parties but do not
pertain
<PAGE>
to and do not control the professional and clinical relationship between and
among VERO II, Physician Employees, VERO II Employees, and VERO II's patients.
Nothing in this Agreement shall be construed to alter or in any way affect the
legal, ethical, and professional relationship between and among VERO II,
Physician Owners, Physician Employees, and VERO II's patients, nor shall
anything contained in this Agreement abrogate any right, privilege, or
obligation arising out of or applicable to the physician-patient relationship.
ARTICLE II.
DEFINITIONS
2.1. Definitions. For the purpose of this Agreement, the following
definitions shall apply:
"Account Debtor" means an account debtor or any other Person obligated in
respect of an Account Receivable.
"Accounts Receivable" means, with respect to VERO II, all accounts and any
and all rights to payment of money or other forms of consideration of any kind
now owned or hereafter acquired (whether classified under the Uniform Commercial
Code as accounts, chattel paper, general intangibles or otherwise) for goods
sold or leased or for services rendered by VERO II, including, but not limited
to, accounts receivable, proceeds of any letters of credit naming VERO II as
beneficiary, chattel paper, insurance proceeds, contract rights, notes, drafts,
instruments, documents, acceptances and all other debts, obligations and
liabilities in whatever form from any other Person; provided that, cash, checks
and credit card purchases are not included in the definition of Accounts
Receivable.
"Affiliate" means, with respect to any Person, any entity which directly
or indirectly controls, is controlled by, or is under common control with, such
Person or any Subsidiary of such Person or any Person who is a director, officer
or partner of such Person or any Subsidiary of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to (a) vote ten percent (10%) or more of the securities having ordinary voting
power for the election of directors of such Person, or (b) direct or cause the
direction of management and policies of a business, whether through the
ownership of voting securities, by contract or otherwise and either alone or in
conjunction with others or any group.
"Applicable Law" means all applicable provisions of constitutions,
statutes, rules, regulations, ordinances and orders of all Governmental
Authorities and all orders and decrees of all courts, tribunals and arbitrators,
and shall include, without limitation, Health Care Law.
"Assigned Lease" shall have the meaning as defined in Section 3.1.
"Base Service Fee" shall equal [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxx] per year, payable in monthly payments of [xxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
"CHAMPUS" means the Civilian Health and Medical Program of the Uniformed
Services.
"Change in Control" shall mean any transaction pursuant to which Company
(a) consummates the sale of substantially all of the assets of Company to an
entity which is publicly traded in exchange for voting stock in such publicly
traded entity or (b) merges with a publicly traded corporation, entity or
corporation or entity controlled by a publicly traded corporation or entity in a
transaction where unrelated persons own at least fifty-one percent (51%) of the
issued and outstanding securities of the surviving entity or corporation
controlling the merged entity.
"Clinic Expenses" shall have the meaning as defined in Section 8.1.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
- 2 -
<PAGE>
"Company" shall mean Specialty Care Network, Inc., a Delaware corporation,
together with its successors and assigns.
"Company Expenses" shall have the meaning as defined in Section 8.1.7.
"Designated Leased Employees" shall have the meaning as defined in Section
6.9.1.
"Direct Lease" shall have the meaning as defined in Section 3.1.
"Disabled" or "Disability" shall mean that a Physician suffers from a
mental or physical condition resulting in such Physician Employee's inability to
perform the essential functions of his or her job as required by Section 6.1.1
(and as may be described with greater specificity in written job descriptions
prepared and maintained by VERO II and approved by the Policy Board) without
significant risk to the health or safety of others, even with such reasonable
accommodation as may be available under the circumstances, and the Policy Board
may reasonably anticipate that such Physician Employee will remain disabled for
at least two years following the commencement of such disability.
"Excluded Expenses" shall have the meaning as defined in Section 8.1.8.
"Fair Market Value" with respect to Company common stock means (i) the
average closing price for the Company common stock as reported on a securities
exchange or quoted on a national quotation system, if any, upon which the
Company common stock is traded or quoted or (ii) in the event Company's common
stock is not traded on any exchange or quoted on a national quotation system,
the fair market value of the Company common stock shall be determined by an
independent appraiser or investment banker selected by two (2) independent
appraisers or investment bankers (one (1) such firm selected by Company and one
(1) such firm selected by the Physician Owner or the Physician Owners as a group
(as the case may be)). Such valuation may include the consideration of discounts
for marketability, minority ownership and other discounts usual and customary in
the valuation process. Unless otherwise specified herein, the cost of any
appraisal shall be borne equally by Company and the Physician Owner or the
Physician Owners as a group (as the case may be).
"GAAP" shall mean generally accepted accounting principles as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession. For purposes of
this Agreement, GAAP shall be applied in a manner consistent with the historic
practices used by Company or VERO II as applicable.
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, board, body, agency, bureau or entity or any arbitrator with
authority to bind a party at law.
"Governmental Receivables" means an Account Receivable of VERO II which
(i) arises in the ordinary course of business of VERO II, (ii) has as its
Third-Party Payor the United States of America or any state or any agency or
instrumentality of the United States of America or any state which makes any
payments with respect to Medicare or Medicaid or with respect to any other
program (including CHAMPUS) established by federal or state law, and (iii) is
required by federal or state law to be paid or to be made to VERO II as a
healthcare provider. Governmental Receivables shall not, however, refer to
amounts payable by private insurers under contract to provide benefits under the
Federal Employee Health Benefit Program.
"Governmental Rules and Regulations" shall have the meaning as defined in
Section 13.7.
"Health Care Law" means any Applicable Law regulating the acquisition,
construction, operation, maintenance or management of a health care practice,
facility, provider or payor, including without limitation, 42 U.S.C. ss.1395nn
and 42 U.S.C. ss. 1320a-7b.
- 3 -
<PAGE>
"Lease" shall mean the Assigned Lease, Direct Leases, and the New Leases,
including all amendments thereto, described in Section 3.1 hereof.
"Leased Premises" shall mean the real property described in the Lease.
"Lender" shall have the meaning as defined in Section 7.2.
"Main Office" shall mean the Leased Premises and all equipment and
facilities owned or operated by Company and utilized by VERO II or any of its
employees within said Leased Premises.
"Medicaid" means any state program pursuant to which health care providers
are paid or reimbursed for care given or goods afforded to indigent persons and
administered pursuant to a plan approved by the Health Care Financing
Administration under Title XIX of the Social Security Act.
"Medicare" means any medical program established under Title XVIII of the
Social Security Act and administered by the Health Care Financing
Administration.
"Merger" shall mean the acquisition of Vero Orthopaedics, Inc. ("VERO")
pursuant to the Merger Agreement.
"Merger Agreement" means that certain Merger Agreement, dated November 12,
1996 by and between Company, VERO and Physician Owners.
"Merger A/R" means the accounts receivable acquired from VERO by Company
pursuant to the Merger Agreement.
"Necessary Authorizations" means with respect to VERO II, all certificates
of need, authorization, certifications, consents, approvals, permits, licenses,
notices, accreditations and exemptions, filings and registrations, and reports
required by Applicable Law, including, without limitation, Health Care Law,
which are required, necessary or reasonably useful to the lawful ownership and
operation of VERO II's business.
"New Lease" shall have the meaning as defined in Section 3.1.
"Office Locations" shall have the meaning as defined in Section 3.1.
"Person" shall mean an individual, corporation, partnership, association,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof including, without limitation, Third-Party Payors.
"Physician Employees" shall mean the term as defined in Section 8.1.6.
"Physician Extender Employees" shall mean the term as defined in Section
8.1.5.
"Physician Owners" shall mean Charlene Wilson, M.D. and those Physician
Employees who own an interest, directly or indirectly, in the equity of VERO II.
"Plans" shall have the meaning as defined in Section 6.9.1.
"Policy Board" shall mean a board established pursuant to Section 4.1.
"Practice Net Revenue" shall mean the term as defined in Section 8.1.1.
"Practice Offices" shall mean (i) the Main Office and (ii) all of the
Satellite Offices.
- 4 -
<PAGE>
"Professional Services Revenue" shall mean the term as defined in Section
8.1.2.
"Purchase Price" shall mean the term as defined in Section 8.4.2.
"Purchased A/R" means, with respect to VERO II, the Accounts Receivable
purchased pursuant to Section 8.3 of this Agreement.
"VERO II Operating Account" shall mean that certain operating account
established by VERO II at a bank selected by VERO II in VERO II's sole
discretion as more fully described in Section 5.11.
"VERO II Plan" shall mean the term as defined in Section 6.9.1.
"Satellite Offices" shall mean each location at which one or more of VERO
II's employees provide services as described on Exhibit 2.1 and all equipment
and facilities owned or operated by Company and utilized by any of said persons
at such location.
"Settlement Date" shall mean the term as defined in Section 8.3.3.
"Service Agreement" means this Agreement.
"Subsidiary" means a Person of which an aggregate of 51% or more of the
voting stock of any class or classes or 51% or more of other voting or equity
interests is owned of record or beneficially by another Person, or by one or
more Subsidiaries of such Person.
"Substitute Physician(s)" shall mean the term as defined in Section
11.9.1(b).
"Technical Employees" shall mean the term as defined in Section 8.1.4.
"Third-Party Payors" means each Person which makes payment under a
Third-Party Payor Program, and each Person which administers a Third-Party Payor
Program.
"Third-Party Payor Programs" means Medicare, Medicaid, CHAMPUS, insurance
provided by Blue Cross and/or Blue Shield, managed care plans, and any other
private health care insurance programs and employee assistance programs as well
as any future similar programs.
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY COMPANY
3.1. Practice Offices. (a) Company has received a leasehold interest in
certain offices and locations which comprise the Practice location ("Main
Office") and/or satellite offices ("Satellite Offices") as identified on Exhibit
3.1 (collectively the "Office Locations") through (i) an assignment of any
existing leases on said Office Locations (the "Assigned Leases") or (ii)
entering into a new lease with respect to one or more of the Office Locations
(the "Direct Leases") with a copy of the Assigned Leases and Direct Leases
attached hereto as Exhibit 3.1.
(b) Company agrees to provide offices and facilities at the Office
Locations (or at comparable facilities on the termination of the Assigned Leases
or Direct Leases) to VERO II. Such facilities shall include all personal
property necessary to operate the facility. If any Assigned Leases or Direct
Leases are terminated by their terms, Company shall enter into a lease of a new
facility comparable to the Office Location whose lease is terminated (the "New
Lease") with the consent of the Policy Board. Company shall not enter into a
lease for a new Main Office or Satellite Office for VERO II without the approval
of the Policy Board.
- 5 -
<PAGE>
(c) VERO II agrees to comply with all terms and provisions of the Assigned
Leases, Direct Leases and New Leases.
3.2. Use of Practice Offices. VERO II shall not use or occupy the Main
Office or Satellite Offices for any purpose which is prohibited by the Assigned
Leases, Direct Leases or New Leases, by this Agreement or which is directly or
indirectly forbidden by law, ordinance, or governmental or municipal regulation
or order, or which may be dangerous to life, limb or property, or which would
increase the fire and extending coverage insurance rate in any Practice Office
or contents.
ARTICLE IV.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board. The parties shall
establish a Policy Board which shall be responsible for developing management
and administrative policies for the overall operation of any Practice Office.
The Policy Board shall consist of six (6) members. Company shall designate, in
its sole discretion, three (3) members of the Policy Board. VERO II shall
designate, in VERO II's sole discretion, three (3) members of the Policy Board.
Any matter decided by a majority of the members of the Policy Board shall
constitute the decision of the Policy Board with respect to the matter.
4.2. Duties and Responsibilities of the Policy Board. The Policy Board
shall have the following duties and obligations:
4.2.1. Capital Improvements and Expansion. The Policy Board shall review
all requests by VERO II for any renovations, capital improvements, expansions
and new equipment purchases or leases. The Policy Board shall determine whether
such expenditures are appropriate based upon economic feasibility, physician
support, productivity, market conditions, and the annual budget formulated
pursuant to this Agreement. If the Policy Board determines that the acquisition
of additional equipment or facilities is appropriate, then Company shall use its
best efforts to arrange for the financing and acquisition of the property.
Governance issues affecting the Policy Board shall be addressed in accordance
with the rules set forth in Exhibit 4.1.
4.2.2. Annual Budgets. All annual capital and operating budgets prepared
by Company in accordance with Section 5.2 of this Agreement, shall be subject to
the review of the Policy Board.
4.2.3. Marketing. All advertising and other marketing of the services
performed at any Practice Office shall be subject to the prior review and
approval of the Policy Board.
4.2.4. Patient Fees; Collection Policies. As a part of the annual
operating budget in consultation with VERO II and Company, to the extent allowed
by Applicable Law, the Policy Board shall review and advise VERO II as to an
appropriate fee schedule for all physician and ancillary services rendered by
VERO II, which fee schedule shall ultimately be determined by VERO II in VERO
II's sole discretion. In addition, the Policy Board shall approve the credit
collection policies of VERO II.
4.2.5. VERO II and Payor Relationships. Decisions regarding the
establishment or maintenance of relationships with institutional health care
providers and payors, or with parties under arrangements for setting up new
Satellite Offices of VERO II in the future, shall be made by the Policy Board in
consultation with VERO II.
4.2.6. Strategic Planning. The Policy Board shall develop long-term
strategic planning objectives.
4.2.7. Capital Expenditures. The Policy Board shall determine the priority
of major capital expenditures including the procurement of any new or additional
office space for Practice Offices.
- 6 -
<PAGE>
4.2.8. Restrictive Covenants for Physician. The approval of the Policy
Board shall be required for any variations to the restrictive covenants
prescribed for any physician employment contract as set forth in Article VII or
Exhibit 11 of this Agreement.
4.2.9. Grievance Referrals. The Policy Board shall consider and make final
decisions regarding grievances pertaining to matters not specifically addressed
in this Agreement as referred to it by the Physician Employees.
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY COMPANY
5.1. Performance of Management Functions. Company shall use its best
efforts to manage the day-to-day operations of the Main Practice Office and any
Satellite Offices in a business-like manner. Company shall provide or arrange
for the services set forth in this Article V, the cost of all of which shall be
included in Clinic Expenses. Company is hereby expressly authorized to perform
its services hereunder in whatever manner it deems reasonably appropriate to
meet the day-to-day requirements of Practice Office operations in accordance
with the general standards approved by the Policy Board and to maintain the
lease agreements for each of the Practice Offices, including, without
limitation, performance of some of the business office functions at locations
other than the Main Practice Office. VERO II will not act in a manner which
would prevent Company from efficiently managing the day-to-day operations of the
Main Practice Office and maintaining the operations of the Satellite Offices in
a business-like manner.
5.2. Financial Planning and Goals. Subject to Section 4.2.2. of this
Agreement, Company shall prepare annual capital and operating budgets reflecting
in reasonable detail anticipated revenues and expenses, and sources and uses of
capital for growth in VERO II's practice and medical services rendered at the
Practice Office. Said budgets shall reflect amounts, if any, allocated for
capital purchases, improvements, expansion and any new leasing arrangements.
Thereafter, but no later than thirty (30) days prior to the end of the fiscal
year, the Policy Board and Company shall agree upon a budget for the upcoming
fiscal year. The budget, as described in Section 4.2.2., shall be binding upon
Company and VERO II. Company shall consult with VERO II and the Policy Board in
the preparation of all budgets. Company and VERO II acknowledge and agree that
once a budget has been approved, neither Company nor VERO II shall make
expenditures or incur expenses in excess of budgeted amounts without the prior
approval of the Policy Board.
5.3. Audits and Financial Statements. Company shall prepare annual
financial statements for the operations of VERO II and, in its sole discretion,
may cause the financial statements to be audited by a certified public
accountant selected by Company. VERO II shall cooperate fully in such audit. The
cost of such audit shall be included in Clinic Expenses. If Company elects to
have the financial statements audited by a certified public accountant with a
big six accounting firm, the resulting audited financial statements shall be
binding on VERO II and Company. If Company elects not to have VERO II's
financial statements so audited, VERO II shall have the option to obtain such an
audit, by a certified public accountant with a mutually acceptable accounting
firm. Company shall fully cooperate in such audit. The cost of such audit shall
be included in Clinic Expenses. In such event, Company and VERO II shall be
bound by the resulting audited financial statements. All parties shall be
entitled to copies of any information provided to or by the auditors by or to
any party. Additionally, Company shall prepare monthly unaudited financial
statements containing a balance sheet and statements of income from Practice
Office operations, which shall be delivered to VERO II within thirty (30)
business days after the close of each calendar month.
5.4. Inventory and Supplies. Except as limited by Section 5.11, Company
shall order and purchase inventory and supplies and such other ordinary,
necessary or appropriate materials which Company shall deem to be necessary in
the operation of the Practice Offices and which are requested by VERO II and are
within the budget for the applicable fiscal period. Company shall not purchase
inventory, goods or supplies from any Affiliate of Company without approval of
the Policy Board and after full disclosure of all terms to the Policy Board.
- 7 -
<PAGE>
5.5. Management Services and Administration.
5.5.1. VERO II hereby appoints Company as VERO II's sole and exclusive
manager and administrator of all day-to-day business functions. VERO II agrees
that the purpose and intent of this Agreement is to relieve VERO II and
Physician Employees to the maximum extent possible of the administrative,
accounting, personnel and business aspects of their practice, with Company
assuming responsibility and being given all necessary authority to perform these
functions. Company agrees that VERO II and only VERO II will perform the medical
functions of VERO II's practice. Company will have no authority, directly or
indirectly, to perform, and will not perform, any medical function. Company may,
however, advise VERO II as to the relationship between VERO II's performance of
medical functions and the overall administrative and business functioning of
VERO II's practice. To the extent that a Company employee assists Physician
Employees in performing medical functions, such employees shall be subject to
the professional direction and supervision of Physician Employees and in the
performance of such medical functions shall not be subject to any direction or
control by, or liability to, Company, except as may be specifically authorized
by Company.
5.5.2. Company shall, on behalf of VERO II, bill patients and collect the
professional fees for medical services rendered by VERO II or any Physician
Employee, regardless of when or where such services are rendered. All billings
for Physician Employee's services shall be made in the name of and under the
provider number of VERO II. VERO II hereby appoints Company to be VERO II's true
and lawful attorney-in-fact, for the following purposes: (i) to bill patients in
VERO II's name and on VERO II's behalf; (ii) to collect Accounts Receivable
resulting from such billing in VERO II's name and on VERO II's behalf; (iii) to
receive payments from insurance companies, prepayments from health care plans,
and all other Third-Party Payors; (iv) to take possession of and endorse in the
name of VERO II (and/or in the name of an individual physician, such payment
intended for purpose of payment of a physician's bill) any notes, checks, money
orders, insurance payments and other instruments received in payment of Accounts
Receivable; and (v) to initiate legal proceedings in the name of VERO II to
collect any accounts and monies owed to VERO II or any Physician Employee, to
enforce the rights of VERO II as creditors under any contract or in connection
with the rendering of any service, and to contest adjustments and denials by any
Governmental Authority (or its fiscal intermediaries) as Third-Party Payors.
Except for cash proceeds from the collection of Accounts Receivable purchased
from VERO II by Company, Company shall deposit any cash receipts collected on
behalf of VERO II into the VERO II Operating Account described in Section 5.11.
5.5.3. Company shall design, supervise and maintain possession of all
files and records relating to the operation of VERO II, including but not
limited to accounting, billing, patient medical records, and collection records.
While the Company shall maintain custody, patient medical records shall at all
times be and remain the property of VERO II and shall be located at the Practice
Offices so that they are readily accessible for patient care. The Physician
Employees shall have the obligation to oversee the preparation and maintenance
of patient medical records, and to provide such medical information as shall be
necessary and appropriate to the records' clinical function and to sustain and
ensure the availability of Third-Party Payor reimbursement for services
rendered. The management of all files and records shall comply with applicable
state and federal statutes. Company shall use its best efforts to preserve the
confidentiality of patient medical records and use information contained in such
records only as permitted by law, to the extent necessary to perform the
services set forth herein.
5.5.4. Company shall supply to VERO II necessary clerical, accounting,
bookkeeping and computer services, printing, postage and duplication services,
medical transcribing services and any other ordinary, necessary or appropriate
service for the operation of the Practice Offices.
5.5.5. Subject to the overall guidance of the Policy Board, Company shall
design and implement an adequate and appropriate public relations program on
behalf of VERO II, with appropriate emphasis on public awareness of the
availability of services at the Practice Offices. The public relations program
shall be conducted in compliance with Applicable Law and regulations governing
advertising by the medical profession and applicable canons of principles of
professional ethics of VERO II and Physician Employees of VERO II.
5.5.6. Company shall provide the data necessary for VERO II to prepare
VERO II's annual income tax returns. Company shall have no responsibility for
the preparation of VERO II's federal or state income tax returns or the payment
- 8 -
<PAGE>
of such income taxes. Company shall prepare or cause to be prepared on VERO II's
behalf, necessary employment tax returns. VERO II shall be obligated to pay any
taxes due on such employment tax returns with respect to the Physician Owners.
5.5.7. Company shall assist VERO II in recruiting additional physicians,
carrying out such administrative functions as may be appropriate, such as
advertising for and identifying potential candidates, obtaining credentials, and
arranging interviews; provided, however, VERO II shall interview and make the
ultimate decision as to the suitability of any physician to become associated
with VERO II. All physicians recruited by Company and accepted by VERO II shall
be the sole employees of VERO II, to the extent such physicians are hired as
employees.
5.5.8. Company shall negotiate managed care contracts on behalf of VERO II
and shall administer all managed care contracts in which VERO II participates.
VERO II, at its discretion, shall have the right to enter into or reject such
contracts negotiated by Company.
5.5.9. Company shall arrange for legal and accounting services related to
operations of the Practice Offices and Physician Employee's practice at the
Practice Offices incurred traditionally in the ordinary course of business,
including the cost of enforcing any contract with a Physician Employee
containing restrictive covenants, provided such services shall be approved in
advance by the Policy Board. Notwithstanding the foregoing, VERO II shall have
the authority to arrange for legal and accounting services relating to matters
other than day-to-day management of VERO II; such other matters including but
not limited to issues relating to VERO II governance issues, compensation of
Physician Owners, and issues which arise between VERO II and Company; provided,
however, such fees shall be considered Excluded Expenses.
5.5.10. Company shall provide for the proper cleanliness of the premises,
and maintenance and cleanliness of the equipment, furniture and furnishings
located upon such premises.
5.5.11. Upon receipt of dues, statements or license notices from the
Physician Employees, Company shall make payment for the cost of professional
licensure fees and board certification fees of physicians associated with VERO
II.
5.5.12. Company shall negotiate for and cause premiums to be paid with
respect to the insurance provided for in Section 10.1.
5.6. Personnel. After Company (or a subsidiary of Company) has obtained a
license from the Florida Department of Business and Professional Regulation to
offer staff leasing services pursuant to Chapter 402 of the Florida Statutes
Annotated (prior to Company having obtained such license, the employees
referenced in this sentence shall be employees of VERO II), Company shall
provide Physician Extender Employees and other non-physician professional
support (administrative personnel, clerical, secretarial, bookkeeping and
collection personnel) reasonably necessary for the conduct of the operations at
the Practice Offices. Company shall determine and cause to be paid the salaries
and fringe benefits of all such personnel. Such personnel shall be employees of
Company, with those personnel performing patient care services subject to the
professional direction and supervision of Physician Employees. If VERO II is
dissatisfied with the services of any person, VERO II shall consult with
Company. Company shall in good faith determine whether the performance of that
employee could be brought to acceptable levels through counsel and assistance,
or whether such employee should be terminated. All of Company's obligations
regarding staff shall be governed by the overriding principle and goal of
providing quality medical care. Employee assignments shall be made to assure
consistent and continued rendering of quality medical support services and to
ensure prompt availability and accessibility of individual medical support staff
to physicians in order to develop constant, familiar and routine working
relationships between individual physicians and individual members of the
medical support staff. If VERO II disagrees with an assignment, VERO II may
appeal such assignment to the Policy Board. Company shall maintain established
working relationships wherever possible and Company shall make every effort
consistent with sound business practices to honor the specific requests of VERO
II with regard to the assignment of Company's employees.
5.7. Events Excusing Performance. Company shall not be liable to VERO II
or Physician Owners for failure to perform any of the services required herein
in the event of strikes, lock-outs, calamities, acts of God, unavailability of
- 9 -
<PAGE>
supplies or other events over which Company has no control for so long as such
events continue, and for a reasonable period of time thereafter.
5.8. Compliance with Law and Business Standards. Company shall comply with
Applicable Law including, without limitation, Health Care Law including, without
limitation, federal, state, and local laws and regulations affecting billing and
reimbursement, referrals, patient privacy and confidentiality, and management of
hazardous materials and infectious waste. Company shall discharge its
obligations under this Agreement consistent with applicable business and
industry standards and practices.
5.9. Quality Assurance. Company shall assist VERO II in fulfilling VERO
II's obligations to patients to maintain professionally recognized quality of
medical and professional services.
5.10. New Medical Services and Additional Practice Offices. If VERO II
desires to have a new medical service provided at any of the Practice Offices or
desires to establish a new clinic, a proposal of such service or the
establishment of such new clinic shall be submitted to the Policy Board. Should
the Policy Board approve the expansion of service or the establishment of such
new clinic, Company, at its option, shall have the exclusive right to provide
services necessary to support VERO II in VERO II's delivery of such new medical
services at the Practice Office or new clinic, as applicable; provided, however,
if the type of service is an ancillary service that would be improper under any
rules, regulations or laws for Company to offer to VERO II patients, then
Company shall not have the option to provide such service. Should Company
decline to provide the necessary support service for the new service or new
clinic, VERO II shall be entitled to perform such service at VERO II's own
expense and the revenues therefrom shall not be included in the calculation of
Company's service fees under Article VIII of this Agreement; provided, however,
that Company shall have the option to assume performance of the necessary
support services for providing such new service or new clinic by buying out VERO
II's investment in the service at VERO II's Book Value at anytime within
eighteen (18) months of the date such new service is first provided, which Book
Value shall be based on the price of the assets purchased by VERO II less
depreciation accrued to the date of acquisition of such service by Company, as
determined under GAAP.
5.11. Collection of Certain Patient Receipts and Payment of Clinic
Expenses. VERO II agrees to establish and maintain a bank account, which shall
be referred to as the VERO II Operating Account, for the purpose of (a)
depositing proceeds from the sale of VERO II's Accounts Receivable pursuant to
Section 8.3 and (b) paying (i) any Service Fees owed pursuant to Article VIII of
this Agreement, (ii) expenses which are solely the obligation of VERO II
(Excluded Expenses), and (iii) compensation or distributions to Physician
Owners, and the distributions shall be made in that order of payment. VERO II
shall designate a Company employee as a signatory on the VERO II Operating
Account. After the payment of any Service Fees owed pursuant to Article VIII of
this Agreement, and expenses which are solely the obligation of VERO II, VERO II
may withdraw amounts for distributions to Physician Owners.
5.12. Other VERO II Accounts. VERO II shall have the right to open or
create bank accounts in addition to the VERO II Operating Account described in
Section 5.11 of this Agreement.
5.13. Discounts. All discounts on purchases made by Company on behalf of
VERO II shall be passed on to VERO II.
ARTICLE VI.
OBLIGATIONS OF VERO II AND PHYSICIAN OWNERS
6.1. Professional Services.
6.1.1. VERO II, its Physician Owners and Physician Employees shall provide
professional services to patients.
- 10 -
<PAGE>
6.1.2. VERO II, its Physician Owners and Physician Employees shall provide
the professional services to patients described in Section 6.1.1 above in
compliance at all times with ethical standards, laws and regulations applying to
VERO II's professional practice. VERO II shall also make all reports and
inquiries to the National Practitioners Data Bank and/or any state data bank
required by Applicable Law. VERO II shall use its best efforts to determine that
each Physician Employee and Technical Employee associated with VERO II who
provides medical care to patients of VERO II is licensed by the state or states
in which he or she renders professional services. If any disciplinary or medical
malpractice action is initiated against any such individual, VERO II shall
immediately provide Company with copies of any third-party documents (not
otherwise privileged) served on VERO II or letters delivered to VERO II. Such
information shall be deemed confidential information and shall, notwithstanding
such disclosure, remain subject to all privileges and immunities provided by
Applicable Law. Company shall take all steps reasonably necessary to assure that
such privileges and immunities remain intact. VERO II shall carry out a program
to monitor the quality of medical care practiced at the Practice Offices to
promote a high quality of medical care.
6.2. Medical Practice. VERO II shall use and occupy the Practice Offices
exclusively for the practice of medicine and shall comply with all Applicable
Law and standards of medical care. It is expressly acknowledged by the parties
that the medical practice or practices conducted at the Main Office shall be
conducted solely by physicians or medical practitioner associated with VERO II,
and no other physician or medical practitioner shall be permitted to use or
occupy the Main Office without the prior written consent of Company.
6.3. Employment of Physician Employees. VERO II shall have complete
control of and responsibility for the hiring, compensation, supervision,
evaluation and termination of Physician Employees, although at the request of
VERO II, Company shall consult with VERO II respecting such matters. VERO II
shall be responsible, subject to Section 8.4, for the payment of such Physician
Employees' salaries and wages, payroll taxes, Physician Employee benefits and
all other taxes and charges now or hereafter applicable to them. With respect to
physicians, VERO II shall only employ and contract with licensed physicians
meeting applicable credentialing guidelines established by VERO II.
6.4. Professional Dues and Education Expenses. Except to the extent
provided in Section 8.1.3(k), Physician Owners shall be solely responsible for
the cost of membership in professional associations and the cost of continuing
professional education. VERO II shall ensure that each Physician Employee
participates in such continuing medical education as is necessary for such
physician to remain licensed.
6.5. Professional Insurance Eligibility. VERO II shall cooperate in the
obtaining and retaining of professional liability insurance by assuring that all
Physician Employees are insurable and participating in an on-going risk
management program.
6.6. Events Excusing Performance. VERO II and Physician Owners shall not
be liable to Company for failure to perform any of the services required herein
in the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which VERO II has no control for so long as such
events continue, and for a reasonable period of time thereafter.
6.7. Fees for Professional Services. VERO II shall be solely responsible
for legal, accounting and other professional services fees (Excluded Expenses)
incurred by VERO II, except as otherwise determined by the Policy Board.
6.8. Peer Review. VERO II agrees to cooperate with Company in establishing
a system of peer review within and among the provider practices as necessary to
obtain provider contracts. In connection therewith, VERO II agrees to assist in
the formulation of provider guidelines for each treatment or surgical modality,
and agrees to abide by said guidelines, and further agrees to submit to periodic
reviews by a third party to monitor compliance with said guidelines. VERO II
acknowledges that the establishment of provider guidelines may be necessary to
obtain PPO, HMO, IPA and other similar provider contracts, both private and
government funded. To the extent that said provider guidelines must be filed or
registered with any Third-Party Payor, VERO II agrees to cooperate with Company
in making such filings or registrations. It is agreed and acknowledged that all
such peer review guidelines shall be established and monitored by medical
personnel on the staff of VERO II and other practices that are part of the peer
review process, and shall not be promulgated, established
- 11 -
<PAGE>
or enforced independently by Company. To the extent possible, all information
obtained through the peer review process shall remain confidential and the
parties shall take all steps reasonably necessary to assure that all privileges
and immunities provided by Applicable Law remain intact.
6.9. VERO II Employee Benefit Plans.
6.9.1. Effective as of the date of the closing under the Merger Agreement,
VERO II shall amend the tax-qualified retirement plan(s) described on Exhibit
6.9.1 (the "VERO II Plan") to provide that employees of Company who are
classified as "leased employees" (as defined in Code Section 414(n)) of VERO II
shall be treated as VERO II employees for purposes described in Code Section
414(n)(3). Not less often than annually, VERO II and Company shall agree upon
and identify in writing those individuals to be classified as leased employees
of VERO II (the "Designated Leased Employees"). VERO II and Company shall
establish mutually agreeable procedures with respect to the participation of
Designated Leased Employees in the VERO II Plan. Such procedures shall be
designed to avoid the tax disqualification of the VERO II Plan, similar plans of
practices similarly situated, (collectively, the "Plans").
6.9.2. If the Policy Board determines that the relationship between
Company and VERO II (and other practices similarly situated) constitutes an
"affiliated service group" (as defined in Code Section 414(m)), Company and VERO
II shall take such actions as may be necessary to avoid the tax disqualification
of the Plans. Such actions may include the amendment, freeze, termination or
merger of the VERO II Plan.
6.9.3. The Plans described on Exhibit 6.9.1 attached hereto are approved
by Company. VERO II shall not enter into any new "employee benefit plan" (as
defined in Section 3(3) of the Employment Retirement Income Security Act of
1974, as amended ("ERISA") without the consent of Company. In addition, VERO II
shall not offer any retirement benefits or make any material retirement payments
other than under the VERO II Plan to any stockholder of VERO II without the
express written consent of Company. Except as otherwise required by law, VERO II
shall not materially amend, freeze, terminate or merge the VERO II Plan without
the express written consent of Company. In the event of either of the foregoing,
Company's consent shall not be withheld if such action would not jeopardize the
qualification of any of the Plans. VERO II agrees to make such changes to the
VERO II Plan, including the amendment freeze, termination or merger of the VERO
II Plan, as may be approved by the Policy Board and Company but only if such
changes are necessary to prevent the disqualification of any of the Plans.
6.9.4. Expenses incurred in connection with the VERO II Plan or other VERO
II employee benefit plans, including, without limitation, the compensation of
counsel, accountants, corporate trustees, and other agents shall be included in
Clinic Expenses.
6.9.5. The contribution and administration expenses for the Designated
Leased Employees shall be included in VERO II's operating budget. VERO II and
Company shall not make employee benefit plan contributions or payments to VERO
II for their respective employees in excess of such budgeted amounts unless
required by law or the terms of the VERO II Plan. Company shall make
contributions or payments with respect to the VERO II Plan or other VERO II
employee benefit plans, as a Clinic Expense, on behalf of eligible Designated
Leased Employees, and other eligible VERO II employees. In the event a VERO II
Plan or other VERO II employee benefit plan is terminated, Company shall be
responsible, as a Clinic Expense, for any funding liabilities related to
eligible Designated Leased Employees; provided, however, Company shall only be
responsible for the funding of any liability accruing after the date of the
Merger Agreement.
6.9.6. Company shall have the sole and exclusive authority to adopt, amend
or terminate any employee benefit plan for the benefit of its employees,
regardless of whether such employees are Designated Leased Employees, unless
such actions would require the amendment, freeze or termination of the VERO II
Plan to avoid disqualification of the VERO II Plan, in which case any such
action would be subject to the express prior written consent of the Policy
Board. Company shall have the sole and exclusive authority to appoint the
trustee, custodian and administrator of any such plan.
6.9.7. In the event that any "employee welfare benefit plan" (as defined
in ERISA Section 3(l)) maintained or sponsored by VERO II must be amended,
terminated, modified or changed as a result of VERO II or Company being deemed
- 12 -
<PAGE>
to be a part of an affiliated service group, the Policy Board will replace such
plan or plans with a plan or plans that provides those benefits approved by the
Policy Board. It shall be the goal of the Policy Board in such event to provide
substantially similar or comparable benefits if the same can be provided at a
substantially similar cost to the replaced plan.
6.10. Credentialing. To the extent permitted by applicable law, Company
shall assist VERO II in the credentialing of each Physician Employee, each
Technical Employee and each Physician Extender Employee.
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT
The parties recognize that the services to be provided by Company shall be
feasible only if VERO II operates an active medical practice to which both VERO
II and the physicians associated with VERO II devote their full time and
attention. To that end:
7.1. Exclusive Arrangement. During the term of this Agreement, Company
shall be VERO II's and Physician Owners' sole provider of the management
services described in this Agreement and neither VERO II, Physician Owners nor
any of VERO II's or Physician Owners' employees shall provide such management
services during the term of this Agreement. VERO II and the Physician Owners
agree that during the term of this Agreement, neither VERO II nor Physician
Owners will enter into any similar agreements with any physician practice
management company or entity. VERO II and the Physician Owners further agree
that during the term of this Agreement, they will not engage, directly or
indirectly, as a principal owner, shareholder (other than a holder of fewer than
5% of the outstanding shares of a publicly-traded company), partner, joint
venturer, agent, equity owner, or in any other capacity whatsoever, in any
corporation, partnership, joint venture, or other business association or entity
that operates ambulatory surgery centers or provides management services of the
nature provided by Company pursuant to this Agreement, within Indian River
County, Florida or contiguous counties or any location within seventy-five (75)
miles of the Main Clinic or any future facility that replaces the Main Clinic
(wherever located) or any Satellite Office utilized by VERO II at any time
during the term of this Agreement.
7.2. Restrictive Covenants.
7.2.1. By Current Physician Employees. VERO II shall obtain and enforce
formal agreements from current Physician Employees, other than Technical
Employees, pursuant to which the Physician Employees agree not to establish,
operate or provide physician services at any medical office, clinic or
outpatient and/or ambulatory treatment or diagnostic facility providing services
substantially similar to those provided by VERO II, except on VERO II's behalf,
within Indian River County, Florida or contiguous counties or any location
within seventy-five (75) miles during the first five (5) years of the term of
this Agreement or fifty (50) miles thereafter of the Main Office or any future
facility that replaces the Main Office (wherever located at such time) or any
Satellite Office thereafter at the time of termination of employment with VERO
II and for a period of twenty-four (24) months after any termination of
employment with VERO II. Such agreements shall be a condition to employment and
shall be in a form satisfactory to Company and shall provide that Company is a
third-party beneficiary to such agreements and that such third-party beneficiary
rights may be assigned to Company's lender ("Lender"). This Section 7.2 shall
relate solely to Physician Employees who are not also Physician Owners.
7.2.2. By Current and Future Physician Owners. On the earlier of one
hundred eighty (180) days from the effective date of this Agreement, or on
thirty (30) days after written request by Company, which such written request
includes a reasonable explanation or basis for the request, VERO II shall obtain
and enforce formal restrictive covenants with current and future Physician
Owners, the terms of which shall be substantially similar to the provisions of
Exhibit 11. Such agreements shall provide that Company is a third-party
beneficiary to such agreements. VERO II agrees to enforce the restrictive
covenants. The cost and expense of such enforcement shall be a Clinic Expense,
and all damages and other amounts recovered thereby shall be included in
Professional Services Revenue. In the event that after a request by Company,
VERO II does not pursue any remedy that may be available to it by reason of a
breach or default of a restrictive covenant,
- 13 -
<PAGE>
upon the request of Company, VERO II shall assign to Company such causes of
action and/or other rights it has related to such breach or default and shall
cooperate with and provide reasonable assistance to Company with respect
thereto; in which case, all costs and expenses incurred in connection therewith
shall be borne by Company and shall be included in Company Expenses, and Company
shall be entitled to all damages and other amounts recovered thereby. The above
described restrictive covenants between VERO II and Physician Owners shall be in
addition to and not in place of the restrictive covenants described in Exhibit
11 between Company and the Physician Owners.
7.3. Restrictive Covenants By Future Physician Employees. VERO II shall
obtain and enforce formal agreements from each future Physician Employee other
than Technical Employees, hired or contracted, pursuant to which such physicians
agree not to establish, operate or provide physician services at any medical
office, clinic or outpatient and/or ambulatory treatment or diagnostic facility
providing services substantially similar to those provided by VERO II except on
VERO II's behalf, within Indian River County, Florida or contiguous counties or
any location within seventy-five (75) miles during the first five (5) years of
the term of this Agreement or fifty (50) miles thereafter of the Main Office or
any future facility that replaces the Main Office (wherever located at such
time) or any Satellite Office at the time of termination of said Physician
Employee's contract with VERO II and for a period of twenty-four (24) months
thereafter. Such agreements shall be a condition to employment and shall be in a
form satisfactory to Company and shall provide that Company is a third-party
beneficiary to such agreements and that such third-party beneficiary rights may
be assigned to any Lender. This Section 7.3 shall relate solely to Physician
Employees who are not also Physician Owners. The terms and conditions of Exhibit
11 shall govern restrictive covenants relating to Physician Owners.
7.4. Rights of Company. Except as limited below, Company shall at all
times during the term of this Agreement and thereafter have the right to enter
into additional service agreements with other physicians and practices
regardless of where such physicians and/or practices are located providing for
management services and facilities to such physicians and/or practices.
Notwithstanding the foregoing, and except as set forth in Section 11.9.3, in the
event that Company desires to enter into a Service Agreement with another
practice located within seventy-five (75) miles during the first five (5) years
of the term of this Agreement or fifty (50) miles thereafter of VERO II's Main
Office or any Satellite Office, then the Policy Board must first approve Company
entering into such agreement. In the event that the individuals representing
Company on the Policy Board can reasonably demonstrate that entering into such
agreement will not have a material adverse effect on VERO II's practice
operations, earnings or cash flow, then the individuals representing VERO II
shall consent to Company entering into such agreement.
7.5. Enforcement. VERO II acknowledges and agrees that since a remedy at
law for any breach or attempted breach of the provisions of this Article VII
shall be inadequate, Company shall be entitled to specific performance and
injunctive or other equitable relief in case of any such breach or attempted
breach in addition to whatever other remedies may exist by law. All parties
hereto also waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such injunctive or other equitable relief.
If any provision of Article VII relating to the restrictive period, scope of
activity restricted and/or the territory described therein shall be declared by
a court of competent jurisdiction to exceed the maximum time period, scope of
activity restricted or geographical area such court deems reasonable and
enforceable under Applicable Law, the time period, scope of activity restricted
and/or area of restriction held reasonable and enforceable by the court shall
thereafter be the restrictive period, scope of activity restricted and/or the
territory applicable to the restrictive covenant provisions in this Article VII.
In addition, breach of the provisions of this Article VII may trigger certain
rights of Company to redeem a Physician Owner's Company common stock pursuant to
the terms of Article VIII of that certain stockholders agreement between Company
and its stockholders (the "Stockholders Agreement").
7.6. Modification of Restrictive Covenants. Upon the termination of
employment of a Physician Owner or Physician Employee, the Policy Board shall
have the authority to release or reduce in whole or in part the terms of the
restrictive covenants, including but not limited to the mileage radius
limitations set forth above in Sections 7.2 and 7.3. In the event that the
individuals representing VERO II on the Policy Board can reasonably demonstrate
that a modification to the restrictive covenant will not have a material adverse
effect on Company's or VERO II's practice operations, earnings or cash flow,
then the individuals representing Company shall consent to the proposed
modifications.
- 14 -
<PAGE>
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
8.1. Service Fees. During the first thirty-six (36) months of the term of
this Agreement, Company shall receive a service fee equal to (a) the greater of
(i) [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] or (ii) the Base Service
Fee, plus (b) the amount of Clinic Expenses. Upon the expiration of the first
thirty-six (36) months of the term of this Agreement, Company shall receive a
service fee equal to [xxxxxxxxxxxxxxxxxxxxxxxxx]of Practice Net Revenue plus the
amount of Clinic Expenses. In the event that a Physician Owner ceases to
practice medicine during the first thirty-six (36) months of the term of this
Agreement, such Physician Owner shall be personally liable for any reduction in
VERO II's service fees payable as further described under Section 11.9.1 of this
Agreement. In the event that a Physician Owner either dies or becomes Disabled
during such thirty-six (36) month period, VERO II, or the applicable Physician
Owner, as the case may be, shall be entitled to satisfy the amount owed by
transferring to Company an amount of Company common stock having a Fair Market
Value equal to the amount owed or paying to Company cash in the amount owed (or
a combination thereof).
8.1.1. "Practice Net Revenue" shall mean Professional Services Revenue,
less Clinic Expenses.
8.1.2. "Professional Services Revenue" shall mean all fees actually
recorded each month (net of any amounts reimbursed to any patients or
Third-Party Payors during the applicable month and net of any adjustments for
contractual allowances, Medicaid, worker's compensation, employee/dependent
health care benefit programs, professional courtesies and other activities that
do not generate a collectible fee) by or on behalf of VERO II as a result of
professional medical services personally furnished to patients and other fees or
income generated in their capacity as Physician Employees and Technical
Employees, and any revenue from the sale of any goods.
8.1.3. "Clinic Expenses" shall mean all operating and non-operating
expenses of VERO II arising hereunder unless expressly provided otherwise,
including, without limitation:
(a) salaries, benefits and other direct costs of all Clinic
employees including Company's employees and Physician Extender Employees
as defined in Section 8.1.5 working at the Practice Offices and salaries,
payroll taxes and employee benefits paid to Physician Employees (other
than Physician Owners) under Section 6.3 and to Technical Employees as
defined in Section 8.1.4,
(b) obligations of Company under Leases provided for herein under
Article III,
(c) the expenses and charges incurred for the Practice Offices,
including without limitation utilities, telephone, etc.,
(d) personal property and intangible taxes assessed against
Company's assets utilized by VERO II in the Practice Offices from and
after the date of this Agreement,
(e) interest expense on indebtedness incurred by Company to (i)
satisfy the obligations of VERO II, if any, assumed under the Merger
Agreement, (ii) provide working capital for Company's performance of any
of its obligations to VERO II hereunder, or (iii) purchase equipment,
(f) malpractice insurance premiums, disability insurance premiums to
cover accommodations to the Practice Offices under the definition of
"Disabled" or "Disability," and fire, workers compensation and general
liability insurance premiums and life insurance premiums, during the first
three (3) years of this Agreement, for life insurance on the lives of
Physician Owners, with VERO II as the death beneficiary,
(g) the cost of any goods purchased for resale,
- 15 -
<PAGE>
(h) the depreciation, as determined under GAAP, for any equipment or
depreciable property owned by Company and used in VERO II's Office
Locations by VERO II to be billed to VERO II on a monthly basis and paid
to Company at the same time Company pays for VERO II's Accounts Receivable
pursuant to Section 8.3,
(i) direct costs of all employees or consultants of Company engaged
to provide services at or in connection with VERO II or who actually
provide services at or in connection with the Clinic for improved
performance, such as quality assurance, reasonable expenses required for
physician accommodations under the definition of "Disabled" or
"Disability," materials management, purchasing program, change in coding
analysis, physician recruitment; provided, however, only the portion of
expenses related to such employee or consultant, without mark-up, that is
allocable in a fair and reasonable manner to work approved by the Policy
Board which is performed at or for the benefit of VERO II shall be
included in Clinic Expenses,
(j) expenses related to professional meetings, seminars, dues,
medical books and professional licensing fees for Physician Employees
(other than Physician Owners) provided, however, that such amount shall
not exceed $10,000 during any calendar year for any Physician Employee
(other than Physician Owners). If the cost incurred for such professional
meetings, seminars, dues, medical books and professional licensing fees
exceeds $10,000 during any calendar year, then the Physician Employee
incurring such cost shall be solely liable for the overage;
(k) expenses related to professional meetings, seminars, dues,
medical books and professional licensing fees for Physician Owners;
provided, however, that such amount shall not exceed $10,000 during any
calendar year for any Physician Owner. If the cost incurred for such
professional meetings, seminars, dues, medical books and professional
licensing fees exceeds $10,000 during any calendar year, then the
Physician Owner incurring such cost shall be solely liable for the
overage; and
(l) any and all other ordinary and necessary expenses incurred by
VERO II or approved by the Policy Board and reasonably incurred by the
Company for the direct benefit of VERO II in carrying out their respective
obligations under this Agreement.
Clinic Expenses shall not include Excluded Expenses or Company Expenses.
Excluded Expenses shall be the sole obligation of VERO II. Company Expenses
shall be the sole obligation of Company.
8.1.4. "Technical Employees" shall mean individuals who provide billable
services on behalf of VERO II and are employees of VERO II.
8.1.5. "Physician Extender Employees" shall mean Physician Assistants,
Nurse Practitioners, and other such persons who are employees of Company, but
excluding any Technical Employees.
8.1.6. "Physician Employees" shall mean only those individuals who are
doctors of medicine (including Physician Owners) and who are employed by VERO II
or are otherwise under contract with VERO II to provide professional services to
patients seen in the Main Office or Satellite Offices and are duly licensed to
provide professional medical services in the state or states in which he or she
renders professional services under this Agreement.
8.1.7. "Company Expenses" shall mean, pursuant to GAAP applied on a
consistent basis:
(a) Any corporate overhead charges of Company and other items
incurred by Company that are not incurred specifically for the purpose of
providing services to VERO II or are not directly attributable to VERO II,
as reasonably determined by Company, including, without limitation,
salaries and benefits of executive officers of Company, except as
otherwise provided for in the definition of Clinic Expenses;
(b) Any amortization of any intangible asset resulting from the
Merger;
- 16 -
<PAGE>
(c) Any depreciation attributable to increases in the book value of
tangible depreciable assets resulting from the Merger;
(d) Any legal and accounting expenses incurred by Company in
connection with the Merger; and
(e) All taxes of Company, including, but not limited to, state and
federal income taxes and franchise taxes, but excluding state and federal
employee taxes related to employees who provide services for VERO II,
property taxes on assets used by VERO II and other taxes specifically
included in Clinic Expenses.
8.1.8. "Excluded Expenses" shall be the sole obligation of VERO II and
shall mean, pursuant to GAAP applied on a consistent basis:
(a) Any salaries or other distributions made to Physician Owners
whether for professional fee income or otherwise;
(b) Any federal, state or other taxes associated therewith;
(c) Except as provided in Section 8.1.3(k), expenses of Physician
Owner's to maintain licensure or meet continuing education requirements,
including related travel expense; and
(d) Any other items specifically designated as Excluded Expenses
elsewhere in this Agreement including but not limited to those items
listed on Exhibit 8.1.8(d).
8.2. Payment of Service Fee. The amounts to be paid to Company under this
Article VIII shall be payable monthly, at the time that Company pays VERO II for
the Accounts Receivable previously purchased by Company as described in Section
8.3 below. The amount payable shall be estimated based upon the previous month's
operating results of VERO II. Adjustments to the estimated payments shall be
made to reconcile actual cumulative amounts due under this Article VIII, by the
end of the following month during each calendar year. Upon preparation of annual
financial statements as provided in Section 5.3, final adjustments to the
service fee for the preceding year shall be made and any additional payments
owing to Company or VERO II shall then be made to the party owed the additional
sum of money. The adjustment and any amount owed shall be calculated and paid
within ninety (90) days following the close of Company's fiscal year.
8.3. Purchase of Accounts Receivable.
8.3.1. VERO II hereby agrees to sell and assign to Company and Company
agrees to buy, all of VERO II's Accounts Receivable each month during which this
Agreement is in existence which are owing to VERO II arising out of the delivery
of medical, surgical, diagnostic or other professional medical goods or
services. Accounts Receivable shall not include, and Company shall not purchase,
any cash, checks or receivables created by credit cards. Company shall bear the
risk of collection and any overage or underage resulting from any purchased
Accounts Receivable.
8.3.2. The purchase price for each Accounts Receivable (the "Purchase
Price") will be equal to the face amount of the Accounts Receivable recorded
each month, less any non-allowed contractual adjustments and net of any reserve
for uncollectible Accounts Receivables based on the historical experience of the
practice as determined by the Company. It is the intent of the parties that the
Purchase Price reflect the actual net realizable value of the Accounts
Receivable.
8.3.3. VERO II will sell all Accounts Receivable to Company, such purchase
to be deemed to be made on the fifteenth (15th) day of the month following the
month in which such Accounts Receivable are created. Company shall pay for the
Accounts Receivable not later than the fifteenth (15th) day of each month
following the month in which the Accounts Receivable is created (the "Settlement
Date"). Company shall pay VERO II for all Accounts Receivable purchased by
check, wire transfer or intrabank transfer to the VERO II Operating Account
described in Section 5.11. The purchase of Accounts Receivable shall be
evidenced by sending Company (i) a copy of each invoice with respect to each
Third-Party Payor on the Accounts Receivable then being purchased; and (ii) any
other information or documentation (including all required Uniform
- 17 -
<PAGE>
Commercial Code releases or financing statements) Company may reasonably need to
identify the Accounts Receivable and obtain payment from the Account Debtors;
provided that such failure to send such documents shall not affect the
obligation of VERO II to sell such Accounts Receivable or Company to buy such
Accounts Receivable. As consideration for the purchase of Accounts Receivable by
Company pursuant to this Section 8.3, Company promises to pay and shall be
obligated to pay for such Accounts Receivable at the time and in the manner
provided below. To the extent permissible by Applicable Law, VERO II will be
deemed to have sold to Company all of VERO II's right, title and interest in
such Accounts Receivable and in any proceeds thereof, and Company will be the
sole and absolute owner thereof and will own all of VERO II's rights and
remedies represented by such Accounts Receivable (including, without limitation,
rights to payment from the respective Account Debtors on such Accounts
Receivable), and Company will have obtained all of VERO II's rights under all
guarantees, assignments and securities with respect to each such Accounts
Receivable.
8.3.4. Upon expiration or termination of this Agreement for any reason,
(i) all Accounts Receivable purchased by Company shall remain the property of
Company and (ii) all Accounts Receivable purchased and not paid for at such
expiration or termination shall be paid for by the 10th of the following month
but effective as of the effective date of such expiration or termination date,
less the amount of any service fee earned by Company pursuant to Section 8.1 of
this Agreement.
8.3.5. In connection with the initial purchase of Accounts Receivable by
Company, VERO II will execute such financing statements or amendments under the
UCC (naming Company as secured party and Lender as assignee) as Company may
reasonably request with respect to any Accounts Receivable that may be purchased
pursuant to this Agreement.
8.3.6. VERO II agrees to cooperate with Company in the collection of the
Accounts Receivable sold by VERO II, transferred pursuant to Section 8.3. At the
option of and upon the request of Company, VERO II shall execute any and all
documentation necessary for the transfer of amounts constituting Accounts
Receivables and/or the establishment of lockboxes in accordance with the
provisions of Exhibit 8.3.6 attached hereto.
8.3.7. All Accounts Receivable of VERO II purchased by Company ("Purchased
A/R") pursuant to this Section 8.3 hereof will, as such Purchased A/R are
purchased, be treated as Professional Service Revenues for accounting and
financial purposes.
8.4. Payment of Clinic Expenses. All Clinic Expenses shall be incurred in
the name of Company, unless VERO II is required by law to incur such expenses,
in which case Company shall indemnify VERO II against any such expenses. Company
shall pay all Clinic Expenses as they become due; provided, however, that
Company may, in the name and on behalf of VERO II, contest in good faith any
claimed Clinic Expense to which there is any dispute regarding the nature,
existence or validity of such claimed Clinic Expense. Upon receipt of VERO II's
service fee, Company shall be required to deposit into the VERO II Operating
Account described in Section 5.11 an amount of money necessary for VERO II to
pay the compensation and benefits associated with the Technical Employees and
Physician Employees (other than Physician Owners) employed by VERO II.
ARTICLE IX.
RECORDS
9.1. Patient Records. Upon termination of this Agreement and unless
otherwise provided herein, VERO II shall retain all patient medical records
maintained by VERO II or Company in the name of VERO II. VERO II shall, at VERO
II's option, be entitled to retain copies of financial and accounting records
relating to all services performed by VERO II. All parties agree to maintain the
confidentiality of patient identifying information and not to disclose such
information except as may be required or permitted by Applicable Law.
9.2. Records Owned by Company. All records relating in any way to the
operation of the Practice Offices which are not the property of VERO II under
the provisions of Section 9.1 above, shall at all times be the property of
Company.
- 18 -
<PAGE>
9.3. Access to Records. During the term of this Agreement, and thereafter,
VERO II or VERO II's designee shall have reasonable access during normal
business hours to VERO II's and Company's financial records, which relate to the
operation of VERO II including, but not limited to, records of collections,
expenses and disbursements as kept by Company in performing Company's
obligations under this Agreement, and VERO II may copy at VERO II's expense any
or all such records.
9.4. Government Access to Records. To the extent required by Section
1861(v)(1)(I) of the Social Security Act, each party shall, upon proper request,
allow the United States Department of Health and Human Services, the Comptroller
General of the United States, and their duly authorized representatives access
to this Agreement and to all books, documents, and records necessary to verify
the nature and extent of the costs of services provided by either party under
this Agreement, at any time during the term of this Agreement and for an
additional period of four (4) years following the last date services are
furnished under this Agreement. If either party carries out any of its duties
under this Agreement through an agreement between it and an individual or
organization related to it or through a subcontract with an unrelated party,
that party to this Agreement shall require that a clause be included in such
agreement to the effect that until the expiration of four (4) years after the
furnishing of services pursuant to such agreement, the related organization
shall make available, upon request by the United States Department of Health and
Human Services, the Comptroller General of the United States, or any of their
duly authorized representatives, all agreements, books, documents, and records
of such related organization that are necessary to verify the nature and extent
of the costs of services provided under that agreement.
ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by VERO II. Throughout the term of this
Agreement, VERO II shall maintain comprehensive professional liability and
worker's compensation insurance for VERO II and all employees of VERO II in
amounts approved by the Policy Board. Not in limitation of the foregoing, VERO
II shall maintain excess general liability umbrella coverage with a One Million
Dollars ($1,000,000) limit as currently maintained by VERO II (with deductible
provisions not to exceed $25,000 per occurrence), the cost of which shall be
paid by Company as a Clinic Expense. In lieu of the foregoing, Company may
provide as a Clinic Expense group insurance for malpractice and/or worker's
compensation insurance. Notwithstanding the foregoing, in the event that Company
procures such group insurance for malpractice and/or worker's compensation
insurance, VERO II must first approve the amount of coverage, the carrier and
the terms of any such coverage for VERO II.
10.2. Insurance to be Maintained by Company. Throughout the term of this
Agreement, Company shall provide and maintain, as a Clinic Expense,
comprehensive professional liability insurance and worker's compensation
insurance as required by Applicable Law for all professional employees of
Company who work at the Practice Offices with limits as determined reasonable by
Company, comprehensive general liability and property insurance covering the
Practice Offices' premises and operations. The deductible provisions on the
personal liability shall not exceed $25,000 per occurrence and the commercial
general liability insurance shall be in amounts customarily maintained by other
businesses in the same or similar business as Company.
10.3. Additional Insureds. VERO II and Company agree to use their best
efforts to have each other named as an additional insured on the other's
respective professional liability insurance programs at Company's expense.
Further, on any insurance where Company will be named as an additional insured,
VERO II will assist Company to obtain appropriate riders to insure payment of
any party indemnified by Company.
10.4. Indemnification. VERO II shall indemnify, hold harmless and defend
Company, its officers, directors and employees, from and against any and all
liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees), caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts or negligent omissions (other than for any claims for (or in
connection with) malpractice arising from the performance or nonperformance of
medical services) by VERO II and/or VERO II's Physician Owners, agents,
employees and/or subcontractors (other than Company) during the term hereof.
Company shall indemnify, hold
- 19 -
<PAGE>
harmless and defend VERO II, the Physician Owners, VERO II's officers, directors
and employees, from and against any and all liability, loss, damage, claim,
causes of action, and expenses (including reasonable attorneys' fees), caused or
asserted to have been caused, directly or indirectly, by or as a result of the
performance of any intentional acts, negligent acts or negligent omissions by
Company and/or its shareholders, agents, employees and/or subcontractors (other
than VERO II and the Physician Owners) during the term of this Agreement.
Neither Company nor VERO II shall have any obligation to indemnify the other
party unless the claim for indemnification is based upon a liability, loss or
damage resulting in the indemnified party making payments to a third party.
Pursuant to the terms of the Stockholders Agreement, Company may have the right
to redeem a Physician Owner's Company common stock to satisfy a Physician
Owner's indemnification obligations.
In the event that either party makes a claim for indemnification under
either the Merger Agreement or this Service Agreement, then the claiming party
shall have the right, to the extent it is owed indemnifications, to pay amounts
owed to the other party under this Agreement into an escrow account (established
pursuant to an escrow agreement to be agreed upon by the parties) to be held by
the escrow agent in an interest bearing account until a determination by either
(i) the parties, (ii) a court of proper jurisdiction or (iii) agreed upon panel
of arbitrators, has been made regarding the claiming party's right to
indemnification. In the event that the claiming party is entitled to
indemnification, then such escrowed funds shall be paid to the claiming party in
partial or complete satisfaction of such indemnification obligation. Any excess
funds remaining in the escrow account after the payment of the indemnification
obligation or any funds held in the escrow account if it is determined that no
indemnification obligation is owed shall be paid to the other party.
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT
11.1. Term of Agreement. This Service Agreement shall be effective upon
the closing of the Merger Agreement, and shall expire on October 31, 2036 unless
earlier terminated pursuant to the terms hereof. Notwithstanding the foregoing,
for purposes of computing the Service Fee for the month of November of 1996
only, the Service Agreement shall be effective upon November 1, 1996.
11.2. Extended Term. Unless earlier terminated as provided for in this
Agreement, the term of this Agreement shall be automatically extended for
additional terms of five (5) years each, unless either party delivers to the
other party, not less than one hundred eighty (180) days prior to the expiration
of the preceding term, written notice of such party's intention not to extend
the term of this Agreement.
11.3. Termination by VERO II for Cause. VERO II may terminate this
Agreement without breach as follows:
11.3.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by Company, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by Company, except for the filing of a petition in
involuntary bankruptcy against Company which is dismissed within thirty (30)
days thereafter, VERO II may give notice of the immediate termination of this
Agreement.
11.3.2. In the event Company shall materially default in the performance
of any duty or obligation imposed upon it by this Agreement and such default
shall continue for a period of sixty (60) days after written notice thereof has
been given to Company by VERO II; or Company shall fail to remit the payments
due as provided in Article VIII hereof and such failure to remit shall continue
for a period of thirty (30) days after written notice thereof, VERO II may
terminate this Agreement.
11.3.3. In the event Company shall, intentionally or in bad faith,
misapply funds or assets of VERO II or commit a similar act which cause material
harm to VERO II, VERO II may terminate this Agreement.
- 20 -
<PAGE>
11.3.4. In the event that Company shall intentionally or in bad faith
violate Applicable Law resulting in a direct, continuing material adverse effect
on the operations, earnings and cash flow of VERO II, VERO II may terminate this
Agreement.
11.4. Termination by Company for Cause. Company may terminate this
Agreement without breach as follows:
11.4.1. In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by VERO II, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by VERO II, except for the filing of a petition in
involuntary bankruptcy against VERO II which is dismissed within thirty (30)
days thereafter, Company may give notice of the immediate termination of this
Agreement.
11.4.2. In the event VERO II shall materially default in the performance
of any duty or obligation imposed upon it by this Agreement, and such default
shall continue for a period of ninety (90) days after written notice thereof has
been given to VERO II by Company, Company may terminate this Agreement.
11.4.3. In the event VERO II's Medicare or Medicaid Number shall be
terminated or suspended as a result of the action or inaction of VERO II or a
Physician Employee, and such termination or suspension shall continue for thirty
(30) days, Company may give notice of the immediate termination of this
Agreement, unless VERO II shall at that time be acting in good faith (and shall
provide reasonable evidence of the action being taken) to reverse such
termination or suspension. Notwithstanding any good faith effort on the part of
VERO II to reverse such termination or suspension, if such termination or
suspension shall not be reversed within ninety (90) days after occurrence,
Company shall have the right to terminate this Agreement immediately.
11.4.4 In the event this Agreement is terminated by Company pursuant to
Section 11.4.1, Section 11.4.2, or Section 11.4.3, Company, at its option, may
require VERO II to purchase from Company all assets, both tangible and
intangible, owned by Company and used or made available for VERO II's use for
the fair market value of such assets on a going concern basis, without regard to
this Agreement. In addition thereto, VERO II shall assume all debt (including
any balance of any remaining debt incurred by the Company to acquire the assets
under the Merger Agreement) and all contracts, payables and leases which are
obligations of Company which relate to the Company's obligations which are
performed at the Office Locations under this Agreement. The fair market value of
the assets shall be determined by an independent appraiser selected by two (2)
independent accountants practicing with "big six" accounting firms, one (1)
selected by VERO II and one (1) selected by Company and neither of which is
providing or has for a period of two (2) years provided services to Company or
VERO II. In addition to the payment for the practice assets, in the event
Company terminates this Agreement pursuant to Section 11.4.1, Section 11.4.2 or
Section 11.4.3 within the first five (5) years of the term of this Agreement,
then VERO II's Physician Owners shall (i) pay to Company an amount of money
equal to the Fair Market Value, as of the date of termination, of one-third
(1/3) of the shares of stock and cash consideration issued by Company to VERO II
pursuant to the Merger Agreement or (ii) surrender to Company for cancellation
one-third (1/3) of the shares of stock and cash consideration issued by Company
to VERO II pursuant to the Merger Agreement. All expenses of any appraisal shall
be paid by VERO II. In the event that Company terminates this Agreement pursuant
to Sections 11.4.1 through 11.4.3, inclusive, and Company requires VERO II to
purchase the practice assets, then upon the closing of the purchase of the
assets, VERO II and its Physician Employees shall be released from the
restrictive covenants provided for under Exhibit 11 of this Agreement. In
addition, termination of this Agreement may trigger certain rights of Company to
redeem a Physician Owner's Company common stock pursuant to the terms of Article
VIII of the Stockholders Agreement.
11.5. Early Termination by VERO II or Company Without Cause Upon Third
(3rd) Anniversary of Agreement. Either party may terminate this Agreement
without cause upon written notice delivered to the other party not less than
nine (9) months or more than ten (10) months or more prior to the end of the
third (3rd) anniversary of the date of this Agreement if the Company has not
filed a registration statement with the United States Securities and Exchange
Commission; provided, however, if the Company files a registration statement,
for an underwritten public offering, with the United States Securities and
Exchange Commission before the end of the date of the third (3rd) anniversary of
this Agreement, then such termination shall be ineffective, and this Agreement
shall continue in force unless otherwise terminated pursuant to the other
provisions of Article XI of this Agreement. In the event that such registration
statement is not effective within one hundred twenty
- 21 -
<PAGE>
(120) days from filing, then the early termination rights described in the first
sentence of this Section 11.5 shall be again exercisable; provided, further,
that if such registration statement was filed during the above described notice
period for early termination, then such period shall be extended for thirty (30)
days from and after the date such early termination rights again become
exercisable. Notwithstanding any other provision of this Agreement to the
contrary, the termination rights set forth in this Section 11.5 shall
immediately terminate and no longer be effective upon a Change in Control of the
Company. Upon a termination pursuant to this Section 11.5, VERO II shall tender
to Company all of the stock issued to VERO II by Company pursuant to the Merger
Agreement, and Company shall return to VERO II the facilities and all assets,
both tangible and intangible, used or made available for VERO II's use in the
Practice Office. VERO II shall assume all debt (including any balance of any
remaining debt incurred by the Company to acquire the assets under the Merger
Agreement) and all contracts, payables and leases which are obligations of
Company and which relate to Company's obligations which are performed at the
Office Locations under this Agreement. The Company and VERO II shall cooperate
to structure any exchange consummated pursuant to this Section 11.5 in a manner
designed to minimize the aggregate tax consequences to the parties arising from
the exchange. Closing of the exchange pursuant to this Section 11.5 shall occur
effective as of the third (3rd) anniversary of this Agreement.
11.6. Consequences of VERO II Termination. In the event that this
Agreement is terminated by VERO II under the terms of Section 11.3 or is
terminated on any other basis (other than (i) because of the normal expiration
of its term set forth in Section 11.1, (ii) by Company for cause as set forth in
Section 11.4 or (iii) by early termination as set forth in Section 11.5), then
upon such termination, VERO II shall purchase from Company all assets, both
tangible and intangible, owned by Company and used or made available for VERO
II's use for the fair market value of such assets on a going concern basis
without regard to this Agreement. In addition thereto, VERO II shall assume all
debt (including any balance of any remaining debt incurred by the Company to
acquire the assets under the Merger Agreement) and all contracts, payables and
leases which are obligations of Company which relate to the Company's
obligations which are performed at the Office Locations under this Agreement.
The fair market value of the assets shall be determined by an independent
appraiser selected by two (2) independent accountants practicing with "big six"
accounting firms, one (1) selected by VERO II and one (1) selected by Company
and neither of which is providing or has for a period of two (2) years provided
services to Company or VERO II. Termination of this Agreement by VERO II or a
Physician Owner may trigger Company's right to redeem all of Company common
stock owned by the Physician Owner as provided for in Section 8.1 (a) of the
Stockholders Agreement.
11.7. Closing of Purchase by VERO II and Effective Date of Termination.
VERO II shall, except as provided below in this Section 11.7, pay cash for the
practice assets purchased pursuant to the provisions of this Section 11. The
amount of the purchase price shall be reduced, but not below zero (0), by the
amount of debt and liabilities of Company assumed by VERO II and shall also be
reduced by any payment Company has failed to make under this Agreement, provided
that such payments or obligations are not otherwise accounted for in the
liabilities assumed by VERO II in connection with the purchase described herein.
The closing date for the purchase shall be determined by VERO II, but shall in
no event occur later than one hundred eighty (180) days from the date of the
notice of termination. The termination of this Agreement shall become effective
upon the closing of the sale of the assets and VERO II and Company shall be
released from the restrictive covenants provided for in Article VII on the
closing date. Company shall give VERO II credit towards the purchase price of
the assets for the Fair Market Value of any Company common stock tendered to the
Company in exchange for such assets. In the event that VERO II terminates this
Agreement pursuant to Sections 11.3.1 through 11.3.4, inclusive, or Sections
11.5, 11.6 or 11.7, then upon the closing of the purchase of the assets, VERO II
and its Physician Employees shall, except as VERO II may so elect to limit
through separate agreements with Physician Owners and Physician Employees, be
released from the restrictive covenants provided for under Article VII or
Exhibit 11 of this Agreement.
11.8. Tail Policy. VERO II shall obtain continuing liability insurance
coverage under either a "tail policy" or a "prior acts policy" with the same
limits and deductibles as set forth in Section 10.1 upon the termination of this
Agreement, or upon a physician's termination of his or her affiliation with VERO
II.
11.9. Restrictions Applicable to Physician Owners. The Physician Owners
hereby acknowledge that the Merger and the terms and conditions of this
Agreement were determined based upon numerous factors, including the Physician
Owners continuing to practice medicine in the future. In connection therewith,
each Physician Owner agrees as follows:
- 22 -
<PAGE>
11.9.1. Early Retirement. If at any time prior to the fifth (5th)
anniversary of this Agreement, a Physician Owner desires to retire from the
practice of medicine, such Physician Owner shall be obligated as follows:
(a) to give Company at least twelve (12) months prior written notice
of the intent to retire; provided, however, that once such retiring
physician has located a replacement physician satisfying the requirements
of Section 11.9.1(b), Company shall waive the remaining months of said
twelve (12) month notice period, and such retirement shall be effective
upon the earlier of twelve (12) months from the date of notice or
commencement of the replacement physician's employment;
(b) to locate a physician or physicians (which may be Physician
Employees), reasonably acceptable to the Policy Board, to replace such
Physician Owner under this Agreement (all costs of locating such
replacement physicians shall be paid by such Physician Owner (the
"Substitute Physician(s)");
(c) to pay to Company any loss of service fees payable under this
Agreement for the remainder of the first five (5) years of this Agreement.
Any loss for any periods of less than twelve (12) months shall be
calculated on an annualized and prorated basis. For purposes of this
Section 11.9.1(c), the amount of the loss shall be calculated as follows:
(i) The Policy Board shall calculate the retiring Physician
Owner's contribution to the payment of VERO II's service fees
during the twelve (12) month period preceding the retiring
Physician Owner's notice of intent to retire.
(ii) In the event the Substitute Physician(s) were Physician
Employees prior to the date upon which notice of intent to
retire was given pursuant to Section 11.9.1(a), the Policy
Board shall calculate such Physician Employee(s) contribution
to the payment of VERO II's service fees during the twelve
month period preceding the notice of intent to retire.
(iii) On each successive anniversary date of this Agreement (through
the fifth anniversary date) following the effective date of
such retirement, the Policy Board shall determine the amount
of service fees generated by the Substitute Physicians between
either (x) the effective date of retirement or (y) the
immediately preceding anniversary date, as applicable, and
such successive anniversary date.
(iv) If the Substitute Physician(s) were Physician Employees prior
to date upon which the notice of intent to retire was given,
the amount of loss shall equal the difference between (i) the
amount calculated pursuant to Section 11.9.1(c)(i) plus the
amount calculated pursuant to Section 11.9.1(c)(ii) and (ii)
the amount calculated pursuant to Section 11.9.1(c)(iii).
(v) If the Substitute Physician(s) were not Physician Employees
prior to the date upon which the notice of intent to retire
was given, the amount of loss shall equal the difference
between (i) the amount calculated pursuant to Section
11.9.1(c)(i) and (ii) the amount calculated pursuant to
Section 11.9.1(c)(iii).
The Policy Board will provide the amount of the loss to the retiring Physician
Owner within thirty (30) days of the applicable anniversary date of this
Agreement and such amount shall be paid by such retiring Physician Owner to
Company within fifteen (15) days of the date of the delivery of the notice of
the amount of loss;
(d) to (i) pay to Company an amount of money equal to the Fair
Market Value, as of the date of retirement, of one-third (1/3) of the
shares of stock issued by the Company to the retiring Physician Owner
pursuant to the Merger Agreement or (ii) surrender to Company for
cancellation one-third (1/3) of the stock issued by Company to the
retiring Physician Owner pursuant to the Merger Agreement. (All expenses
of any appraisal shall be paid by such Physician Owner.); and
- 23 -
<PAGE>
(e) to honor and comply with the restrictive covenants provided for
under Exhibit 11.
11.9.2. Retirement. If at any time after the fifth (5th) anniversary of
this Agreement, a Physician Owner desires to retire, or assume full-time
teaching responsibilities, such Physician Owner shall notify Company in writing
at least twelve (12) months prior to the effective date of such retirement or
start of teaching position; provided, however, that no more than twenty percent
(20%) of the Physician Owners can retire or assume full time teaching
responsibilities within any twelve (12) month period; provided, further, that if
such retiring physician elects to, and has located a replacement physician,
Company shall waive the remaining months of said twelve (12) month notice
period, and such retirement shall be effective upon the earlier of twelve (12)
months from the date of notice or commencement of the replacement physician's
employment. Upon such retirement or start of teaching position, such Physician
Owner shall have no further obligations under this Agreement; provided, however,
the restrictive covenants provided for under Exhibit 11 shall remain in force.
In fulfilling any such full-time teaching responsibilities, such Physician Owner
would be permitted to attend patients in a manner normal and customary for such
faculty position, provided, however, such services must be incident to the
academic/teaching aspects of the institution, and not incident to the regular
examination of patients for a fee whether billed in the name of the institution
or the name of the attending physician. It is not the intent of the Parties to
permit a retired physician to conduct a medical practice through an academic
institution.
11.9.3. Physician Owner Change in Practice/Group Affiliation. In the event
that a Physician Owner leaves the employment of or terminates his or her
affiliation with VERO II, then the terminating Physician Owner may join or
establish another group/practice which has or will enter into a Service
Agreement with Company upon such terminating Physician Owner's affiliation with
such new group/practice. Upon entering into such new Service Agreement, the
terminating Physician Owner shall, except as limited by separate employment
agreements between VERO II and Physician Owners, be released from any obligation
under this Service Agreement. Company shall have the right to enter into such
new Service Agreement without satisfying the requirements of paragraph G of
Exhibit 11. In the event that (i) VERO II consents to Company entering into the
new Service Agreement, (ii) entering into the new Service Agreement will not
adversely affect the operations and earnings of Company, and (iii) the new
group/practice can satisfy the representations and warranties set forth in
Article XIII of this Agreement, then Company will not unreasonably withhold or
refrain from entering into a new Service Agreement with the terminating
Physician Owner's new group/practice. Except as set forth herein, in the event
that the Physician Owner affiliates with a new group/practice that is not a
party to a Service Agreement with Company, then Company, at its option, may
terminate this Agreement solely with respect to the terminating Physician Owner,
and the provisions of Exhibit 11 shall apply. In the event that Company does not
enter into a new Service Agreement, then Company shall terminate this Agreement
with respect to such Physician Owner, and the terminating Physician Owner shall
be obligated as described in Sections 11.9.1(a), and 11.9.1(e) of this
Agreement; provided, however, if such termination is within the first five (5)
years of the term of this Agreement, the terminating Physician Owner shall also
be obligated as described in Sections 11.9.1.(a), 11.9.1.(b), 11.9.1.(c),
11.9.1.(d) and 11.9.1.(e).
11.9.4. Death or Disability. In the event that a Physician Owner dies or
becomes disabled, then the Physician Owner shall have no continuing obligations
under this Agreement; provided, however, in the event of disability, the
restrictive covenants described in Exhibit 11 shall remain in force.
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION
12.1. Use of Insurance Proceeds. All insurance or condemnation proceeds
payable by reason of any physical loss of any of the improvements comprising the
facilities or the furniture, fixtures and equipment used by the Practice
Offices, shall be available for the reconstruction, repair or replacement, as
the case may be, of any damage, destruction or loss. The Policy Board, in
consultation with VERO II, shall review and approve such reconstruction, repair
or replacement.
12.2. Temporary Space. In the event of substantial damage to or the
condemnation of a significant portion of the facilities, Company shall use its
best efforts to provide temporary facilities until such time as the facilities
can be restored or replaced.
- 24 -
<PAGE>
ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF VERO II AND PHYSICIAN OWNERS
VERO II and Physician Owners represent, warrant, covenant and agree with
Company that:
13.1. Validity. VERO II is a Florida corporation. VERO II has the full
power and authority to own VERO II's property, to carry on VERO II's business as
presently being conducted, to enter into this Agreement, and to consummate the
transactions contemplated hereby. Each Physician Owner is an adult citizen and
resident of the State of Florida. Each Physician Owner has the full power and
authority to own his or her property, carry on his or her business as presently
being conducted, to enter into this Agreement, and to consummate the
transactions contemplated hereby.
13.2. Litigation. Except as disclosed pursuant to the Merger Agreement,
there is no suit, action, proceeding at law or in equity, arbitration,
administrative proceeding or other proceeding pending, or threatened against, or
affecting VERO II or any Physician Employee, or to the best of VERO II's and
each Physician Owner's knowledge, any provider or other health care professional
associated with or employed by VERO II as pertains to any claim involving the
providing of health care related services, and to the best of VERO II's and each
Physician Owner's knowledge there is no basis for any of the foregoing.
13.3. Permits. VERO II and all health care professionals associated with
or employed by VERO II have all permits and licenses and other Necessary
Authorizations required by all Applicable Law, except where failure to secure
such licenses, permits and other Necessary Authorizations does not have a
material adverse effect; have made all regulatory filings necessary for the
conduct of VERO II's business; and are not in violation of any of said
permitting or licensing requirements.
13.4. Authority. The execution of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
action, and this Agreement is a valid and binding Agreement of VERO II and each
Physician Owner, enforceable in accordance with its terms. VERO II and each
Physician Owner have obtained all third-party consents necessary to enter into
and consummate the transaction contemplated by this Agreement. Neither the
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby, nor compliance by VERO II or any Physician Owner with any
of the provisions hereof, will:
13.4.1. violate or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under any license, agreement or other
instrument or obligation to which either VERO II or any Physician Owner is a
party;
13.4.2. violate any order, writ, injunction, decree, statute, rule or
regulation applicable to either VERO II or any Physician Owner.
13.5. Compliance with Applicable Law. To the best of VERO II's and each
Physician Owner's knowledge and belief, VERO II and each Physician Owner has
operated in compliance with all federal, state, county and municipal laws,
ordinances and regulations applicable thereto and neither VERO II nor any
provider associated with or employed by VERO II has received payment or any
remuneration whatsoever to induce or encourage the referral of patients or the
purchase of goods and/or services as prohibited under 42 U.S.C. ss. 1320a-7b(b),
or otherwise perpetrated any Medicare or Medicaid fraud or abuse, nor has any
fraud or abuse been alleged within the last five (5) years by any Governmental
Authority, a carrier or a Third-Party Payor.
13.6. Health Care Compliance. VERO II is presently participating in or
otherwise authorized to receive reimbursement from or is a party to Medicare,
Medicaid, and other Third-Party Payor Programs. All necessary certifications and
contracts required for participation in such programs are in full force and
effect and have not been amended or otherwise modified, rescinded, revoked or
assigned as of the date hereof, and no condition exists or to the knowledge of
VERO II no event has occurred which in itself or with the giving of notice or
the lapse of time or both would result in the suspension,
- 25 -
<PAGE>
revocation, impairment, forfeiture or non-renewal of any such Third-Party Payor
Program. VERO II is in full compliance with the material requirements of all
such Third-Party Payor Programs applicable thereto.
13.7. Fraud and Abuse. VERO II and persons and entities providing
professional services for VERO II, have not, to the knowledge of VERO II and
each Physician Owner, after due inquiry, engaged in any activities which are
prohibited by or are in violation of the rules, regulations, policies, contracts
or laws pertaining to any Third-Party Payor Program, or which are prohibited by
rules of professional conduct ("Governmental Rules and Regulations"), including
but not limited to the following: (a) 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; (b) 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; (c) failing to disclose
knowledge by a claimant of the occurrence of any event affecting the initial or
continued right to any benefit or payment on VERO II's own behalf or on behalf
of another, with intent to fraudulently secure such benefit or payment; or (d)
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 (i) in return
for referring an individual to a person for the furnishing or arranging for the
furnishing or any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (ii) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service or item for which payment may be made in whole or in
part by Medicare or Medicaid.
13.8. VERO II Compliance. VERO II has all licenses necessary to operate
the Practice Offices in accordance with the requirements of all Applicable Law
and has all Necessary Authorizations for the use and operation, all of which are
in full force and effect. There are no outstanding notices of deficiencies
relating to VERO II issued by any Governmental Authority or Third-Party Payor
requiring conformity or compliance with any Applicable Law or condition for
participation of such Governmental Authority or Third-Party Payor, and after
reasonable and independent inquiry and due diligence and investigation, VERO II
has neither received notice nor has any knowledge or reason to believe that such
Necessary Authorizations may be revoked or not renewed in the ordinary course.
13.9. Rates and Reimbursement Policies. The jurisdiction in which VERO II
is located does not currently impose any restrictions or limitations on rates
which may be charged to private pay patients receiving services provided by VERO
II. VERO II does not have any rate appeal currently pending before any
Governmental Authority or any administrator of any Third-Party Payor Program.
VERO II has no knowledge of any Applicable Law which has been enacted,
promulgated or issued within the eighteen (18) months preceding the date of this
Agreement or any such legal requirement proposed or currently pending in the
jurisdiction in which VERO II is located which could have a material adverse
effect on VERO II or may result in the imposition of additional Medicaid,
Medicare, charity, free care, welfare, or other discounted or government
assisted patients at VERO II or require VERO II to obtain any necessary
authorization which VERO II does not currently possess.
13.10. Accounts Receivable. With respect to the Purchased A/R, as of the
date of purchase:
13.10.1. All documents and agreements relating to the Purchased A/R that
have been delivered to Company with respect to such Accounts Receivable are true
and correct; VERO II has billed the applicable Account Debtor and VERO II has
delivered or caused to be delivered to such Account Debtor all requested
supporting claim documents with respect to such Accounts Receivable; all
information set forth in the bill and supporting claim documents is true and
correct, and, if any error has been made, VERO II will promptly correct the same
and, if necessary, rebill or, if requested by Company, cooperate with Company to
rebill such Accounts Receivable.
13.10.2. The Purchased A/R are exclusively owned by VERO II and there is
no security interest or lien in favor of any third party, or the recording or
filing against VERO II, as debtor, covering or purporting to cover any interest
of any kind in any Accounts Receivable, except as has been released by each
party holding such adverse interest in the Accounts Receivable. Upon payment of
the Purchase Price with respect to the Purchased A/R and with respect to
Governmental Receivables, to the extent permissible by law, all right, title and
interest of VERO II with respect thereto shall be vested in
- 26 -
<PAGE>
Company, free and clear of any lien, security interest, claim or encumbrance of
any kind, and VERO II agrees to defend the same against the claims of all
Persons.
13.10.3. The Purchased A/R (i) are payable, in an amount not less than
their face amount, as adjusted pursuant to the provisions of Section 8.3.2, by
the Account Debtor identified by VERO II as being obligated to do so, (ii) are
based on an actual and bona fide rendition of services or sale of goods to the
patient by VERO II in the ordinary course of business, (iii) are denominated and
payable only in lawful currency of the United States, and (iv) are accounts or
general intangibles within the meaning of the UCC of the state in which VERO II
has its principal place of business, or are rights to payment under a policy of
insurance or proceeds thereof, and are not evidenced by any instrument or
chattel paper. There are no payors other than the Account Debtor identified by
VERO II as the payor primarily liable on any Purchased A/R.
13.10.4. The Purchased A/R are not (i) subject to any action, suit,
proceeding or dispute (pending or threatened), set-off, counterclaim, defense,
abatement, suspension, deferment, deductible, reduction or termination by the
Account Debtors other than routine adjustments and disallowances made in the
ordinary course of business, to the extent of such adjustments and
disallowances, (ii) past or within sixty (60) days of, the statutory limit for
collection applicable to the Account Debtor, (iii) subject to an invoice which
provides for payment more than forty-five (45) days from the date of such
invoice, (iv) an account which arises out of a sale or other transaction by or
between VERO II to an Affiliate of VERO II, (v) from an Account Debtor who is
also a creditor of VERO II, (vi) an account in which the Account Debtor has
commenced a voluntary case, or an involuntary proceeding has been instituted,
under the federal bankruptcy laws, as now constituted or hereafter amended, or
made an assignment for the benefit or creditors, or if a decree or order for
relief has been entered by a court having jurisdiction in the premises in
respect to the Account Debtor, (vii) an account of which the goods giving rise
to such Accounts Receivable have not been shipped and delivered to and accepted
by the Account Debtor or the services giving rise to such Accounts Receivable
have not been performed by VERO II and accepted by the Account Debtor or the
Accounts Receivable otherwise does not represent a final sale, (viii) is
evidenced by an instrument or chattel paper unless such instrument or chattel
paper is delivered to Company with all appropriate endorsements in favor of
Company, or (ix) other than a complete bona fide transaction which requires no
further act under any circumstances on the part of VERO II to make the Accounts
Receivable payable by the Account Debtor.
13.10.5. VERO II does not have any guaranty of, letter of credit providing
credit support for, or collateral security for, the Purchased A/R, other than
any such guaranty, letter of credit or collateral security as has been assigned
to Company, and any such guaranty, letter of credit or collateral security is
not subject to any lien in favor of any other person.
13.10.6. The goods or services provided and reflected by the Purchased A/R
were medically necessary for the patient in the opinion of VERO II and the
patient received such goods or services.
13.10.7. The face amount of the Accounts Receivable for the services
constituting the basis for the Purchased A/R are consistent with the usual,
customary and reasonable fees charged by other similar medical service providers
in VERO II's community for the same or similar service.
13.10.8. Each Account Debtor with respect to the Purchased A/R (i) is not
currently the subject of any bankruptcy, insolvency or receivership proceeding,
nor is it generally unable to make payments on its obligations when due, (ii) is
located in the United States, and (iii) is one of the following: (x) a party
which in the ordinary course of its business or activities agrees to pay for
healthcare services received by individuals, including, without limitation,
Medicare, Medicaid, governmental bodies, commercial insurance companies and
non-profit insurance companies (such as Blue Cross and Blue Shield entities)
issuing health, personal injury, workers compensation or other types of
insurance; (y) employers or unions which self-insure for employee or member
health insurance, prepaid healthcare organizations, preferred provider
organizations, health maintenance organizations or any other similar person, or
(z) a Third-Party Payor of the type described in the definition of Governmental
Receivables.
13.10.9. The proceeds of the sale of the Purchased A/R will be used for
the business and commercial purposes of VERO II. The sale of the Purchased A/R
hereunder is made in good faith and without actual intent to hinder, delay or
defraud present or future creditors of VERO II.
- 27 -
<PAGE>
13.10.10. Except with respect to Governmental Receivables, the insurance
policy, contract or other instrument obligating an Account Debtor to make
payment with respect to the Purchased A/R (i) does not contain any provision
prohibiting the transfer of such payment obligation from the patient to VERO II,
or from VERO II to Company, (ii) has been duly authorized by VERO II and to the
knowledge of VERO II has been duly authorized by the Account Debtor and,
together, with the Purchased A/R, constitutes the legal, valid and binding
obligation of the Account Debtor in accordance with its terms, (iii) together
with the applicable Purchased A/R, does not contravene in any material respect
any requirement of law applicable thereto, and (iv) was in full force and effect
and applicable to the patient at the time the services constituting the basis
for the Purchased A/R were performed.
The Purchased A/R are purchased without recourse, except for the
representations, warranties and covenants made by VERO II and the Physician
Owners with respect thereto. None of the foregoing representations and
warranties with respect to the Purchased A/R shall be deemed to constitute a
guaranty by VERO II that the Purchased A/R will be collected by Company. VERO II
shall not be responsible for any damages for any breach of a representation or
warranty under this Section 13.10 until Company has suffered a loss on the
purchase of VERO II's Accounts Receivable. Damages for such breach shall be
limited to the amount of Company's loss on the purchase of such Accounts
Receivable.
13.11. Full Disclosure. When considered in the context of all information
contained herein, to the knowledge of VERO II no representation or warranty made
by VERO II in this Agreement contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading.
13.12. Exhibits. All the facts recited in Exhibits annexed hereto shall be
deemed to be representations of fact by VERO II as though recited in this
Article XIII.
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents, warrants, covenants and agrees with VERO II as
follows:
14.1. Organization. Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Company
has the full power to own its property, to carry on its business as presently
conducted, to enter into this Agreement and to consummate the transactions
contemplated hereby.
14.2. Authority. Company has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, as well as the
consummation of the transactions contemplated hereby. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
hereby will not, violate any provisions of the charter or the bylaws of Company
or any indenture, mortgage, deed of trust, lien, lease, agreement, arrangement,
contract, instrument, license, order, judgment or decree or result in the
acceleration of any obligation thereunder to which Company is a party or by
which it is bound.
14.3. Absence of Litigation. No action or proceeding by or before any
court or other Governmental Authority has been instituted or is, to the best of
Company's knowledge, threatened with respect to the transactions contemplated by
this Agreement.
14.4. Transactions with Affiliates. Company shall not enter into any
transaction or series of transactions, whether or not related or in the ordinary
course of business, with any Affiliate of VERO II or Company, other than on
terms and conditions substantially as favorable to Company as would be
obtainable by Company at the time in a comparable arm's-length transaction with
a person not an Affiliate.
- 28 -
<PAGE>
ARTICLE XV.
COVENANTS OF VERO II AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements. VERO II shall not
incorporate, merge or consolidate with any other entity or individual or
liquidate or dissolve or wind-up VERO II's affairs or enter into any
partnerships, joint ventures or sale-leaseback transactions or purchase or
otherwise acquire (in one or a series of related transactions) any part of the
property or assets (other than purchases or other acquisitions of inventory,
materials and equipment in the ordinary course of business) of any other person
or entity.
15.2. Necessary Authorizations/Assignment of Licenses and Permits. VERO II
and each Physician Owner shall maintain all licenses, permits, certifications,
or other Necessary Authorizations and shall not assign or transfer any interest
in any license, permit, certificate or other Necessary Authorization granted to
it by any Governmental Authority, nor shall VERO II or any Physician Owner
assign, transfer, or remove or permit any other individual or entity to assign,
transfer or remove any records of VERO II or any Physician Owner, including
without limitation, patient records, medical and clinical records (except for
removal of such patient records required under any Applicable Law).
15.3. Transaction with Affiliates. Neither VERO II nor any Physician Owner
shall enter into any transaction or series of transactions, whether or not
related or in the ordinary course of business, with any Affiliate of VERO II or
Company, other than on terms and conditions substantially as favorable to VERO
II or the Physician Owner, as would be obtainable by VERO II or the Physician
Owner at the time in a comparable arms-length transaction with a person not an
Affiliate.
15.4. Compliance with All Laws. VERO II and each Physician Owner shall use
their best efforts to comply with all laws and regulations relating to VERO II's
practice and the operation of any facility, including, but not limited to, all
state, federal and local laws relating to the acquisition or operation of a
health care practice. Furthermore, neither VERO II nor any Physician Owner shall
intentionally violate any Governmental Rules and Regulations.
15.5. Third-Party Payor Programs. VERO II shall maintain VERO II's
compliance with the requirements of all Third-Party Payor Programs in which VERO
II is currently participating or authorized to participate.
15.6. Change in Business or Credit and Collection Policy. VERO II shall
not make any change in the character of VERO II's business or in the credit and
collection policy, which change would, in either case, impair the collectibility
of any Purchased A/R or any Merger A/R or otherwise modify, amend or extend the
terms of any such account other than in the ordinary course of business.
15.7. Treatment of Accounts Receivable. VERO II will (i) treat transfers
to Company of Accounts Receivable hereunder as a sale for all purposes,
including tax and accounting (and shall accurately reflect such sale in its
financial statements), and will advise all persons who inquire about the
ownership of such Accounts Receivable that they have been sold to Company; (ii)
not treat any such Accounts Receivable as an asset on VERO II's books and
records; (iii) record in VERO II's books, records and computer files pertaining
thereto that such Accounts Receivable have been sold to Company; (iv) pay all
taxes, if any, relating to the transfer of such Accounts Receivable after the
same have been purchased by Company; (v) not impede or interfere with Company's
collection of such Accounts Receivable; (vii) not amend, waive or otherwise
permit or agree to any deviation from the terms or conditions of such Accounts
Receivable; (viii) use all reasonable efforts to obtain all consents from
patients which are required by law in order for Company, or any servicing entity
retained by Company, to secure information needed to obtain or to expedite
payment from the respective Account Debtors; and (ix) have billed such Accounts
Receivable on the same bases and using the same policies and practices that it
has used in the past unless Company has been advised in writing of a change
prior to the purchase of such Accounts Receivable. Company or its designated
representatives from time to time may verify the Accounts Receivable, inspect,
check, take copies or extracts from VERO II's books, records and files, and VERO
II will make the same available to Company or such representatives at any
reasonable time for such purposes.
- 29 -
<PAGE>
15.8. Security Interest. If, contrary to the mutual intent of VERO II and
Company, any purchase of Purchased A/R is not characterized as a sale, VERO II
shall, effective as of the date hereof, be deemed to have granted (and VERO II
does hereby grant) to Company a first priority security interest in and to any
and all of the Purchased A/R and the proceeds thereof to secure the repayment of
all amounts advanced to VERO II hereunder with accrued interest thereon, and
this Agreement shall be deemed to be a security agreement. With respect to such
grant of a security interest, Company may at its option exercise from time to
time any and all rights and remedies available to it under the UCC or otherwise.
VERO II agrees that five (5) days shall be reasonable prior notice of the date
of any public or private sale or other disposition of all or part of the
Purchased A/R. VERO II represents and warrants that the location of VERO II's
principal place of business, and all locations where VERO II maintains records
with respect to its accounts are set forth under its name in Section 16.3
hereof. VERO II agrees to notify Company in writing thirty (30) days prior to
any change in any such location. The exact name of VERO II is as set forth at
the beginning of this Agreement, and except as set forth on the signature page
hereof, VERO II has not changed its name in the last five (5) years, and during
such period VERO II did not use, nor does VERO II now use, any fictitious or
trade name. VERO II shall notify Company in writing thirty (30) days prior to
any change in any such name.
ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment. Company shall have the right to assign its rights
hereunder to any person, firm or corporation under common control with Company
and to any lending institution from which Company obtains financing, including
but not limiting the restrictive covenants included in Article VII (covenant not
to compete), for security purposes or as collateral. VERO II agrees to, and
acknowledges, Company's right to assign Company's rights under this Agreement to
any Lender and further agrees that upon receipt of written notice from such
Lender, VERO II shall pay to Lender or cause to be paid to Lender all amounts
which are otherwise payable to Company pursuant to the terms of this Agreement,
including, without limitation, all service fees, and other Clinic Expenses and,
until such amounts are delivered to Lender, hold payments in trust for Lender.
Except as set forth above, neither Company nor VERO II shall have the right to
assign their respective rights and obligations hereunder without the written
consent of the other party. Without limiting the foregoing, VERO II acknowledges
that, as collateral for certain obligations, Company has assigned all of its
rights hereunder to NationsBank of Tennessee, N.A. as Agent (the "Agent") for
itself and other banks and institutional lenders from time to time (collectively
the "Banks") and has granted the Agent for the benefit of the Banks a lien and
security interest upon all real and personal property used in the operation of
the Office Locations (the "Pledged Assets"). As an inducement for the Banks to
extend or continue the extension of credit to Company, VERO II (i) acknowledges
that the collateral assignment to the Agent covers all rights of Company
hereunder, including, but not limited to, rights arising from warranties and
representations made by VERO II, rights to enforce covenants made by VERO II,
and rights to receive all payments due Company; (ii) agrees to regard the Agent
as the owner of any or all of the assigned rights upon written notice to VERO II
of this election from the Agent; (iii) agrees that neither the Agent nor any of
the Banks has obligation for the performance of the duties of Company hereunder,
and shall not assume any such duty by the exercise of rights as a secured
lender; (iv) agrees to give the Agent written notice of any material default
hereunder on Company's part at the address of 1 NationsBank Plaza, Nashville,
Tennessee 37239, Attn: David Dupuy, and to allow at least thirty (30) days
thereafter for the cure of such default before VERO II terminates this
Agreement; (v) agrees that the rights of VERO II under this Agreement,
including, but not limited to, the right to the use of the Pledged Assets, are
and shall be junior to any security interest that the Agent and the Banks, their
successors or assigns may have in the Pledged Assets at any time; (vi) agrees
that the benefits of the above undertakings in favor of the Agent and Banks
shall further extend to all successors and assigns of the Agent and Banks,
provided that any notices given by VERO II under this Section shall be given to
the Agent at the foregoing address unless VERO II has received written notice of
a change thereof; and (vii) agrees that this Section may not be modified, and no
provision of this Section may be waived, absent the written approval of the
Agent.
16.2. Whole Agreement; Modification. This Agreement supersedes all prior
agreements between the parties and there are no other agreements or
understandings, written or oral, between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement.
- 30 -
<PAGE>
16.3. Notices. All notices required or permitted by this Agreement shall
be in writing and shall be deemed to have been given (i) when received if given
in person, (ii) on the date of acknowledgment of receipt if sent by telex,
facsimile or other wire transmission, (iii) one business day after being sent by
overnight delivery service, or (iv) three days after being deposited in the
United States mail, certified or registered mail, postage prepaid, addressed as
follows:
To Company: Specialty Care Network, Inc.
44 Union Boulevard
Suite 600
Lakewood, Colorado 80228
Attention: Kerry Hicks
With a copy to: Baker, Donelson, Bearman & Caldwell
165 Madison Avenue
Suite 2000
Memphis, Tennessee 38103
Attention: David T. Popwell, Esq.
To VERO II: Vero Orthopaedics II, P.A.
1260 37th Street
Vero Beach, Florida 32960
Attention:__________________
With a copy to: Clem, Polackwich, Vocelle & Taylor
Univest Bldg., Suite 501
2770 N. Indian River Blvd.
Vero Beach, Florida 32960
Attention: James A. Taylor, III
or to such other address as either party shall notify the other.
16.4. Binding on Successors. Subject to Section 16.1, this Agreement shall
be binding upon the parties hereto, and their successors, assigns, heirs and
beneficiaries.
16.5. Waiver of Provisions. Any waiver of any terms and conditions hereof
must be in writing, and signed by the parties hereto. The waiver of any of the
terms and conditions of this Agreement shall not be construed as a waiver of any
other terms and conditions hereof.
16.6. Governing Law. The validity, interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
State of Florida.
16.7. No Practice of Medicine. The parties acknowledge that Company is not
authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or service
required of Company in this Agreement should be construed or deemed by any
Governmental Authority or court to constitute the practice of medicine, the
performance of said act or service by Company shall be deemed waived and
unenforceable to the minimum extent required to comply with Applicable Law.
16.8. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
- 31 -
<PAGE>
16.9. Additional Documents. Each of the parties hereto agrees to execute
any document or documents that may be requested from time to time by any other
party to implement or complete such party's obligations pursuant to this
Agreement.
16.10. Attorneys' Fees. If legal action is commenced by any party to
enforce or defend its rights under this Agreement, the prevailing party in such
action shall be entitled to recover its costs and reasonable attorneys' fees in
addition to any other relief granted.
16.11. Time is of the Essence. Time is hereby expressly declared to be of
the essence in this Agreement.
16.12. Confidentiality. No party hereto shall disseminate or release to
any third party any information regarding any provision of this Agreement, or
any financial information regarding the other (past, present or future) that was
obtained by the other in the course of the negotiations of this Agreement or in
the course of the performance of this Agreement, including, but not limited to,
any information relating to the internal operations of VERO II, VERO II fees or
the terms of any of the managed care contracts, without the other party's
written approval; provided, however, the foregoing shall not apply to
information which (i) is generally available to the public other than as a
result of a breach of confidentiality provisions; (ii) becomes available on a
non-confidential basis from a source other than the other party or its
affiliates or agents, which source was not itself bound by a confidentiality
agreement; (iii) which is required to be disclosed by law or pursuant to court
order (Company shall provide VERO II with copies of any information regarding
VERO II provided by Company to any third party); or (iv) except for disclosure
to its bank, underwriters or lenders, or its advisors to the extent required by
Section 9.4, or as required in connection with reports on filings with the SEC
or State Departments of Securities.
16.13. Contract Modifications for Prospective Legal Events. If any state
or federal laws or regulations, now existing or enacted or promulgated after the
effective date of this Agreement, are interpreted by judicial decision, a
regulatory agency or legal counsel in such a manner as to indicate that the
structure of this Agreement may be in violation of such laws or regulations,
VERO II and Company shall amend this Agreement as necessary. To the maximum
extent possible, any such amendment shall preserve the underlying economic and
financial arrangements between and among VERO II and Company.
16.14. Remedies Cumulative. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any party, but the same shall be distinct,
separate and cumulative and may be exercised from time to time as often as
occasion may arise or as may be deemed expedient.
16.15. Language Construction. The language in all parts of this Agreement
shall be construed, in all cases, according to VERO II's fair meaning, and not
for or against either party hereto. The parties acknowledge that each party and
its counsel have reviewed and revised this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.
16.16. No Obligation to Third Parties. Except as provided in Section 16.1,
none of the obligations and duties of Company or VERO II under this Agreement
shall in any way or in any manner be deemed to create any obligation of Company
or of VERO II to, or any rights in, any person or entity not a party to this
Agreement.
- 32 -
<PAGE>
16.17. Communications. VERO II and Company agree that good communication
between the parties is essential to the successful performance of this
Agreement, and each pledges to communicate fully and clearly with the other on
matters relating to the successful operation of VERO II's practice at the
Practice Offices.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COMPANY:
SPECIALTY CARE NETWORK, INC.
By:________________________________________
Title:_____________________________________
VERO II:
VERO ORTHOPAEDICS II, P.A.
By:________________________________________
Title:_____________________________________
PHYSICIAN OWNERS:
____________________________________________
James L. Cain, M.D.
____________________________________________
David W. Griffin, M.D.
____________________________________________
George K. Nichols, M.D.
____________________________________________
Peter G. Wernicki, M.D.
____________________________________________
Charlene Wilson, M.D.
- 33 -
<PAGE>
EXHIBIT 3.1
LEASE AGREEMENT
3.1-1
<PAGE>
EXHIBIT 4.1
POLICY BOARD GOVERNANCE RULES
A. Number, Tenure and Qualifications. The Policy Board shall consist of
six (6) members. Company shall designate, in its sole discretion, three (3)
members of the Policy Board. VERO II shall designate, in VERO II's sole
discretion, three (3) members of the Policy Board. The initial Policy board
shall be chosen at the time of the closing of the Exchange. Thereafter, the
respective Policy Board Members shall be chosen at such time and in such manner
as shall be determined by the respective party making the appointment.
B. Duties and Responsibilities of the Policy Board. The Policy Board shall
have the duties and responsibilities more particularly described in Section 4.2
of this Agreement.
C. Regular Meetings of the Policy Board. Regular meetings of the Policy
Board shall be held on the first Monday of each calendar quarter at such times
and places as the Policy Board by resolution may determine and specify, and if
so determined no notice thereof need be given.
D. Special Meetings. Special meetings of the Policy Board may be held at
any time or place whenever called by written request of at least two (2) Policy
Board Members, notice thereof being given to each Policy Board Member by the
Policy Board Members calling the meeting, or they may be held at any time
without formal notice provided all of the Policy Board Members are present or
those not present shall at any time waive or have waived notice thereof.
E. Notice. Notice of any special meeting shall be given at least ten (10)
days previously thereto by written notice delivered personally, by telegram, or
facsimile. If mailed, such notice shall be mailed to each Policy Board Member at
his business address no less than ten (10) days previously thereto, and shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. If notice be given by facsimile, such notice shall be deemed to be
delivered when information of the transmission is received.
F. Meetings by any Form of Communication. The Policy Board shall have the
power to permit any and all Policy Board Members to participate in a regular or
special meeting by, or conduct the meeting through the use of any means of
communication by which all Policy Board Members participating may simultaneously
hear each other during the meeting. A Policy Board Member participating in a
meeting by this means is deemed to be present in person at the meeting.
G. Quorum. All of the members of the Policy Board as constituted from time
to time shall constitute a quorum for the transaction of business, but a lesser
number may adjourn any meeting and the meeting may be held as adjourned without
further notice. When a quorum is present at any meeting, a majority of the
members present thereat shall decide any question brought before such meeting,
except as otherwise provided by this Agreement or by these Governance Rules. The
fact that a Policy Board Member has an interest in a matter to be voted on at
the meeting shall not prevent his being counted for purposes of a quorum.
H. Vacancies. Any vacancy occurring in the Policy Board shall be filled by
the Party which chose such vacated Policy Board Member(s).
I. Removal. Any Policy Board Member may be removed without cause by the
Party which chose such Policy Board Member.
J. Committees. The majority of the Policy Board may appoint an executive
committee or such other committees as it may deem advisable, composed of one (1)
or more Policy Board Members, and may delegate authority to
4.1-1
<PAGE>
such committees as is not inconsistent with this Agreement. The members of such
committee shall serve at the pleasure of the Policy Board.
K. Presumption of Assent. A Policy Board Member who is present at a
meeting of the Policy Board at which action on any matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the secretaries of the Company and VERO II immediately after the adjournment
of the meeting. Such right to dissent shall not apply to a Policy Board Member
who voted in favor of such action.
L. Informal Action by Board Members. Any action required to be taken at a
meeting of the Policy Board, or any other action which may be taken at a meeting
of the Policy Board, may be taken without a meeting if all Policy Board Members
consent to taking such action without a meeting. If all Policy Board Members
consent to taking such action without a meeting, the affirmative vote of a
majority of the Policy Board Members is the act of the Policy Board. The action
must be evidenced by one or more written consents describing the action taken,
signed by each Policy Board Member, indicating each signing Policy Board
Member's vote or abstention on the action, and shall be included in the minutes
or filed with the Policy Board records reflecting the action taken.
4.1-2
<PAGE>
EXHIBIT 6.9.1
VERO II PLAN
6.9.1-1
<PAGE>
EXHIBIT 8.1.8(d)
EXCLUDED EXPENSES
Excluded Expenses include, but are not limited to the following items:
a. Accounting, legal and other professional fees attributed to VERO II
or to Physician Employees; provided, however, legal and accounting
expenses incurred in the ordinary course of VERO II's business,
approved by the Policy Board will be Clinic Expenses.
b. Contribution expenses, cash or non-cash, which include, but are not
limited to costs of sponsoring sports teams, political
contributions, unapproved marketing expenses, and contributions to
hospitals and staff.
c. Automobile expenses including payments, repairs and maintenance,
mileage, depreciation, etc.
d. Entertainment expenses of any kind.
e. Physician benefits including insurance (health, life (except to the
extent allowed under Section 8.1.3(f)), dental, disability (except
to the extent allowed under Section 8.1.3(f)), etc., but not
including malpractice insurance), vacation time, sick time, paid
leave of absence, contributions to and administration of physician
retirement plans (pension, 401(k), IRA, others), etc.
f. Employment tax expenses including Federal and State Unemployment
taxes, FICA taxes, Medicare taxes, etc.
g. Home office expenses including the acquisition costs, depreciation,
repairs and maintenance, and ongoing operating expenses of:
computers, software, copying machines, fax machines, telephones and
telephone lines, cellular telephones, etc.; and the costs of having
an office in one's home including allocated rent, utility and
depreciation expenses.
h. Meal expenses.
i. Medical supplies and drugs either used or distributed by a Physician
Employee without billing for such supplies and drugs at standard
rates.
j. Presentation expenses of any kind including professional services,
slide production, travel, meals, entertainment, etc.
k. Personal postage expenses.
l. Personal laundry expenses.
m. Personal assistant expenses (including the time staff spends on
personal errands for Physician Employees).
8.1.8.(d)-1
<PAGE>
EXHIBIT 8.3.6
ACCOUNTS RECEIVABLE COLLECTION
1.1 Collection of Accounts Receivable. VERO II agrees to cooperate with
Company in the collection of the Accounts Receivables sold by VERO II,
transferred pursuant to Section 8.3.
1.2 Definitions. In addition to the definitions contained in Article II of
the Agreement, for purposes of this Exhibit 8.3.6., the following terms shall be
applicable:
"Accounts" means, with respect to VERO II, all Accounts Receivable
including any and all rights to payment of money or other forms of
consideration of any kind (whether classified under the Uniform Commercial
Code as accounts, chattel paper, general intangibles, or otherwise) for
goods sold or leased or for services rendered by VERO II, including, but
not limited to, accounts receivable, proceeds of any letters of credit
naming VERO II as beneficiary, chattel paper, insurance proceeds, contract
rights, notes, drafts, instruments, documents, acceptances, and all other
debts, obligations and liabilities in whatever form from any other Person.
"Collecting Bank" means the main office of ______________________________
located at ___________________________________, or such other financial
institution agreed to by Company.
"Finance Charge Rate" means a rate of interest equal to the lesser of (i)
eighteen percent (18%) per annum or (ii) the maximum rate of interest
allowed by applicable law from time to time in effect.
"Governmental Lockbox Account" means an account established at the
Collecting Bank by VERO II into which all proceeds of VERO II's
Governmental Receivables are remitted.
"Lender" shall mean any lender to Company that has a security interest in
the Accounts from time to time.
"Lockbox Agreements" means that certain Lockbox Operating Procedural
Agreements -- Governmental Receivables to be entered into between the
Collecting Bank as to Governmental Receivables and that certain Lockbox
Operating Procedural Agreement -- Non-Governmental Receivables to be
entered between the Collecting Bank, Lender and VERO II as to Accounts
which are not Governmental Receivables, in a form acceptable to counsel
for Company.
"Main Account" means Company's operating account established and
maintained at the Collecting Bank.
"Non-Governmental Lockbox Account" means the account established by the
Company with the Collecting Bank into which all proceeds from VERO II's
Accounts under which a Third-Party Payor is the Account Debtor (other than
Governmental Receivables) are remitted.
"Non-Governmental Receivables" means the Accounts which are not
Governmental Receivables.
"Notification Letter" means a written notification from VERO II to
Third-Party Payors informing such Third-Party Payors that all proceeds due
under VERO II's Accounts are to be remitted to the Non-Governmental
Lockbox Account or the Governmental Lockbox Account, as the case may be,
substantially in a form acceptable to counsel for Company.
1.3 Collection of Governmental Receivables. With respect to payments on
Governmental Receivables, at the request and option of Company, VERO II agrees
that the following procedures shall apply:
8.3.6-1
<PAGE>
(a) VERO II shall enter into a Lockbox Agreement applicable to
Governmental Receivables in a form acceptable to counsel for Company and
reasonably acceptable to VERO II and establish a Governmental Lockbox Account.
Governmental Lockbox Account shall be an account in the name of VERO II. All
payments in respect of VERO II's Governmental Receivables are to be made
directly to such account. In the event Company exercises this option, VERO II
shall instruct each Account Debtor in respect of VERO II's Governmental
Receivables to remit all such payments directly to such Governmental Lockbox
Account pursuant to a Notification Letter. In addition, VERO II shall attach
written instructions to each invoice representing such Governmental Receivable
generated subsequent to the date of this Agreement instructing such Third-Party
Payor or Account Debtor that payment under such invoice is to be paid to the
Governmental Lockbox Account. VERO II agrees that it shall not deposit any funds
other than payments on Governmental Receivables into, nor make any withdrawals
from, the Governmental Lockbox Account without the prior written consent of
Company. VERO II further agrees that it shall not during the term of this
Agreement terminate, modify or amend in any manner the Lockbox Agreement
applicable to the Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to Governmental
Receivables, VERO II shall instruct the Collecting Bank to transfer
automatically all amounts deposited in Governmental Lockbox Account constituting
good funds to Company's Main Account. VERO II shall have no right or interest in
the Main Account. VERO II shall not, so long as any purchased Account remains
unpaid, change or cancel such automatic transfer order at any time, or, without
the prior written consent of Company, change either the identity of Governmental
Lockbox Account or the instructions to each Account Debtor on the related
Governmental Receivable to make its payments to such account. Any such action
shall be considered a breach of this Agreement for which Company shall be
entitled to all remedies at law and in equity, including obtaining an
injunction.
(c) VERO II will cooperate with Company and its agents in the
identification of sums deposited into Governmental Lockbox Account, which
cooperation shall continue until all purchased Accounts sold hereunder have been
collected.
(d) VERO II agrees to pay, on demand, a finance charge equal to the
Finance Charge Rate, on any payment on a Governmental Receivable received by
VERO II that is not deposited in Governmental Lockbox Account within forty-eight
(48) hours after receipt by VERO II.
1.4 Collection of Non-Governmental Receivables. With respect to payments
on Non-Governmental Receivables, if requested by Company and at Company's
option, VERO II agrees that the following procedures shall apply:
(a) Prior to the sale of any Non-Governmental Receivable hereunder,
Company, the Collecting Bank and Lender (if requested by Lender) shall enter
into a Lockbox Agreement applicable to Non-Governmental Receivables in a form
acceptable to counsel for Company and Company shall establish Non-Governmental
Lockbox Account. The NonGovernmental Lockbox Account shall be an account in the
name of Company. All payments in respect of VERO II's Non-Governmental
Receivables are to be made directly to such account. If Company exercises its
option herein, at request of Company, VERO II shall instruct each Account Debtor
in respect of VERO II's Non-Governmental Receivables to remit all such payments
directly to such Non-Governmental Lockbox Account pursuant to a Notification
Letter. In addition, VERO II shall attach written instructions to each invoice
representing such Non-Governmental Receivable generated subsequent to the date
of this Agreement instructing such Third-Party Payor or Account Debtor that
payment under such invoice is to be paid to the Non-Governmental Lockbox
Account. VERO II agrees that it shall not deposit any funds other than
Non-Governmental Receivables into, nor make any withdrawals from, the
Non-Governmental Lockbox Account without the prior written consent of Company.
VERO II further agrees that it shall not during the term of this Agreement
terminate, modify or amend in any manner the Lockbox Agreement applicable to the
Non-Governmental Lockbox Account.
(b) In accordance with the Lockbox Agreement pertaining to
Non-Governmental Receivables, Company shall instruct the Collecting Bank to
transfer automatically all amounts deposited in the Non-Governmental Lockbox
Account constituting good funds to Company's Main Account. VERO II shall have no
right or interest in the Non-Governmental Lockbox Account nor to the Main
Account and such accounts shall be in the name of and under the control of
Company. VERO II shall not, so long as any purchased Account remains unpaid, and
in any event, during the term of this Agreement, at any time, or, without the
prior written consent of Company, change the instructions to each Account Debtor
on the related
8.3.6-2
<PAGE>
Non-Governmental Receivable to make its payments to such account. Any such
action shall be considered a breach of this Agreement for which Company shall be
entitled to all remedies at law and in equity, including obtaining an
injunction.
(c) VERO II will cooperate with Company and its agents in the
identification of sums deposited into NonGovernmental Lockbox Account, which
cooperation shall continue until all purchased Accounts sold hereunder have been
collected.
(d) VERO II agrees to pay, on demand, a finance charge equal to the
Finance Charge Rate, on any Non-Governmental Receivable received by VERO II that
is not deposited in Non-Governmental Lockbox Account within forty-eight (48)
hours after receipt by VERO II.
1.5 Procedures Without Lockbox. In the event that Company elects to forego
the procedures established in Sections 1.3 and 1.4, VERO II shall instruct the
Collecting Bank to transfer automatically all amounts constituting good funds in
the account or accounts of VERO II established for the collection of
Governmental Receivables and Non-Governmental Receivables to Company's Main
Account at _____________ __________, ____________________________, Account
______________ (the "Main Account") pursuant to a standing order in a form
acceptable to Company's legal counsel. VERO II shall have no right or interest
in Company's Main Account and such account shall be in the name of and under the
control of Company. VERO II shall not, so long as any purchased account remains
unpaid, change or cancel such standing order at any time, or, without the prior
written consent of Company, change the instructions to each Account Debtor on
each Governmental Receivable and Non-Governmental Receivable to make its
payments to such account. Any such action shall be considered a breach of this
Agreement for which Company shall be entitled to all remedies at law and in
equity, including obtaining an injunction.
1.6 Misdirected Payments. (a) If after the date of this Agreement, an
Account Debtor shall make payment of a purchased Account to a location other
than is provided in the Notification Letter or VERO II otherwise receives
payments on Accounts that are purchased by Company under the terms of this
Agreement ("Misdirected Payments"), VERO II (at its own cost and expense) shall
promptly take all necessary steps to effect collection of such Misdirected
Payment from any other party claiming an interest therein or having possession
thereof and (i) hold such payment in trust for Company, (ii) segregate such
payment, (iii) use its best efforts not to commingle such payment with VERO II's
own funds or other assets, and (iv) deliver such payment no later than
forty-eight (48) hours from the day of receipt to the Governmental Lockbox
Account or the Non-Governmental Lockbox Account, as applicable.
(b) VERO II agrees to pay, on demand, the Finance Charge Rate on any
Misdirected Payment received by VERO II that is not deposited in the Company
Main Account within forty-eight (48) hours after receipt by VERO II.
8.3.6-3
<PAGE>
EXHIBIT 11
NON-COMPETITION
A. VERO II and each of the Physician Owners agree and covenant that,
during the term of this Agreement and for a period of thirty-six (36) months
after termination of this Agreement (other than a termination pursuant to
Section 11.3.1 through 11.3.4, inclusive, or Section 11.5, of the Service
Agreement). VERO II and/or the Physician Owner(s), as applicable, shall not,
either directly as a partner, employer, agent, independent contractor, employee
or indirectly through a corporation, partnership, affiliate, subsidiary or
otherwise:
(i) Subject to the provisions of paragraph G below, establish,
operate or provide professional medical services at any medical office,
clinic or other health care facility at any location within seventy-five
(75) miles of (i) the Main Office location; (ii) any of the Satellite
Offices; or (iii) any location at which Company provides services to any
practice at the time of such termination;
(ii) Subject to the provisions of paragraph G below, publicly
announce or offer (by any method) to provide professional medical services
at any medical office, clinic or other health care facility at any
location within seventy-five (75) miles during the first five (5) years of
the term of this Agreement or fifty (50) miles thereafter of (i) the Main
Office; (ii) any of the Satellite Offices; or (iii) any location at which
Company provides services to any practice at the time of such termination;
(iii) Solicit, induce or attempt to induce, in connection with any
business competitive with that being serviced by Company, patients of any
physician (including VERO II and/or the Physician Owner(s)) associated or
affiliated with Company to leave the care of physicians associated or
affiliated with Company; or
(iv) Solicit, induce or attempt to induce any employee, consultant
or other persons associated or affiliated with Company or any Affiliate of
Company to leave the employment of, or to discontinue their association
with, Company or such Affiliate of Company.
B. If VERO II and/or the Physician Owner(s) violate the covenants set
forth in paragraph A of this Exhibit 11, then the duration of the restrictions
contained in paragraph A shall be extended an additional month for each month
during which such violation occurred but was not discovered by Company,
beginning upon the date that Company learns of the violation and so notifies
VERO II and/or the Physician Owners in writing. In addition, breach of the
covenants set forth in paragraph A above may trigger certain rights of Company
to redeem a Physician Owner's Company common stock pursuant to the terms of
Article VIII of the Stockholders Agreement.
C. VERO II and/or the Physician Owner(s) acknowledge and agree that the
covenants contained in this Exhibit 11 are necessary to protect the business and
goodwill of Company and that a breach of these covenants will result in
irreparable harm and continuing damage to Company. As a result, VERO II and/or
the Physician Owner(s) agree that if VERO II and/or the Physician Owner(s)
breach or threaten to breach these covenants, Company shall be entitled to
specific performance and/or injunctive or other equitable relief in order to
prevent the continuation of such harm, as well as money damages. VERO II and/or
the Physician Owner(s) waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such equitable relief.
D. VERO II and the Physician Owner(s) acknowledge and agree that if VERO
II and/or the Physician Owner(s) breach the covenants contained in this Exhibit
11 and Company is unable for any reason to obtain a restraining order from a
court of competent jurisdiction within thirty (30) days after application to
enjoin the breach by VERO II and/or the Physician Owner(s), it will be difficult
to calculate the precise amount of Company's damages. As a result, the parties
have determined that, in the event of such a breach, Company's damages shall be
equal to 300% of the total amount of Professional Service Revenues attributable
to VERO II and/or the applicable Physician Owner(s) during the twelve (12)
months prior to the termination of the Agreement.
11-1
<PAGE>
E. The parties have attempted to limit the provisions of this Exhibit 11
only to the extent necessary to protect each party's interests. However, the
parties hereby agree that, in the event that any provision, section or
subsection of this Exhibit 11 is adjudged by any court of competent jurisdiction
to be void or unenforceable, in whole or part, such court shall modify and
enforce any such provision, section or subsection to the extent that it believes
to be reasonable under the circumstances.
F. In the event that the Service Agreement has been in effect for at least
five (5) years, a Physician Owner may buy-out the noncompetition restriction
applicable to him or her by paying to Company an amount equal to (A)(i) the
after tax amount (based upon the actual tax rate applied for any shares
previously sold and the long-term capital gains rate then in effect for any
shares held at the time of termination) of appreciation in value (from the date
of Merger to the date of sale of any common stock sold or the date of
termination of affiliation with Company for any common stock then held) of the
Company common stock (as of the date of termination) received by the applicable
Physician Owner at the time of the Merger, less (ii) the after tax amount (based
upon the terminating Physician Owner's effective federal income tax rate during
the years in which this Agreement was in effect) of the terminating Physician
Owner's pro rata share (based on the terminating Physician Owner's proportionate
share of all Professional Services Revenues collected by VERO II during the term
of the Agreement) of service fees paid to Company during the period of the
Service Agreement (but not less than zero), plus (B) one-third of the Fair
Market Value of the Company common stock and any cash consideration received by
the terminating Physician Owner at the time of the Merger (valued at the time of
the Merger); provided, however, in the event that at the time of termination, if
the Fair Market Value per share of the Company common stock is less than
one-third (1/3) of the value per share of the Company common stock at the time
of the Merger, then the maximum amount payable to Company to buy out the
noncompetition restriction shall equal the total Fair Market Value of the
Company common stock then held by the terminating Physician Owner plus one-third
(1/3) of the cash consideration (acquired in the Merger) plus the amount of any
gains realized by the terminating Physician Owner from the prior sale of Company
common stock. The terminating Physician Owner may pay the amount owed by
transferring to Company an amount of Company common stock having a Fair Market
Value equal to the amount owed or pay to Company cash in the amount owed (or a
combination of cash and common stock). The above references to Company common
stock (except for the immediately preceding sentence) shall not include any
Company common stock purchased for cash or acquired pursuant to the conversion
of the Company's convertible debentures.
G. Upon the termination of this Agreement, the Policy Board shall have the
authority to modify the terms of the restrictive covenants, including but not
limited to the mileage radius limitations set forth above in paragraph A. In the
event that the individuals representing VERO II or Company, as the case may be,
on the Policy Board can reasonably demonstrate that a modification to the
restrictive covenant will not have a material adverse effect on Company's or
VERO II's practice operations, earnings or cash flow, then the individuals
representing Company or VERO II, as the case may be, shall consent to the
proposed modification.
11-2
================================================================================
REVOLVING LOAN AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 1, 1996
AMONG
SPECIALTY CARE NETWORK, INC.,
SCN OF PRINCETON, INC.
AND
NATIONSBANK OF TENNESSEE, N.A.,
AND
NATIONSBANK OF TENNESSEE, N.A., AS AGENT
================================================================================
<PAGE>
SPECIALTY CARE NETWORK
REVOLVING LOAN AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 1, 1996
TABLE OF CONTENTS
Paragraph Number Page
- ---------------- ----
SECTION I. DEFINITIONS.................................................... 1
SECTION II. THE LOANS..................................................... 17
2.1 The Commitments................................................ 17
2.2 Use of Proceeds................................................ 18
2.3 Interest Rates and Payments of Interest........................ 19
2.4 Commitment Fee................................................. 21
2.5 Nonusage Fee................................................... 21
2.6 Reduction of Commitment........................................ 23
2.7 Alternate Rate of Interest..................................... 23
2.8 Change in Circumstances........................................ 23
2.9 Change in Legality............................................. 25
2.10 Payment to the Agent........................................... 26
SECTION III. CONDITIONS PRECEDENT......................................... 26
3.1 Documents Required for the Closing............................. 26
3.2 Documents Required for All Subsequent Disbursements............ 28
3.3 Information Required for Permitted Acquisition................. 29
3.4 Legal Matters.................................................. 29
SECTION IV. COLLATERAL SECURITY........................................... 29
4.1 Composition of the Collateral.................................. 29
4.2 Rights in Property Held by the Banks........................... 29
4.3 Rights in Property of the Borrower and Subsidiaries............ 30
4.4 Priority of Liens.............................................. 30
4.5 Financing Statements........................................... 30
4.6 Collection of Receivables...................................... 31
4.7 Mortgagees' Waivers............................................ 31
SECTION V. REPRESENTATIONS AND WARRANTIES................................. 32
5.1 Original....................................................... 32
<PAGE>
5.2 Survival....................................................... 35
SECTION VI. THE BORROWER'S COVENANTS...................................... 35
6.1 Affirmative Covenants.......................................... 35
6.2 Negative Covenants............................................. 41
SECTION VII. DEFAULT...................................................... 44
7.1 Events of Default.............................................. 44
7.2 Acceleration................................................... 46
7.3 Remedies....................................................... 46
SECTION VIII. THE AGENT.................................................. 47
8.1 Authorization.................................................. 47
8.2 Standard of Care............................................... 47
8.3 No Waiver of Rights............................................ 48
8.4 Payments....................................................... 48
8.5 Indemnification................................................ 48
8.6 Exculpation.................................................... 49
8.7 Credit Investigation........................................... 49
8.8 Resignation.................................................... 49
8.9 Proration of Payments.......................................... 50
8.10 No Liability For Errors........................................ 50
8.11 Offset......................................................... 50
SECTION IX. MISCELLANEOUS................................................. 51
9.1 Construction................................................... 51
9.2 Further Assurance.............................................. 51
9.3 Enforcement and Waiver by the Banks............................ 51
9.4 Expenses of the Banks.......................................... 51
9.5 Notices........................................................ 51
9.6 Waiver and Release............................................. 52
9.7 Indemnification................................................ 52
9.8 Participations and Assignments................................. 53
9.9 Applicable Laws................................................ 56
9.10 Binding Effect, Assignment and Entire Agreement................ 56
9.11 Severability................................................... 56
9.12 Counterparts................................................... 56
9.13 Arbitration.................................................... 56
<PAGE>
SCHEDULE OF EXHIBITS
EXHIBIT
- -------
A Form of Notes
B Existing Indebtedness and Liens
C Subordinated Indebtedness
D Real Property
E Form of Stock Pledge Agreement
F Form of Guaranty and Suretyship Agreement
G Form of Opinion Letter
H Corporate Matters
(States of Incorporation and Qualification; Stock Ownership)
I Addresses
J Stock Pledge Exhibit
K Litigation and Claims
L Compliance with Laws
M Material Leases, Contracts and Commitments
N Management
O Assignment and Acceptance
<PAGE>
REVOLVING LOAN AND SECURITY AGREEMENT
THIS REVOLVING LOAN AND SECURITY AGREEMENT is made as of the 1st day
of November, 1996, by and among Specialty Care Network (the "Borrower"); the
Guarantors, jointly and severally, as such term is defined herein; NationsBank
of Tennessee, N.A. (the "Banks"); and NationsBank of Tennessee, N.A. (the
"Agent"), individually and as Agent.
W I T N E S S E T H:
WHEREAS, Borrower has entered into various merger and exchange
agreements to acquire the assets of five (5) orthopaedic practices located in
Princeton, New Jersey; Philadelphia, Pennsylvania; Vero Beach, Florida;
Tallahassee, Florida; and Baltimore, Maryland; and
WHEREAS, pursuant to a Commitment Letter dated July 11, 1996,
NationsBank of Tennessee, N.A. committed to loan to Specialty Care Network the
sum of up to Twenty Million Dollars ($20,000,000.00) on a revolving basis to
fund the purchase price of the acquisitions and to provide working capital; and
WHEREAS, Bank, Borrower and Bank in its capacity as Agent desire to
provide more specifically for their obligations with respect to the revolving
loans;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and obligations herein contained, and each intending to be legally
bound hereby, the parties agree as follows:
SECTION I. DEFINITIONS
As used herein:
"Accounts", "Chattel Paper", "Contract Rights", "Documents",
"Equipment", "Fixtures", "General Intangibles", "Goods", "Instruments" and
"Inventory" shall have the same respective meanings as are given to those terms
in the UCC.
"Accounts Receivable" means all rights to payment for goods sold,
leased or otherwise marketed in the ordinary course of business or for services
rendered in the ordinary course of business, and all sums of money or other
proceeds due or to become due thereon pursuant to transactions with Persons,
except for that portion of the sum of money or other proceeds due or to become
due which relate to sales, use or property taxes levied in connection with such
transactions, recorded on books of account in accordance with generally accepted
accounting principles consistently applied.
<PAGE>
"Acquisition" means any transaction, or any series of related
transactions, by which any Person, in the transaction or as of the most recent
transactions in a series of transactions, directly or indirectly acquires any
going concern or all or a substantial part of the assets of any corporation,
partnership or other entity or any division of any such entity, or any such
entity or any division of such an entity becomes a Subsidiary of such Person.
"Acquisition EBITDA" means, with respect to a Practice acquired by a
Borrower or any Subsidiary and covered by a Service Agreement, (i) the pro forma
income to the Borrower and its Subsidiaries that would have arisen under the
applicable Service Agreement preceding the effective date of the acquisition,
determined based upon the actual financial performance of the acquired Practice
over the period for which a calculation of Consolidated Cash Flow is made,
without adjustment, (ii) less the pro forma amount of expenses (other than
interest, taxes, depreciation and amortization) that the Borrower and its
Subsidiaries would have incurred over the same period on account of the acquired
Practice (including, but not limited to, additional expense of administrative
personnel), in each case calculated as if the Practice had been acquired
effective as of the beginning of the relevant financial period.
"Acquisition Loan" means Loans made by the Banks pursuant to
Paragraph 2.1 to fund the cost of Acquisitions, Capital Expenditures, and the
development of focused musculoskeletal surgery centers as set forth in Paragraph
2.2.
"Acquisition Loan Commitment" means, as to any Bank, the obligation
of such Bank to make Acquisition Loans to the Borrower in an amount not to
exceed that set forth in Paragraph 2.1.
"Acquisition Loan Termination Date" means November 1, 1998, unless
extended in writing by the Banks in their sole discretion.
"Adjusted Consolidated Cash Flow" means, for any period of
determination, Consolidated Cash Flow plus Rental Expenses less the sum of
non-expensed loan advances made to physicians and the greater of Internally
Financed Capital Expenditures or those non-financed Capital Expenditures
budgeted for such period as reflected in Borrower's budget delivered to the
Banks pursuant to Paragraph 6.1(B)(4) hereof.
"Affiliates" means as to any Person (A) any Person which, directly,
or indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with such Person, or (B) any Person who is a director or
executive officer (i) of such Person, (ii) of any Subsidiary of such Person or
(iii) of any Person described in clause (A) above. For purposes of this
definition, "control" of a Person shall mean the power, direct or indirect, (i)
to vote or direct the voting of more than five percent (5%) of the outstanding
shares of voting stock of such Person, or (ii) to direct or cause the direction
of the management and policies of such Person whether by contract or otherwise.
In no event shall any of the Banks be deemed to be Affiliates of the Borrower.
2
<PAGE>
"Agent" means NationsBank of Tennessee, N.A. in its capacity as
agent for the Banks pursuant to Section VIII hereof, and not in its individual
capacity as a Bank, and any successor Agent appointed pursuant to Section VIII.
"Agreement" means this Revolving Loan and Security Agreement, as it
may be amended, restated, renewed or extended from time to time.
"Applicable LIBO Rate Margin" means three percent (3%) per annum
with respect to Acquisition Loans and two and three quarters percent (2.75%)
with respect to Working Capital Loans; provided however, that during any fiscal
quarter of the Borrower where the Borrower shall have satisfied the Funded Debt
to Consolidated Cash Flow ratio test indicated in the table below, then the
Applicable LIBO Rate Margin for the Effective Period (as defined below) shall be
the percentage rate per annum set forth opposite the appropriate test in the
table below:
- --------------------------------------------------------------------------------
Funded Debt to Applicable LIBO Rate Applicable LIBO Rate
Consolidated Cash Flow Margin for Acquisition Margin for Working Capital
Ratio Loans Loans
- --------------------------------------------------------------------------------
Greater than 3.0 3.00% per annum 2.75% per annum
- --------------------------------------------------------------------------------
Greater than 2.50 and less 2.25% per annum 2.75% per annum
than or equal to 3.00
- --------------------------------------------------------------------------------
Greater than 2.00 and less 2.00% per annum 2.00% per annum
than or equal to 2.50
- --------------------------------------------------------------------------------
Greater than 1.50 and less 2.00% per annum 1.75% per annum
than or equal to 2.00
- --------------------------------------------------------------------------------
Greater than 1.00 and less 1.75% per annum 1.75% per annum
than or equal to 1.50
- --------------------------------------------------------------------------------
Less than or equal to 1.00 1.75% per annum 1.50% per annum
- --------------------------------------------------------------------------------
The Funded Debt to Consolidated Cash Flow ratio shall be computed in the same
manner as set forth in 6.1(F)(1), and the Applicable LIBO Rate Margin shall be
confirmed by the Agent on the basis of quarter-annual consolidated financial
statements of the Borrower delivered to the Banks pursuant to Paragraph
6.1(B)(1). The "Effective Period" shall be the period commencing on the first
business day of the first month following delivery to the Agent of the quarterly
financial statements of the Borrower pursuant to Paragraph 6.1(B)(1), which
financial statements indicate that the applicable test set forth above has been
satisfied for the preceding fiscal quarter, and ending on the date that is three
months after such commencement date. At the end of any Effective Period, the
Applicable LIBO Rate Margin shall automatically become three percent (3%) per
annum with respect to all Acquisition Loans and two and three-quarters percent
(2.75%) per annum with respect to all Working Capital Loans unless at or prior
to such time
3
<PAGE>
the next Effective Period shall have commenced. Notwithstanding the foregoing,
following the completion of a Successful IPO, in addition to the reduction based
upon Funded Debt to Consolidated Cash Flow test, the Applicable LIBO Rate
Margins shall be permanently reduced in each case by one quarter of one percent
(0.25%) per annum commencing as of the date on which Borrower receives the cash
proceeds from the Successful IPO.
"Applicable Prime Rate Margin" means one and one-quarter percent
(1.25%) per annum with respect to all Acquisition Loans and one percent (1%) per
annum with respect to all Working Capital Loans; provided however, that during
any fiscal quarter of the Borrower where the Borrower shall have satisfied the
Funded Debt to Consolidated Cash Flow ratio test indicated in the table below,
the Applicable Prime Rate Margin for the Effective Period (as defined below)
shall be the percentage rate per annum set forth opposite the appropriate test
in the table below:
- --------------------------------------------------------------------------------
Funded Debt to Applicable Prime Rate Applicable Prime Rate
Consolidated Cash Flow Margin for Acquisition Margin for Working Capital
Ratio Loans Loans
- --------------------------------------------------------------------------------
Greater than 3.0 1.25% per annum 1.00% per annum
- --------------------------------------------------------------------------------
Greater than 2.50 and less 0.75% per annum 1.00% per annum
than or equal to 3.00
- --------------------------------------------------------------------------------
Greater than 2.00 and less 0.25% per annum 0.50% per annum
than or equal to 2.50
- --------------------------------------------------------------------------------
Greater than 1.50 and less 0.25% per annum 0.00% per annum
than or equal to 2.00
- --------------------------------------------------------------------------------
Greater than 1.00 and less 0.00% per annum 0.00% per annum
than or equal to 1.50
- --------------------------------------------------------------------------------
Less than or equal to 1.00 0.00% per annum 0.00% per annum
- --------------------------------------------------------------------------------
The Funded Debt to Consolidated Cash Flow ratio shall be computed in the same
manner as set forth in 6.1(F)(1), and the Applicable Prime Rate Margin shall be
confirmed by the Agent on the basis of the quarter-annual consolidated financial
statements of the Borrower delivered to the Banks pursuant to Paragraph
6.1(B)(1). The "Effective Period" shall be the period commencing on the first
business day of the first month following delivery to the Agent of the quarterly
financial statements of the Borrower pursuant to Paragraph 6.1(B)(1), which
financial statements indicate that the applicable test set forth above has been
satisfied for the preceding fiscal quarter, and ending on the date that is three
months after such commencement date. At the end of any Effective Period, the
Applicable Prime Rate Margin shall automatically become one and one-quarter
percent (1.25%) per annum with respect to all Acquisition Loans and one percent
(1%) per annum with respect to all Working Capital Loans unless at or prior to
such time the next Effective Period shall have commenced. Notwithstanding the
foregoing, following the
4
<PAGE>
completion of a Successful IPO, in addition to the reductions based upon Funded
Debt to Consolidated Cash Flow test, the Applicable Prime Rate Margins shall be
permanently reduced in each case by one quarter of one percent (0.25%) per annum
commencing as of the date on which Borrower receives the cash proceeds from the
Successful IPO.
"Assignment and Acceptance" means an Assignment and Acceptance
substantially in the form of Exhibit O.
"Bank" means initially NationsBank of Tennessee, N.A. and thereafter
each Bank listed on a signature page of or to this Agreement, and "Banks" means
all of such Banks collectively.
"Borrowing Base" means that amount which is equal to two times
(2.0x) Consolidated Cash Flow as calculated for the Borrower and its
Subsidiaries over the most recent Borrowing Base Reference Period. Following a
Successful IPO, the figure of "two times (2.0x)" shall be deleted and replaced
with the figure of "three times (3.0x)" for purposes of computing the Borrowing
Base.
"Borrowing Base Adjustment Date" means that date following each
Borrowing Base Reference Period which occurs on the earlier of: (A) the date on
which the Banks actually receive the Borrowing Base calculations from the
Borrower as required by Subparagraph 6.1(B)(4) hereof, or (B) forty-five (45)
days after the last day of the previous Borrowing Base Reference Period.
"Borrowing Base Reference Period" means, for any period of
determination, the period of four (4) consecutive quarter-annual fiscal periods
of the Borrower and/or its Subsidiaries (i.e., rolling four quarters) ending on
the last day of the immediately preceding quarter-annual fiscal period. The
first Borrowing Base Reference Period occurring after the date of this Agreement
shall be measured from January 1, 1996 through December 31, 1996 and shall
incorporate the 1996 Acquisition EBITDA of the acquired Practices.
"Business Day" means any day on which the state banks and national
banking associations in Nashville, Tennessee are open for the conduct of
ordinary business; provided however, that when used in connection with
determining the LIBO Rate, the term "Business Day" shall also exclude any day on
which banks are not open for dealings in U.S. Dollar deposits in the London
Interbank Market.
"Capital Expenditures" means all amounts paid by the Borrower and
its Subsidiaries in connection with the purchase of property, plant, machinery,
equipment or other similar expenditures (including capital leases of any of the
foregoing) which would be required to be capitalized and shown on the
consolidated balance sheet of Borrower and its Subsidiaries in accordance with
generally accepted accounting principles consistently applied.
"Closing" means the valid execution and delivery of the Notes and
Collateral Documents to the Agent, or as the Banks otherwise direct.
5
<PAGE>
"Collateral" has the meaning set forth in Paragraph 4.1.
"Collateral Documents" means the documents specified in Paragraphs
3.1 (B) through (D).
"Commitment Percentage" means each Bank's respective percentage of
the Total Commitments as set forth in Paragraph 2.1 hereof.
"Consolidated Assets" means, as to the Borrower and its
Subsidiaries, all assets as shown on a consolidated balance sheet of the
Borrower and its Subsidiaries.
"Consolidated Capital" means, as to the Borrower and its
Subsidiaries, all Funded Debt plus Stockholders' Equity as shown on a
consolidated balance sheet of the Borrower and its Subsidiaries.
"Consolidated Cash Flow" means, as to the Borrower and its
Subsidiaries, the aggregate of: (A) Consolidated Earnings Before Interest and
Taxes, (B) amortization of intangible assets; and (C) depreciation; all as shown
by the consolidated statement of operations of the Borrower and its
Subsidiaries, calculated in accordance with generally accepted accounting
principles consistently applied. The positive Acquisition EBITDA of acquired
Practices shall also be included in Consolidated Cash Flow, but only if Agent is
satisfied, in its reasonable discretion, as to the accuracy and reliability of
the financial information related thereto. In assessing the accuracy and
reliability of such financial information, (i) unqualified audited financial
statements prepared by a regional or national accounting firm shall be
acceptable, and (ii) financial statements reviewed (but not audited) by such a
firm shall also be acceptable unless Agent in good faith determines that
reviewed statements for a particular enterprise are subject to material doubt as
to their accuracy. The negative Acquisition EBITDA for any Practice shall be
included in Consolidated Cash Flow, based upon the best information available.
Notwithstanding any other provision hereof, the Acquisition EBITDA attributed to
Non-Corporate Unperfected Subsidiaries shall not be included in Consolidated
Cash Flow if Non-Corporate Unperfected Subsidiaries would account for more than
ten percent (10%) of total Consolidated Cash Flow.
"Consolidated Current Assets" means, at any time, all assets that,
in accordance with generally accepted accounting principles consistently
applied, are classified as current assets on a consolidated balance sheet of the
Borrower and its Subsidiaries.
"Consolidated Current Liabilities" means, at any time, all
liabilities that, in accordance with generally accepted accounting principles
consistently applied, are classified as current liabilities on a consolidated
balance sheet of the Borrower and its Subsidiaries, plus, to the extent not
previously taken into account as a current liability, the then outstanding
amount of Working Capital advances hereunder regardless of their maturity date.
"Consolidated Earnings Before Interest and Taxes" means, for any
period of determination, the consolidated net earnings (or net loss) of Borrower
and its Subsidiaries
6
<PAGE>
exclusive of all write-ups, gains from sales of assets, or other extraordinary
or nonrecurring gains whether of a cash or noncash nature, but after all
expenses and other proper charges other than Interest Expense and taxes,
determined for any period in accordance with generally accepted accounting
principles consistently applied.
"Consolidated Fixed Assets" means, at any time, all tangible, fixed
assets which are, in accordance with generally accepted accounting principles
consistently applied, classified as property, plant and equipment on a
consolidated balance sheet of the Borrower and its Subsidiaries.
"Consolidated Liabilities" means all Indebtedness that, in
accordance with generally accepted accounting principles consistently applied,
which are classified as liabilities on a consolidated balance sheet of the
Borrower and its Subsidiaries.
"Consolidated Net Income" means, for any particular fiscal period,
the net earnings (or net loss) of the Borrower and its Subsidiaries on a
consolidated basis, determined in accordance with generally accepted accounting
principles consistently applied, excluding however (A) any gains resulting from
the sale or write-up of assets, and (B) any other extraordinary or non-recurring
non-cash gains or losses.
"Debt Service" means for any given period, the sum of the payments
made by the Borrower and its Subsidiaries of (A) Interest Expense, (B) Rental
Expense, and (C) any mandatory repayments of principal on any Consolidated
Liabilities, plus (D) one-seventh (1/7th) of the amount then outstanding under
the Acquisition Loan.
"Eligible Assignee" means (A) a commercial bank organized under the
laws of the United States, or any State thereof, and having a combined capital
and surplus of at least $300,000,000.00; (B) a commercial bank organized under
the laws of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $300,000,000.00,
provided that such bank is acting through a branch or agency located in the
United States; (C) any Bank and any Affiliate of a Bank or Lender; (D) any
Federal Reserve Bank; and (E) any other Person consented to by the Agent.
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) and the Superfund Amendments and
Reauthorization Act (SARA); the Resource Conservation and Recovery Act (RCRA);
the Emergency Planning and Community Right to Know Act; the Clean Water Act
(Federal Water Pollution Control Act); the Safe Drinking Water Act; the Clean
Air Act; the Surface Mining Control and Reclamation Act; the Coastal Zone
Management Act; the Noise Control Act; the Occupational Safety and Health Act;
the Toxic Substances Control Act (TSCA); the Federal Insecticide, Fungicide and
Rodenticide Act (FIFRA); any so-called "Superfund" or "Superlien" law; or any
other federal, state or local statute, law, ordinance, code, rule, regulation,
order, decree or other requirements of any governmental body regulating,
relating to or imposing
7
<PAGE>
liability or standards of conduct concerning any Hazardous Materials or toxic or
dangerous chemical, waste, substance or material.
"Eurodollar Liabilities" has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"Eurodollar Loan" means any Loan which bears interest based on the
LIBO Rate.
"Eurodollar Rate Reserve Percentage" means the reserve percentage
applicable during any Eurodollar Loan Interest Period (or if more than one such
percentage shall be so applicable, the daily average of such percentages for
those days in such Interest Period during which any such percentage shall be so
applicable) under regulations issued from time to time by the Board of Governors
of the Federal Reserve System (or any successor) for determining the maximum
reserve requirement (including, without limitation, any emergency, supplemental
or other marginal reserve requirement) for Banks with respect to liabilities or
assets consisting of or including Eurodollar Liabilities having a term equal to
such Interest Period.
"Event of Default" has the meaning set forth in Paragraph 7.1.
"Financial Statements" means the year-end audited financial
statements of Vero Orthopaedics, P.A., Princeton Orthopaedic Associates II,
P.A., and Reconstructive Orthopaedic Associates, II, P.A., plus the unaudited
compilation of Tallahassee Orthopaedic Clinic II, P.A., and the Greater
Chesapeake Associates, L.L.C. for the period ending December 31, 1995.
"Financing Statements" means any one or more filings made pursuant
to the UCC to perfect the security interests in the Collateral granted to Banks
pursuant to Section IV hereof.
"Floating Rate Loan" means any Loan which bears interest based on
the Prime Rate.
"Fraud and Abuse Laws" means Section 1128B(b) of the Social Security
Act, 42 U.S.C. Section 1320a-7b(b) and Section 1877 of the Social Security Act,
42 U.S.C. Section 1877, as from time to time amended; any successor statute(s)
thereto; all rules and regulations promulgated thereunder; and any other Law
relating to the ownership of medical facilities by providers of medical services
or the referral of patients to medical facilities owned by providers of medical
services.
"Funded Debt" means at any date, with respect to the Borrower and
its Subsidiaries, all of the following obligations (without duplication) of
Borrower and its Subsidiaries as of such date: (i) all obligations for borrowed
money, (ii) all obligations evidenced by bonds, debentures, notes or other
similar instruments, (iii) all obligations to pay the deferred purchase price of
property, except trade accounts payable arising in the ordinary course of
business, (iv) all obligations as lessee under capitalized leases, (v) all
obligations to
8
<PAGE>
purchase securities or other property which arise out of or in connection with
the sale of the same or substantially similar securities or property, (vi) all
non-contingent obligations to reimburse any bank or other person in respect of
amounts paid under a letter of credit or similar instrument, (vii) all debt of
others secured by a lien on any asset of Borrower and its Subsidiaries, whether
or not such debt is assumed, and (viii) all debt of others guaranteed by
Borrower and/or its Subsidiaries.
"Government Authority" means any governmental or quasi-governmental
entity, court or tribunal including, without limitation, any department,
commission, board, bureau, agency, administration, service or other
instrumentality of any foreign or domestic governmental entity.
"Guarantor" individually means any one of the following
corporations, each of which is also a Subsidiary for the purposes of this
Agreement, and "Guarantors" means all such corporations jointly and severally:
(A) SCN of Princeton, Inc., a New Jersey corporation.
"Hazardous Materials" means any hazardous, toxic or dangerous
chemical, substance, waste or material defined as such in any of the
Environmental Laws.
"Indebtedness" means, as to the Borrower or any Subsidiary, all
items of indebtedness, obligation or liability, whether matured or unmatured,
liquidated or unliquidated, direct or contingent, joint or several, including
without limitation:
(A) All indebtedness guaranteed, directly or indirectly, in
any manner, or endorsed (other than for collection or deposit in the ordinary
course of business) or discounted with recourse;
(B) All indebtedness in effect guaranteed, directly or
indirectly, through agreements, contingent or otherwise: (1) to purchase such
indebtedness; or (2) to purchase, sell or lease (as lessee or lessor) property,
products, materials or supplies or to purchase or sell services, primarily for
the purpose of enabling the debtor to make payment of such indebtedness or to
assure the owner of the indebtedness against loss; or (3) to supply funds to or
in any other manner invest in the debtor;
(C) All indebtedness secured by (or for which the holder of
such indebtedness has a right, contingent or otherwise, to be secured by) any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance upon property owned or acquired subject thereto, whether or not the
liabilities secured thereby have been assumed; and
(D) All indebtedness incurred as the lessee of facilities,
goods or services under leases that, in accordance with generally accepted
accounting principles consistently applied, should not be reflected on the
Borrower's or any Subsidiary's balance sheet.
9
<PAGE>
"Interest Expense" means, with respect to the Borrower and its
Subsidiaries for any period, the gross interest expenses of the Borrower and its
Subsidiaries for such period determined in accordance with generally accepted
accounting principles consistently applied as shown on its income statement.
"Interest Payment Date" shall mean, as to any Loan, the last day of
the Interest Period applicable to such Loan and, in addition, in the case of a
Eurodollar Loan with an Interest Period of six (6) months' duration, the day
that would have been an Interest Payment Date for such Loan if such Loan had an
Interest Period of three (3) months.
"Interest Period" shall mean: (a) as to any Eurodollar Loan, the
period commencing on the date of such Eurodollar Loan and ending on the
numerically corresponding day (or, if there is no numerically corresponding day,
on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter,
as the Borrower may elect, and (b) as to any Floating Rate Loan, the period
commencing on the date of such Loan and ending on the first (1st) day of the
next calendar month, and (ii) the applicable Loan Termination Date; provided,
however, that (x) if any Interest Period would end on a day that shall not be a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless, with respect to Eurodollar Loans only, such next succeeding
Business Day would fall in the next calendar month, in which case such Interest
Period shall end on the next preceding Business Day and (y) no Interest Period
with respect to any Loan shall end later than the respective Loan Termination
Date. Interest shall accrue from and including the first day of an Interest
Period to but excluding the last day of such Interest Period.
"Interest Rate Contracts" means interest rate swap agreements,
interest rate cap agreements, interest rate collar agreements, interest rate
insurance and other agreements or arrangements designed to provide protection
against fluctuations in interest rates.
"Internally Financed Capital Expenditures" means Capital
Expenditures financed by Borrower and its Subsidiaries from existing cash or
Consolidated Cash Flow and not from purchase money financing or other debt
incurred and not prohibited by Paragraph 6.2(E).
"IPO" means a public offering by Borrower pursuant to a filed
registration statement of any series of common stock of Borrower under the
Securities Act of 1933, as amended.
"Laws" means all ordinances, statutes, rules, regulations, orders,
injunctions, writs or decrees of any government or political subdivision or
agency thereof, or any court or similar entity established by any thereof.
"LIBO Rate" means, for any Eurodollar Loan for any Interest Period
therefore, the rate per annum appearing on Telerate Page 3750 (or any successor
page) as the London interbank offered rate for deposits in Dollars at
approximately 11:00 a.m. (London time) two Business Days prior to the first day
of such Interest Period for a term comparable to such
10
<PAGE>
Interest Period. If for any reason such rate is not available, the term "LIBO
Rate" shall mean, for any Eurodollar Loan for any Interest Period therefor, the
rate per annum appearing on Reuters Screen LIBO Page as the London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period; provided, however, if more than one rate is
specified on Reuters Screen LIBO Page, the applicable rate shall be the
arithmetic mean of all such rates.
"Loan" means any funds which any Bank has advanced or will advance
to the Borrower on a revolving basis pursuant to this Agreement, and "Loans"
means all such advances by all Banks.
"Loan Documents" means this Agreement, the Notes, and the Collateral
Documents, or any other document executed or delivered by or on behalf of the
Borrower or any Subsidiary evidencing or securing the Obligations.
"Majority Banks" means those Banks having sixty-six and two-thirds
(66 2/3%) percent or more of the aggregate unpaid principal amount of the
Obligations owing to the Banks, or, if no such principal amount is then
outstanding, Banks having at least sixty-six and two-thirds (66 2/3%) percent of
the Commitments.
"Material Adverse Change" means a material adverse change in the
business or conditions (financial or otherwise) or in the results of operations
of the Borrower and its Subsidiaries (unless otherwise indicated), taken as a
whole as reasonably determined by the Majority Banks.
"Material Adverse Effect" means, when referring to the taking of an
action or the omission to take an action, that such action, if taken, or
omission, would have a material adverse effect on the business, condition
(financial or otherwise) or results of operations of the Borrower and its
Subsidiaries (unless otherwise indicated), taken as a whole as reasonably
determined by the Majority Banks.
"Non-Corporate Subsidiary" means a Subsidiary that is other than a
corporation.
"Non-Corporate Unperfected Subsidiary" means a Non-Corporate
Subsidiary, Borrower's interest in which is not subject to a perfected security
interest to secure the Obligations.
"Note" means a promissory note substantially in the form of Exhibit
A attached hereto, duly executed and delivered to the Agent by Borrower and
payable to the order of each of the Banks in the amount of its Commitment,
including any amendment, modification, renewal, extension, or replacement
thereof, and "Notes" means the Notes payable to each of the Banks collectively.
11
<PAGE>
"Obligations" means the obligation of the Borrower:
(A) To pay the principal of and interest on the Notes in
accordance with the terms thereof and to satisfy all of its other liabilities to
the Banks hereunder, whether now existing or hereafter incurred, matured or
unmatured, direct or contingent, joint or several, including any extensions,
modifications, and renewals thereof and substitutions therefor;
(B) To repay to the Banks all amounts advanced by the Banks
hereunder on behalf of the Borrower, including, but without limitation, advances
for overdrafts, principal or interest payments to prior secured parties,
mortgagees, or lienors, or for taxes, levies, insurance, rent, repairs to or
maintenance or storage of any of the Collateral; and
(C) To reimburse the Banks, on demand, for all of the Agent's
reasonable out-of-pocket expenses and costs, including the reasonable fees and
expenses of its counsel, in connection with the preparation, amendment,
modification, or enforcement of this Agreement and the documents required
hereunder, including, without limitation, any proceeding brought or threatened
to enforce payment of any of the obligations referred to in the foregoing
paragraphs (A) and (B), or any suits or claims against any Bank whatsoever as a
result of such Bank's execution of this Agreement and making of its Loan;
provided, the expenses and attorneys' fees of all Banks shall be reimbursed in
connection with the enforcement of this Agreement and the other Loan Documents.
"Permitted Acquisition" means any business, enterprise or operation
of any Person unrelated to or unaffiliated with the Borrower which is the
subject of an acquisition permitted under Paragraph 6.2(M).
"Permitted Acquisition Indebtedness" means purchase money
indebtedness incurred by the Borrower or any Subsidiary in connection with the
purchase of a Permitted Acquisition approved by the Banks pursuant to Paragraphs
3.3 and 6.2(M) that:
(A) Is in a principal amount not more than sixty percent (60%)
of the Permitted Acquisition Price;
(B) Is unsecured;
(C) Has a maturity of not less than two (2) years; and
(D) Is not cross-defaulted with and is not more restrictive in
its terms and conditions than the Obligations secured hereby, in the judgment of
the Banks.
In addition, it shall include such other purchase money indebtedness as has
otherwise been approved by the Banks pursuant to Paragraph 3.3 or not prohibited
by Paragraph 6.2E(8).
12
<PAGE>
"Permitted Acquisition Price" means the aggregate purchase price of
any Permitted Acquisition, including notes, assumed debt, amounts allocated to
non-compete agreements and the minimum amounts reasonably expected to be paid
under any earn-out agreements.
"Permitted Investments" means all expenditures made and all
liabilities incurred (contingent or otherwise) by any Borrower or any Subsidiary
for:
(A) obligations issued or guaranteed as to principal and
interest by the United States of America and having a maturity of not more than
twelve (12) months from the date of purchase;
(B) certificates of deposit, issued by banks organized under
the laws of the United States of America or any State thereof and foreign
subsidiaries of such bank, having a rating of not less than A or its equivalent
by Standard & Poor's Corporation, or its successor;
(C) commercial paper or finance company paper which is rated
not less than prime-one or A-1 or their equivalents by Moody's Investor
Services, Inc. or Standard & Poor's Corporation or their successors;
(D) repurchase agreements related to an investment of the type
described in Clause (A) above, provided that the counter-party thereto is a
government securities dealer designated by the Federal Reserve Bank of New York
as a "Reporting Dealer" and whose financial statements indicate that it has a
capital of at least $50,000,000.00 and that the investment which is the subject
of such repurchase agreement shall be at all times during the term of the
repurchase agreement in the possession of the Borrower (or the Agent) or the
interest of such Borrower therein shall be appropriately recorded in accordance
with the United States Federal Regulations regarding Book Entry Treasury
Securities; and
(E) Permitted Acquisitions.
"Permitted Liens" means:
(A) Liens for taxes, assessments, or similar charges, incurred
in the ordinary course of business that are not yet due and payable;
(B) Pledges or deposits made in the ordinary course of
business to secure payment of workmen's compensation, or to participate in any
fund in connection with workmen's compensation, unemployment insurance, old-age
pensions or other social security programs;
(C) Liens of mechanics, materialmen, warehousemen, carriers,
or other like liens, securing obligations incurred in the ordinary course of
business that are not yet due and payable;
13
<PAGE>
(D) Good faith pledges or deposits made in the ordinary course
of business to secure performance of bids, tenders, contracts (other than for
the repayment of borrowed money) or leases, not in excess of ten percent (10%)
of the aggregate amount due thereunder, or to secure statutory obligations, or
surety, appeal, indemnity, performance or other similar bonds required in the
ordinary course of business;
(E) Encumbrances consisting of zoning restrictions, easements
or other restrictions on the use of real property, none of which materially
impairs the use of such property by the Borrower or any Subsidiary in the
operations of its business, and none of which is violated in any material
respect by existing or proposed structures or land use;
(F) Liens in favor of the Agent for the benefit of the Banks;
(G) Existing liens set forth or described on Exhibit B,
attached hereto and made a part hereof, and renewals thereof;
(H) Liens of equipment notes and capitalized leases granted to
secure not more than the amount of the purchase price financed thereby;
provided, that in the case of an Acquisition or assumption the Acquisition or
assumption is either permitted by Paragraph 6.2(M) or not otherwise prohibited
herein;
(I) Landlord's liens on Fixtures retained in any lease;
(J) The following, if the validity or amount thereof is being
contested in good faith by appropriate and lawful proceedings, so long as levy
and execution thereon have been stayed and continue to be stayed; if Borrower or
any Subsidiary has posted such security as may be required by Laws or as is
reasonably satisfactory to Banks; and if the following do not, in the aggregate,
materially detract from the value of the properties of the Borrower or any
Subsidiary taken as a whole, or materially impair the use thereof in the
operation of their respective businesses:
(1) Claims or liens for taxes, assessments or charges
due and payable and subject to interest or penalty;
(2) Claims, liens and encumbrances upon, and defects of
title to, real or personal property, including any attachment of personal or
real property or other legal process prior to adjudication of a dispute on the
merits;
(3) Claims or liens of mechanics, materialmen,
warehousemen, carriers, or other like liens; and
(4) Adverse judgments on appeal.
14
<PAGE>
"Person" means any individual, corporation, partnership, limited
liability company, association, joint-stock company, estate, trust,
unincorporated organization, joint venture, court or government or political
subdivision or agency thereof.
"Pledged Stock" means the stock and other interests pledged pursuant
to the Stock Pledge Agreement described in Paragraph 3.1.
"Pledgors" means the owners of the Pledged Stock as set forth in the
Stock Pledge Agreement(s).
"Practice" means a musculoskeletal treatment center or a
musculoskeletal or orthopedic medical practice. Whenever in this Agreement
"Practice" is used in describing an Acquisition by the Borrower or any
Subsidiary, and if the reference relates to a medical practice, such reference
is to the Acquisition of the assets used in the operation of the Practice that
can lawfully be acquired by Borrower or any Subsidiary or to the Acquisition of
an interest in an entity that owns, as of the time of purchase, only those
assets that can be lawfully acquired by Borrower or any Subsidiary.
"Prime Rate" means that rate announced by NationsBank of Tennessee,
N.A. from time to time as the NationsBank Prime Rate. No representation is made
herein that the NationsBank Prime Rate is the lowest rate at which any bank will
lend to its customers.
"Provider" means an orthopedic doctor or other musculoskeletal
doctor whose specialty is complementary to the practice of orthopedics and who
performs professional services respecting a Practice that is either managed by
Borrower or any Subsidiary or the assets of which are owned by Borrower or any
Subsidiary.
"Quarterly Dates" means the first day of each January, April, July,
or October, the first of which shall be the first such day after November 1,
1996.
"Quarterly Period" means (a) the Period from the date of Closing to
the next succeeding Quarterly Date and (b) thereafter, any period from the first
day after a Quarterly Date to the next succeeding Quarterly Date.
"Real Property" means those leases and other interests in real
estate described in Exhibit D hereto.
"Records" means correspondence, memoranda, tapes, books, discs,
paper, magnetic storage and other documents or information of any type, whether
expressed in ordinary or machine language.
"Rental Expense" means, with respect to the Borrower and its
Subsidiaries for any period, the gross rental expenses that are paid by the
Borrower and its Subsidiaries for such period determined in accordance with
generally accepted accounting principles consistently applied.
15
<PAGE>
"Same Clinic Revenue and Income Report" means a report produced by
the Borrower for all musculoskeletal centers/clinics owned and/or operated
directly or indirectly by Borrower, showing consolidated pre-tax revenues and
income generated by each of them for the immediately preceding fiscal quarter
together with Borrower's service fees.
"Seller" means the former owner of a Practice that is acquired by
the Borrower or any Subsidiary.
"Service Agreement" means one of those service or management
agreements now or hereafter entered into between a Provider or Providers and the
Borrower or any Subsidiary in connection with the management of an orthopedic or
musculoskeletal practice.
"Shareholders' Equity" means, at any time, the sum of the following
accounts set forth in a consolidated balance sheet of the Borrower and its
Subsidiaries, prepared in accordance with generally accepted accounting
principles consistently applied: (A) the par or stated value of all outstanding
capital stock; (B) capital surplus; and (C) retained earnings.
"Subordinated Indebtedness" means all Indebtedness incurred at any
time by the Borrower or any Subsidiary, the repayment of which is subordinated
to the Loans in form and manner satisfactory to the Banks. All existing
Subordinated Indebtedness is so specified in Exhibit C attached hereto.
"Subsidiary" means any Person of which fifty percent (50%) or more
of the outstanding voting securities or other equity interests in such Person
shall, at the time of determination, be owned directly, or indirectly through
one or more intermediaries, by the Borrower and "Subsidiaries" means all such
corporations together with each of the Guarantors, if different.
"Successful IPO" means an IPO with respect to the Borrower in which
the Borrower receives net proceeds after underwriting discount and related
expenses in excess of Twenty Million Dollars ($20,000,000.00) for the public
sale of its stock.
"Total Commitments" means the aggregate of the several Commitments
of the Banks in the principal amount of up to Twenty Million Dollars
($20,000,000.00) as set forth in Section II of this Agreement, subject to
reduction by the Borrower pursuant to Paragraph 2.6 below.
"UCC" means the Uniform Commercial Code as in effect on the date
hereof in the State of Tennessee, as it may be amended from time to time;
provided that if by reason of mandatory provisions of law, the perfection or the
effect of perfection or non-perfection of a security interest in any Collateral
is governed by the Uniform Commercial Code as in effect in a jurisdiction other
than Tennessee, "UCC" means the Uniform Commercial Code as in effect in such
other jurisdiction for purposes of the provisions hereof relating to such
perfection or effect of perfection or non-perfection.
16
<PAGE>
"Working Capital" means those funds used for general corporate
purposes in the ordinary course of business, but excluding the costs of the
Acquisition of any Person, permitted or otherwise, and the costs of Capital
Expenditures.
"Working Capital Loan" means Loans made pursuant to Paragraph 2.1
for the purpose or purposes set forth in Paragraph 2.2.
"Working Capital Loan Commitment" means, as to any Bank, the
obligation of such Bank to make Working Capital Loans in an amount not to exceed
the amount set forth in Paragraph 2.1.
"Working Capital Loan Termination Date" means November 11, 1997,
being 364 days from the date of Closing and initial funding, unless extended in
writing by the Banks in their sole discretion.
The definitions in this Section I shall apply equally to both the
singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms. The words "include", "includes" and "including" shall be deemed to
be followed by the phrase "without limitation". All references herein to
Articles, Sections, Exhibits and Schedules shall be deemed references to
Articles and Sections of, and Exhibits and Schedules to, this Agreement unless
the context shall otherwise require. Except as otherwise expressly provided
herein, all terms of an accounting or financial nature shall be construed in
accordance with generally accepted accounting principles, as in effect from time
to time.
SECTION II. THE LOANS
2.1 The Commitments. (A) Subject to the terms and conditions of and
relying on the representations, warranties and covenants contained in this
Agreement, each Bank agrees to fund severally but not jointly to the Borrower
the amount set out below their names, which for all of the Banks shall be the
aggregate maximum principal amount of up to Twenty Million Dollars
($20,000,000.00), provided the principal balance of the Loans outstanding shall
not exceed the Borrowing Base. The maximum Acquisition Loan Commitment and the
maximum Working Capital Loan Commitment of each of the Banks and its respective
percentage of the Total Commitments (the "Commitment Percentage" of each Bank)
are as follows:
17
<PAGE>
- --------------------------------------------------------------------------------
Bank Acquisition Loan Working Capital Loan Commitment
Commitment Amount Commitment Amount Percentage
- --------------------------------------------------------------------------------
NationsBank of
Tennessee, N.A. $15,000,000.00 $5,000,000.00 100%
- --------------------------------------------------------------------------------
TOTAL
COMMITMENTS $15,000,000.00 $5,000,000.00 100%
- --------------------------------------------------------------------------------
The Loans shall be evidenced initially by the (i) Fifteen Million Dollar
($15,000,000.00) Acquisition Loan Note of Borrower to NationsBank of Tennessee,
N.A., (ii) the Five Million Dollar ($5,000,000.00) Working Capital Loan Note of
Borrower to NationsBank of Tennessee, N.A., which Notes are substantially in the
form set forth in Exhibit A attached hereto, with each Note payable in
accordance with its terms. The Borrower may obtain Acquisition and/or Working
Capital Loans, repay without penalty or premium and reborrow hereunder, from the
date of this Agreement up to but not including the respective Acquisition Loan
Termination Date and Working Capital Loan Termination Date, either the full
amount of the Total Commitments, subject to the Borrowing Base limitation and
other limitations as hereinafter set forth, or any lesser sum which is in the
minimum amount of Fifty Thousand Dollars ($50,000.00) and in an integral
multiple of Twenty-Five Thousand Dollars ($25,000.00) if in excess thereof;
provided, however, Borrower may not borrow more than two (2) times in any
calendar week. Each advance of the Loans hereunder shall be made by each Bank
ratably in accordance with its respective Commitment Percentage of such advance.
(B) The obligations of each Bank to make advances to Borrower
pursuant to its respective Acquisition and Working Capital Loan Commitments
shall not exceed at any time such Bank's Commitment Percentage multiplied by the
applicable Borrowing Base as in effect during the term of this Agreement. The
Borrowing Base shall be adjusted on each Borrowing Base Adjustment Date, with
the initial Borrowing Base amount in effect from the date hereof through the
first Borrowing Base Adjustment Date being $7,000,000.00. If at any time the
aggregate outstanding principal balances of the Loans exceeds the Borrowing
Base, then Borrower shall immediately pay to Agent for the account of the Bank
any such excess principal to reduce such outstanding principal balances to the
applicable Borrowing Base amount. Such payment shall be applied pursuant to
Paragraph 2.10.
(C) The failure of any Bank to make any advances hereunder pursuant
to its Commitment shall not relieve any other Bank of its obligation, if any,
hereunder to make its advances pursuant to its Commitment. However, no Bank
shall be responsible for any other Bank's failure or refusal to make any
advances pursuant to such other Bank's Commitment.
2.2 Use of Proceeds. Acquisition Loan advances may be used by the
Borrower for Permitted Acquisitions, Capital Expenditures and the development of
musculoskeletal focused surgery centers. Working Capital Loan advances may be
used by the
18
<PAGE>
Borrower for Working Capital needs; provided, if all amounts are fully drawn
under the Acquisition Loan Commitment, then the Borrower may also use funds
under the Working Capital Loan Commitment to fund Permitted Acquisitions in the
musculoskeletal field and/or Capital Expenditures. The Borrower shall disclose
in each Borrowing Notice the purpose of each advance, and the Banks shall have
no obligation to fund unless Borrower is in compliance with all of the
provisions and conditions of this Agreement and, if the advance is for Working
Capital, the amount of the advance plus all outstanding advances for Working
Capital does not exceed a total of Five Million Dollars ($5,000,000.00).
2.3 Interest Rates and Payments of Interest.
(A) Loans made hereunder may be either Eurodollar Loans,
Floating Rate Loans, or a combination thereof. Eurodollar Loans shall be in the
minimum amount of $1,000,000.00 and shall be in an integral multiple of
$100,000.00.
(B) The Borrower shall give the Agent irrevocable notice (a
"Borrowing Notice") not later than 10:00 a.m. Nashville time at least three (3)
Business Days prior to the date of any requested disbursement of Eurodollar
Loans and one (1) Business Day prior to any requested disbursement of Floating
Rate Loans. Each Borrowing Notice shall be written and may be made by
telecopier, telex or cable in addition to the means set forth for giving notice
in Paragraph 9.5. Each Borrowing Notice shall specify the funding source of the
Loan, i.e., Acquisition Loan or Working Capital Loan; the requested date of such
requested disbursement; the aggregate amount of such disbursement; the type of
Loan, i.e., Eurodollar or Floating Rate; and if a Eurodollar Loan, the
designated Interest Period. The Agent shall promptly advise the other Banks of
any Borrowing Notice given pursuant to this Section and each Bank's portion of
the requested Loan. Not later than noon (12:00 a.m.) Nashville time on each
disbursement date, and subject to the terms and conditions hereof, Agent will
credit the proceeds of the Loans received by Agent from the Banks to the
Borrower's deposit account with Agent. Each such Borrowing Notice shall obligate
the Borrower to accept the Loan disbursement requested thereby.
(C) The Borrower shall have the right at any time, on prior
irrevocable written or telex notice to the Agent not later than 10:00 a.m.,
Nashville time, three (3) Business Days prior to the date of any requested
conversion, to convert any Floating Rate or Eurodollar Loan into a Loan of
another type, or to continue any Eurodollar Loan for another Interest Period
(specifying in each case the Interest Period to be applicable thereto), subject
in each case to the following:
(1) Each conversion or continuation shall be made
prorata among the Banks in accordance with the respective principal amounts of
the Loan converted or continued;
(2) No Eurodollar Loan shall be converted at any time
other than at the end of the Interest Period applicable thereto;
19
<PAGE>
(3) Each conversion shall be effected by applying the
proceeds of the new Eurodollar and/or Floating Rate Loan, as the case may be, to
the Loan (or portion thereof) being converted;
(4) The number of Eurodollar Loans outstanding at one
time may not exceed six (6); and
(5) No Interest Period may be selected for any
Eurodollar Loan that would end later than a repayment date occurring on or after
the first day of such Interest Period if the aggregate outstanding amount of
Eurodollar Loans with Interest Periods ending prior to such repayment date plus
the aggregate outstanding amount of all Floating Rate Loans is not equal to or
greater than the principal amount(s) of the Loan(s) to be paid on such repayment
date.
(D) Each notice pursuant to this Paragraph shall be
irrevocable and shall refer to this Agreement and specify (1) the identity and
principal amount of the particular Loan that the Borrower request be converted
or continued, (2) if such notice requests conversion, the date of such
conversion (which shall be a Business Day), and (3) if a Loan is to be converted
to a Eurodollar Loan or a Eurodollar Loan is to be continued, the Interest
Period with respect thereto. In the event that the Borrower shall not give
notice to continue any Eurodollar Loan for a subsequent period, such Eurodollar
Loan (unless repaid) shall automatically be converted into a Floating Rate Loan.
If the Borrower shall fail to specify in any Borrowing Notice the type of
borrowing or, in the case of a Eurodollar Loan, the applicable Interest Period,
the Borrower will be deemed to have requested a Floating Rate Loan. If Agent
reasonably believes that any failure by Borrower to specify the type of
borrowing or the applicable Interest Period shall have resulted from failure of
communications equipment or clerical error, then prior to funding any such
borrowing the Agent shall use reasonable efforts to obtain confirmation from
Borrower of the contents of such Borrowing Notice; however, in the absence of
prompt confirmation by Borrower which specifies the type of borrowing and/or the
applicable Interest Period, the Borrower will be deemed to have requested a
Floating Rate Loan. Notwithstanding anything to the contrary contained above, if
an Event of Default shall have occurred and be continuing, no Eurodollar Loan
may be continued and no Floating Rate Loan may be converted into a Eurodollar
Loan.
(E) Interest shall be charged and paid on each Acquisition and
Working Capital Loan from the date of the initial advance thereunder until such
Loan is paid or converted as follows:
(1) For a Floating Rate Loan, at an annual rate equal to
the Prime Rate plus the Applicable Prime Rate Margin for such Acquisition or
Working Capital Loan, said rate to change contemporaneously with any change in
the Prime Rate.
(2) For a Eurodollar Loan, at a rate equal to the LIBO
Rate plus the Applicable LIBO Rate Margin for such Acquisition or Working
Capital Loan.
20
<PAGE>
(3) The Borrower shall pay to any Bank, if and so long
as such Bank shall be required under regulations of the Board of Governors of
the Federal Reserve System to maintain reserves with respect to liabilities or
assets consisting of or including Eurodollar Liabilities, additional interest on
the unpaid principal amount of each Eurodollar Loan, from the date of such
advance until said principal amount is paid in full, at an interest rate per
annum equal at all times to the remainder obtained by subtracting (i) the LIBO
Rate for the Interest Period from (ii) the rate obtained by dividing the LIBO
Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage
for such Interest Period, payable on each date on which interest is payable.
Such additional interest shall be determined by such Bank who shall notify
Borrower thereof; however, such additional interest shall be payable only if the
condition of Paragraph 2.9(C)(2) is satisfied.
(4) Interest for both Floating Rate Loans and Eurodollar
Loans shall be computed on the basis of a 360-day year counting the actual
number of days elapsed, and shall be due and payable without notice on each
Interest Payment Date.
(F) Notwithstanding the foregoing, upon the occurrence of an
Event of Default interest shall be charged at the Default Rate as defined and
set forth in the Notes, regardless of whether the Majority Banks have elected to
exercise any other remedies under Section VII hereof, including without
limitation acceleration of the maturity of the outstanding principal of the
Notes. All such interest shall be paid at the time of and as a condition
precedent to the curing of any such default to the extent any right to cure is
given.
(G) All agreements herein made are expressly limited so that
in no event whatsoever shall the interest and loan charges agreed to be paid to
the Banks for the use of the money advanced or to be advanced pursuant to this
Agreement exceed the maximum amounts collectible under applicable laws in effect
from time to time. If for any reason whatsoever the interest or loan charges
paid or contracted to be paid in respect of the Loans shall exceed the maximum
amounts collectible under applicable laws in effect from time to time, then,
ipso facto, the obligation to pay such interest and/or loan charges shall be
reduced to the maximum amounts collectible under applicable laws in effect from
time to time, and any amounts collected by the Banks that exceed such maximum
amounts shall be applied to the reduction of the principal balance of the Loans
and/or refunded to Borrower so that at no time shall the interest or loan
charges paid or payable in respect of the Loans exceed the maximum amounts
permitted from time to time by applicable law. This provision shall control
every other provision herein and in any and all other agreements and instruments
now existing or hereafter arising between Borrower and the Banks with respect to
the Loans.
2.4 Commitment Fee. A commitment fee of One Hundred Twelve Thousand
Five Hundred Dollars ($112,500.00) shall be due and payable (in full at Closing)
to the Banks prorata in accordance with their Commitment Percentages.
2.5 Nonusage Fee. The Borrower shall pay to the Agent for the
account of each Bank a non-use fee on the average daily undisbursed amount of
such Bank's Acquisition Loan Commitment and Working Capital Loan Commitment for
the period from and including
21
<PAGE>
the Closing to but not including the earlier of the date such Commitment is
terminated and the respective Loan Termination Date, at the rate of (a) for the
first Quarterly Period, 0.25% per annum for the Acquisition Loan Commitment and
0.20% per annum for the Working Capital Loan Commitment, and (b) thereafter,
0.35% per annum for the Acquisition Loan Commitment and 0.30% per annum for the
Working Capital Loan Commitment or, for any Quarterly Period prior to the first
day of which (and in any event no later than 45 days after the end of the fiscal
quarter most recently ended) the Borrower has delivered to the Agent a
certificate of the Borrower calculating the Funded Debt to Consolidated Cash
Flow Ratio as at the last day of such fiscal quarter (other than such portion of
such period during which an Event of Default shall be continuing), the
percentage per annum set forth below opposite the Funded Debt to Consolidated
Cash Flow Ratio for the Borrower reflected on such certificate:
- --------------------------------------------------------------------------------
Funded Debt to Applicable Non-Use Applicable Non-Use
Consolidated Cash Flow Fee for Acquisition Fee for Working Capital
Ratio Loans Loans
- --------------------------------------------------------------------------------
Greater than 3.0 0.35% per annum 0.30% per annum
- --------------------------------------------------------------------------------
Greater than 2.50 and less 0.30% per annum 0.30% per annum
than or equal to 3.00
- --------------------------------------------------------------------------------
Greater than 2.00 and less 0.25% per annum 0.25% per annum
than or equal to 2.50
- --------------------------------------------------------------------------------
Greater than 1.50 and less 0.25% per annum 0.20% per annum
than or equal to 2.00
- --------------------------------------------------------------------------------
Greater than 1.00 and less 0.20% per annum 0.20% per annum
than or equal to 1.50
- --------------------------------------------------------------------------------
Less than or equal to 1.00 0.20% per annum 0.15% per annum
- --------------------------------------------------------------------------------
Non-use fees shall be calculated on a 360-day year counting the actual number of
elapsed days.
Accrued non-use fees shall be payable in arrears on each Quarterly Date and on
the earlier of each of the date the relevant Commitments are terminated and the
applicable Acquisition Loan Termination Date or Working Capital Loan Termination
Date.
22
<PAGE>
2.6 Reduction of Commitment. The Borrower shall have the right to
reduce the amount of the Total Commitments, at any time and from time to time,
in any integral multiple of One Million Dollars ($1,000,000.00), which reduction
shall reduce each Bank's Commitment pro rata in accordance with its Commitment
Percentage. Contemporaneously with each such reduction, the Borrower shall repay
to the Agent for the account of each Bank in accordance with its respective
Commitment Percentage the amounts, if any, by which the then outstanding
principal balance of each Note exceeds each Commitment as so reduced. After each
such reduction: (i) the Borrower shall immediately pay the Agent any nonusage
fee provided for in Paragraph 2.5 with respect to the amount by which the Total
Commitments are so reduced, but only with respect to the time such Commitment
existed and only to the extent not previously paid; (ii) the nonusage fee
provided for in Paragraph 2.5 shall be calculated with respect to the Total
Commitments as so reduced; and (iii) the Total Commitments may not be increased
without the written consent of the Banks.
2.7 Alternate Rate of Interest.
(A) In the event, and on each occasion, that on the date of
commencement of any Interest Period for a Eurodollar Loan, any Bank shall have
determined:
(1) That dollar deposits in the amount of the requested
principal amount of such Eurodollar Loan are not generally available in the
London Interbank Market;
(2) That the rate at which such dollar deposits are
being offered will not adequately and fairly reflect the cost to Banks of making
or maintaining such Eurodollar Loan during such Interest Period; or
(3) That reasonable means do not exist for ascertaining
the LIBO Rate,
such Bank shall, as soon as practicable thereafter, give written or telephonic
notice of such determination to the Borrower. In the event of any such
determination, any request by the Borrower for a Eurodollar Loan pursuant to
Paragraph 2.3 shall, until the circumstances giving rise to such notice no
longer exist, be deemed to be a request for a Floating Rate Loan. Each
determination by a Bank hereunder shall be conclusive absent manifest error.
2.8 Change in Circumstances.
(A) Notwithstanding any other provision herein, if after the
date of this Agreement any change in applicable Laws or regulation or in the
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law) shall change the basis of taxation of payments to a Bank under any
Eurodollar Loan made by a Bank or any other fees or amounts payable hereunder
(other than taxes imposed on the overall net income of such Bank by the country
in which such Bank is located, or by the jurisdiction in which such Bank has its
principal office, or by any political subdivision or taxing authority therein),
or shall impose, modify or deem applicable any
23
<PAGE>
reserve requirement, special deposit, insurance charge (including FDIC insurance
on Eurodollar deposits) or similar requirement against assets of, deposits with
or for the account of, or credit extended by, such Bank or shall impose on such
Bank or the London Interbank Market any other condition affecting this Agreement
or Eurodollar Loans made by such Bank, and the result of any of the foregoing
shall be to increase the cost to such Bank of making or maintaining any
Eurodollar Loan or to reduce the amount of any sum received or receivable by
such Bank here under (whether of principal, interest or otherwise) in respect
thereof by an amount deemed by such Bank to be material, then the Borrower will
pay to such Bank such additional amount or amounts as will compensate such Bank
for such additional costs of reduction.
(B) If either:
(1) The introduction of, or any change in, or in the
interpretation of, any United States or foreign law, rule or regulation; or
(2) Compliance with any directive, guidelines or request
from any central bank or other United States or foreign governmental authority
(whether or not having the force of law) promulgated or made after the date
hereof (but excluding, however, any law, rule, regulation, interpretation,
directive, guideline or request contemplated by or resulting from the report
dated July, 1988, entitled "International Convergence of Capital Measurement and
Capital Standards" issued by the Basle Committee on Banking Regulations and
Supervisory Practices),
affects or would affect the amount of capital required or expected to be
maintained by a Bank (or any lending office of such Bank) or any corporation
directly or indirectly owning or controlling such Bank (or any lending office of
such Bank) based upon the existence of this Agreement, and such Bank shall have
determined that such introduction, change or compliance has or would have the
effect of reducing the rate of return on Bank's capital or on the capital of
such owning or controlling corporation as a consequence of its obligations
hereunder (including its Commitment) to a level below that which such Bank or
such owning or controlling corporation could have achieved but for such
introduction, change or compliance (after taking into account that Bank's
policies or the policies of such owning or controlling corporation, as the case
may be, regarding capital adequacy) by an amount deemed by such Bank (in its
reasonable discretion) to be material, then, from time to time, the Borrower
shall pay to such Bank such additional amount or amounts as will compensate such
Bank for such reduction attributable to making, funding and maintaining its
Commitment and Loans hereunder.
(C) A certificate of any Bank setting forth such amount or
amounts as shall be necessary to compensate such Bank (or its participating Bank
or other entities pursuant to Paragraph 9.8) as specified in paragraph (A) or
(B) above, as the case may be, shall be delivered to the Borrower and shall be
conclusive absent manifest error; provided however, that the Borrower shall be
responsible for compliance herewith and the payment of increased costs only to
the extent:
24
<PAGE>
(1) Any change in Laws giving rise to increased costs
occurs after the date of this Agreement;
(2) Such change in Laws or the application thereof
applies generally to the banking industry and is not the result of one or more
of the Banks in this Agreement having inadequate or substandard capital as
determined by its regulators; and
(3) The affected Bank gives notice of the change giving
rise to increased costs within one hundred eighty (180) Business Days after such
Bank has, or with reasonable diligence should have had, knowledge of the change,
or else such Bank can only collect costs from and after the date of the notice.
Subject to the foregoing, the Borrower shall pay the affected Bank the amount
shown as due on any such certificate within ten (10) days after its receipt of
such certificate.
(D) The protection of this Paragraph 2.8 shall be available to
each Bank regardless of any possible contention of invalidity or inapplicability
of the law, regulation or condition that shall have been imposed; provided, if a
court of competent jurisdiction (or a final administrative proceeding which is
not judicially challenged) finally determines that such law or regulation is
invalid or unapplicable, then the protection of this Paragraph shall not be
available.
2.9 Change in Legality.
(A) Notwithstanding anything to the contrary herein contained,
if any change in any law or regulation or in interpretation thereof by any
governmental authority charged with the administration or interpretation thereof
shall make it unlawful for any Bank to make or maintain any Eurodollar Loan or
to give effect to its obligations as contemplated hereby, then, by written
notice to the Borrower, such Bank may:
(1) Declare that Eurodollar Loans will not thereafter be
made by such Bank hereunder, whereupon the Borrower shall be prohibited from
requesting Eurodollar Loans from such Bank hereunder unless such declaration is
subsequently withdrawn; and
(2) Require that all outstanding Eurodollar Loans made
by it be converted to Floating Rate Loans, in which event (a) all such
Eurodollar Loans shall be automatically converted to Floating Rate Loans as of
the effective date of such notice as provided in paragraph (B) below and (b) all
payments and prepayments of principal that would otherwise have been applied to
repay the converted Eurodollar Loans shall instead be applied to repay the
Floating Rate Loans resulting from the conversion of such Eurodollar Loans.
(B) For purposes of this Paragraph 2.9, a notice to the
Borrower by any Bank pursuant to (A) above shall be effective, if lawful, on the
last day of the then current Interest Period; in all other cases, such notice
shall be effective on the date of receipt by the Borrower.
25
<PAGE>
2.10 Payment to the Agent.
(A) The Agent shall send the Borrower statements of all
amounts due hereunder, which statements shall be considered correct and
conclusively binding on the Borrower unless the Borrower notifies the Agent to
the contrary within one hundred eighty (180) days of its receipt of any
statement to which it objects. All sums payable to the Banks hereunder shall be
paid directly to the Agent for the account of each Bank in immediately available
funds prior to 12:00 noon, Nashville time, on the date when such sums are due
and payable. Any amounts received by the Agent after 12:00 noon Nashville time
on any Business Day shall be deemed to have been received on the next Business
Day. Alternatively, at its sole discretion, the Agent may charge against any
deposit account of the Borrower maintained with any of the Banks all or any part
of any amount due pursuant to this Agreement.
(B) Each payment made to the Agent on the Notes or for other
sums or fees due hereunder for the account of the Banks shall be properly
remitted by the Agent to each Bank, pro rata in accordance with the outstanding
unpaid principal amount of the Notes held by each Bank, no later than 2:00 p.m.
Nashville time on the date on which Agent receives such payment.
(C) Borrower shall give Agent two (2) Business Days notice of
payments of principal and/or interest other than payments on a regularly
scheduled payment date set forth herein.
SECTION III. CONDITIONS PRECEDENT
The obligation of the Banks to fund and/or continue funding the
Loans hereunder is subject to the following conditions precedent:
3.1 Documents Required for the Closing. The Borrower shall have
delivered to the Agent prior to the initial disbursement of the Loans the
following:
(A) The Notes;
(B) Stock Pledge Agreements (collectively the "Stock Pledge
Agreements") in the form attached hereto as Exhibit E, including Schedule I
thereto, duly executed by the Borrower, together with certificates representing
the shares pledged thereby, duly endorsed in blank, and stock powers duly
endorsed in blank;
(C) Duly executed Guaranty and Suretyship Agreement
(collectively the "Guaranty and Suretyship Agreements") of the Guarantor, in the
form attached hereto as Exhibit F;
(D) The Financing Statements and mortgagee waivers required by
Section IV;
26
<PAGE>
(E) A copy of resolutions of the Borrower's board of
directors, certified by the corporate secretary of Borrower as of the date of
Closing, authorizing the execution, delivery and performance of this Agreement,
the Notes, the Collateral Documents, and each other document to be delivered
pursuant hereto;
(F) A copy of resolutions of each Subsidiary's board of
directors, certified as of the date of Closing by the secretary of each of such
corporations, authorizing the execution, delivery and performance of any
documents to be delivered by such corporation pursuant to this Agreement,
including without limitation any of the Collateral Documents.
(G) A copy, certified as of the most recent date practicable,
by the applicable Secretaries of State of, of the Borrower's and each
Subsidiary's Charter, together with a certificate dated the date of the Closing
of the Borrower's corporate secretary to the effect that such certificates of
incorporation have not been amended since the date of the aforesaid Secretary of
State certifications;
(H) A copy of the Borrower's by-laws certified by Borrower's
secretary as of the date of the Closing;
(I) A certificate dated the date of the Closing of the
Borrower's corporate secretary as to the incumbency and signatures of the
officers of the Borrower executing this Agreement, the Notes, the Collateral
Documents, and each other document to be delivered pursuant hereto;
(J) A certificate dated the date of the Closing of each
Subsidiary's corporate secretary as to the incumbency and signatures of the
officers of each of such corporation executing any document to be delivered
pursuant hereto, including without limitation any of the Collateral Documents.
(K) Certificates, as of the most recent dates practicable, of
the aforesaid Secretary of State and the Secretary of State of each state in
which the Borrower is qualified as a foreign corporation as to the good standing
of the Borrower;
(L) Copies of the executed Service Agreements with Vero
Orthopaedics, P.A., Princeton Orthopaedic Associates II, P.A., Reconstructive
Orthopaedic Associates II, P.C., TOC Specialists, P.L., and Greater Chesapeake
Orthopaedic Associates, L.L.C.
(M) A written opinion of Messrs. Baker, Donelson, Bearman &
Caldwell, the Borrower's counsel, dated the date of the Closing and addressed
individually to each Bank, in the form attached hereto as Exhibit G and
otherwise satisfactory to the Banks.
(N) A certificate, dated the date of the Closing, signed by
the president, vice president, chief financial officer, or corporate controller
of the Borrower and to the effect that:
27
<PAGE>
(1) The representations and warranties set forth within
Paragraph 5.1 are true as of the date of the Closing;
(2) No Event of Default hereunder, and no event which,
with the giving of notice or passage of time or both, would become such an Event
of Default, has occurred as of such date;
(3) All of the Collateral Documents are and shall remain
in full force and effect.
(O) Copies of all documents evidencing the terms and
conditions of any debt specified as Subordinated Indebtedness on Exhibit C in
form and substance satisfactory to Banks;
(P) A Federal Reserve Form (or Forms) U-1, duly completed and
executed by the Borrower and each Pledgor.
3.2 Documents Required for All Subsequent Disbursements. At the
Closing, and as an express condition precedent to each disbursement of a Loan
after the Closing, the Borrower shall deliver to the Agent a true and accurate
certificate together with any Borrowing Notice, dated the date on which such
disbursement is to be made, signed by the president, vice president, chief
financial officer, or corporate controller of the Borrower and to the effect
that:
(A) As of the date thereof, no Event of Default has occurred
and is continuing, and no event has occurred and is continuing that, with the
giving of notice or passage of time or both, would be an Event of Default;
(B) The amount of the disbursement, when added to the then
outstanding balance of the Loans, does not exceed the current Borrowing Base;
(C) The disbursement will be used only as permitted in
Paragraph 2.2, together with a breakdown showing the intended uses (i.e.,
Permitted Acquisition, Capital Expenditure, or Working Capital) of the requested
disbursement and the actual uses and running total of all outstanding
disbursements;
(D) No Material Adverse Change has occurred since the date of
the Financial Statements or the date of the Closing, as applicable; and
(E) All of the Collateral Documents remain in full force and
effect, and Borrower has provided or caused to be provided such additional
Collateral Documents as required by Paragraph 6.2(M).
If any of the foregoing statements is not true and correct in the judgment of
the Banks, then the Banks shall have no obligation to fund the requested
disbursement.
28
<PAGE>
3.3 Information Required for Permitted Acquisition. Not less than
five (5) Business Days prior to entering into any Permitted Acquisition,
Borrower shall submit to each of the Banks the following information in form and
scope satisfactory to Banks:
(A) A copy of the signed letter of intent and a current draft
of the acquisition agreement with all prepared exhibits, including the Service
Agreement, any seller financing documents, and any lease agreements;
(B) A written description of the company to be acquired,
including location and type of centers, key management, and real estate assets
(including legal descriptions of any owned real estate), if any;
(C) Historical financial statements (reviewed or audited) of
the Permitted Acquisition for the prior two years and the most recent interim
statement;
(D) Two (2) years of consolidated financial projections for
both the Borrower and its Subsidiaries as well as the Person being acquired
commencing from the anticipated date of closing the Acquisition and giving pro
forma effect to any Indebtedness associated with or to be incurred as a result
of the Acquisition;
(E) Copy of acquisition analysis done by Borrower preparatory
to making the Permitted Acquisition;
provided, if the Banks have not approved in writing such acquisition as being a
Permitted Acquisition under Paragraph 6.2(M) within said five (5) day period,
the acquisition and any related disbursement (if any) shall be deemed not a
Permitted Acquisition. If the Borrower requests such in writing, the Banks agree
to notify the Borrower of any reasons for the rejection.
3.4 Legal Matters. At the time of the Closing and thereafter, all
legal matters incidental to the Loans shall be satisfactory to Messrs. Boult,
Cummings, Conners & Berry, counsel to the Banks.
SECTION IV. COLLATERAL SECURITY
4.1 Composition of the Collateral. The property in which a security
interest is granted pursuant to the provisions of Paragraphs 4.2 and 4.3 is
herein collectively called the "Collateral." The Collateral, together with all
of the Borrower's and any Subsidiary's other property of any kind, both real and
personal, held by, assigned to, mortgaged to or conveyed in favor of the Banks,
shall stand as one general, continuing collateral security for all Obliga tions
and may be retained by the Agent and/or Banks until all Obligations have been
satisfied in full.
4.2 Rights in Property Held by the Banks. As security for the prompt
satisfaction of all Obligations and all Guaranties of the Obligations, the
Borrower and each Sub sidiary hereby assign, transfer and set over to the Banks
all of their right, title and interest in
29
<PAGE>
and to, and grant the Banks a lien on and a security interest in, all amounts
that may be owing from time to time by the Banks to the Borrower or such
Subsidiary in any capacity, including, but without limitation, any balance or
share belonging to the Borrower or such Subsidiary of any deposit or other
account with the Banks, which lien and security interest shall be independent of
any right of set-off which the Banks may have.
4.3 Rights in Property of the Borrower and Subsidiaries. As further
security for the prompt satisfaction of all Obligations and all Guaranties of
the Obligations, the Borrower and each Subsidiary hereby assign to the Banks by
and through the Agent all of their respective right, title and interest in and
to, and grant the Banks a lien upon and security interest in, all of the
following, wherever located, whether now owned or hereafter acquired, together
with all substitutions, replacements, improvements, accessions or appurtenances
thereto, and proceeds (including without limitation insurance proceeds) thereof:
(A) Accounts;
(B) Chattel Paper;
(C) Contract Rights;
(D) Documents;
(E) Equipment;
(F) Fixtures;
(G) General Intangibles;
(H) Instruments;
(I) Inventory;
(J) Service Agreements;
(K) The Pledged Stock; and
(L) All Records pertaining to any other Collateral.
4.4 Priority of Liens. The foregoing liens shall be first and prior
liens except for (1) any Permitted Liens on assets which have priority or would
have priority by the operation of Laws, and (2) any Accounts that may not be
legally assignable under applicable federal Medicare and Medicaid laws and
regulations.
4.5 Financing Statements.
(A) The Borrower and each Subsidiary will:
(1) Join with the Agent in executing such additional
Financing Statements (including amendments thereto and continuation statements
thereof) in form satisfactory to the Banks as the Banks may specify;
(2) Pay or reimburse the Banks for all costs and taxes
of filing or recording the same in such public offices as the Banks may
designate, and performing subsequent verification searches; and
30
<PAGE>
(3) Take such other steps as the Banks may reasonably
direct, including the noting of the Banks' lien on the Collateral and on any
certificates of title therefor all to perfect the Banks' security interest in
the Collateral.
(B) A carbon, photographic, or other reproduction of this
Agreement shall be sufficient as a financing statement and may be filed in any
appropriate office in lieu thereof.
(C) To the extent lawful, the Borrower and each Subsidiary
hereby appoint the Agent as their attorney-in-fact (without requiring the Agent
to act as such) to execute any Financing Statement in the name of the Borrower
or such Subsidiary, and to perform all other acts that the Agent reasonably
deems appropriate to perfect and continue the Banks' security interest in, and
to protect and preserve, the Collateral.
4.6 Collection of Receivables. Following the occurrence of any Event
of Default and for so long as such Event of Default remains uncured, upon demand
of the Majority Banks, Borrower and each Subsidiary shall deposit or cause to be
deposited, all checks, drafts, cash, and other remittances received in payment
of services rendered or inventory sold or in payment or on account of its
accounts, immediately upon receipt thereof with Agent in one or more special
"lockboxed" bank accounts maintained with Agent, over which the Majority Banks
alone have power of withdrawal. The funds in said special bank accounts shall,
to the maximum extent allowed by applicable law, be held by the Banks as
security for all loans made hereunder and all other Obligations of Borrower to
the Banks secured hereby. Said proceeds shall be deposited in precisely the form
received, except for the endorsement of Borrower and each Sub sidiary where
necessary to permit collection, which endorsement Borrower and each Subsidiary
agree to make and which Agent also hereby is irrevocably authorized to make on
their behalf. Pending such deposit, Borrower and each Subsidiary agree that they
will not commingle any such checks, drafts, cash, and other remittances with any
of their funds or property, but will hold them separate and apart therefrom and
upon an express trust for the Banks until deposit thereof is made in the said
special bank account. At least twice weekly, Agent will apply the whole or any
part, as the Majority Banks deem appropriate, of the collected funds on deposit
in the said special bank accounts against the principal and/or interest of any
loans made hereunder and/or on Borrower's other Obligations secured hereby, the
order and method of such application to be in the discretion of the Majority
Banks. Any portion of said funds on deposit in the special bank account that the
Majority Banks elect not to apply will be paid over by Agent to Borrower.
4.7 Mortgagees' Waivers. At the request of the Majority Banks, the
Borrower will cause each mortgagee of all real estate owned by the Borrower or
any Subsidiary, to execute and deliver to the Agent instruments, in form and
substance satisfactory to the Banks, by which such mortgagee waives its rights,
if any, to any portion of the Collateral located on such premises, and agrees to
provide Agent notice of and an opportunity to cure any default by Borrower or
such Subsidiary under such mortgage.
31
<PAGE>
SECTION V. REPRESENTATIONS AND WARRANTIES
5.1 Original. To induce the Banks to enter into this Agreement, the
Borrower and each Subsidiary jointly and severally represent and warrant to each
Bank as of the Closing and initial funding hereunder as follows:
(A) The Borrower is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Delaware; each
Subsidiary is a corporation duly organized, validly existing and in good
standing under the Laws of its state of incorporation, all as set forth in
Exhibit H; the Borrower and each Subsidiary have the lawful power to own their
properties and to engage in the business they conduct, and each is duly
qualified and in good standing as a foreign corporation in the jurisdictions
wherein the nature of the business transacted by it or property owned by it is
both material and makes such qualification necessary; the states in which the
Borrower and each Subsidiary are qualified to do business are set forth in
Exhibit H; the percentage of the Borrower's ownership of the outstanding stock
of each Subsidiary is as listed in Exhibit H; and the addresses of all places of
business of the Borrower and each Subsidiary are as set forth in Exhibit I;
(B) Neither the Borrower nor any Subsidiary is in default with
respect to any of its existing Indebtedness, and the making and performance of
this Agreement, the Notes and the Collateral Documents will not (immediately, or
with the passage of time or the giving of notice, or both):
(1) Violate the charter or bylaw provisions of the
Borrower or any Subsidiary, or violate any Laws (except with respect to the
assignment of Accounts due from Medicare and Medicaid), or result in a default
under any material contract, agreement, or instrument to which the Borrower or
any Subsidiary is a party or by which the Borrower or any Subsidiary or its
property is bound; or
(2) Result in the creation or imposition of any security
interest in, or lien or encumbrance upon, any of the assets of the Borrower or
any Subsidiary, except in favor of the Banks;
(C) The Borrower and each Subsidiary have the power and
authority to enter into and perform this Agreement, the Notes and the Collateral
Documents, as applicable, and to incur the Obligations herein and therein
provided for, and have taken all corporate action necessary to authorize the
execution, delivery, and performance of this Agreement, the Notes and the
Collateral Documents;
(D) This Agreement and the Collateral Documents are, and the
Notes when delivered will be, valid, binding, and enforceable in accordance with
their respective terms subject to the general principles of equity (regardless
of whether such question is considered in a proceeding in equity or at law) and
to applicable bankruptcy, insolvency, moratorium, fraudulent or preferential
conveyance and other similar laws affecting generally the enforcement of
creditors' rights;
32
<PAGE>
(E) The Pledgors own the Pledged Stock; the Pledged Stock
constitutes one hundred percent (100%) of the issued and outstanding capital
stock of the respective issuers thereof; and the Pledged Stock has been duly
issued, is fully paid and non-assessable, and except as disclosed in Exhibit J
is free of all claims, security interests, liens, charges and encumbrances;
(F) Except as disclosed in Exhibit K hereto, there is no
pending or threatened order, notice, claim, litigation, proceeding or
investigation against or affecting the Borrower or any Subsidiary, whether or
not covered by insurance, that would involve the pay ment of One Hundred
Thousand Dollars ($100,000.00) or more if adversely determined;
(G) The Borrower and its Subsidiaries have good and marketable
title to all of their respective assets, including without limitation the
Collateral and the Real Property, subject to no security interest, encumbrance
or lien, or the claims of any other Person except for Permitted Liens;
(H) The Financial Statements, including any schedules and
notes pertaining thereto, have been prepared in accordance with generally
accepted accounting principles consistently applied, and fully and fairly
present the financial condition of the Borrower and its Subsidiaries at the
dates thereof and the results of operations for the periods covered thereby, and
there have been no Material Adverse Change in the consolidated financial
condition or business of the Borrower and its Subsidiaries from December 31,
1995 to the date hereof;
(I) As of the date hereof, the Borrower and its Subsidiaries
had no Indebtedness of any nature, including, but without limitation,
liabilities for taxes and any interest or penalties relating thereto, except to
the extent reflected (in a footnote or otherwise) and reserved against in the
December 31, 1995 Financial Statements or as disclosed in or permitted by this
Agreement; the Borrower does not know, and has no knowledge of any basis for the
assertion against it or any Subsidiary as of the date hereof, of any material
Indebtedness of any nature not fully reflected and reserved against in the
December 31, 1995 Financial Statements;
(J) Except as otherwise permitted herein, the Borrower and its
Subsidiaries have filed all federal, state and local tax returns and other
reports they are required by Laws to file prior to the date hereof and which are
material to the conduct of their respective businesses, have paid or caused to
be paid all taxes, assessments and other governmental charges that are due and
payable prior to the date hereof, and have made adequate provision for the
payment of such taxes, assessments or other charges accruing but not yet
payable; the Borrower has no knowledge of any deficiency or additional
assessment in connection with any taxes, assessments or charges not provided for
on its books;
(K) Except as otherwise disclosed in Exhibit L hereto, or
except to the extent that the failure to comply would not have a Material
Adverse Effect on the Borrower or any Subsidiary, the Borrower and its
Subsidiaries have complied in all material respects with all applicable Laws
with respect to: (1) any restrictions, specifications, or other requirement
33
<PAGE>
pertaining to services that the Borrower or any Subsidiary performs, including
Fraud and Abuse Law; (2) the conduct of their respective businesses; (3) the
use, maintenance, and operation of the real and personal properties owned or
leased by them in the conduct of their respective businesses; and (4) health,
safety, worker's compensation, and equal employment opportunity;
(L) The Borrower and its Subsidiaries and their respective
assets and operations are in compliance in all material respects with all
Environmental Laws, and the Borrower and its Subsidiaries will comply in all
material respects with all such Environmental Laws and regulations which may be
imposed in the future; all plants, facilities and properties owned by the
Borrower and its Subsidiaries are and will be on the date of Closing in a clean
and healthful condition, free of asbestos and of all contamination by Hazardous
Materials and other potentially harmful chemical or physical conditions,
including, without limitation, any contamination of the air, soil, groundwater
or surface waters associated with or adjacent to such plants, facilities and
properties; all storage tanks (whether above or below ground) located in or on
such plants, facilities and properties are in sound condition, free or corrosion
or leaks that could allow or threaten the release of any stored material; no
Hazardous Materials have been or are used, stored, treated or disposed of in
violation of applicable Laws and regulations; and neither the Borrower nor any
Subsidiary is a defendant in any administrative or judicial action alleging
liability under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), nor has the Borrower or any Subsidiary
received a notice that it is a potentially responsible party under CERCLA or
similar state Laws.
(M) No representation or warranty by the Borrower or any
Subsidiary contained herein or in any certificate or other document furnished by
the Borrower or any Subsidiary pursuant to this Agreement contains any untrue
statement of material fact or omits to state a material fact necessary to make
such representation or warranty not misleading in light of the circumstances
under which it was made;
(N) Each consent, approval or authorization of, or filing,
registration or qualification with, any Person required to be obtained or
effected by the Borrower or any Subsidiary in connection with the execution and
delivery of the Loan Documents or the undertak ing or performance of any
obligation thereunder has been duly obtained or effected;
(O) All existing Indebtedness: (1) for money borrowed; or (2)
under any security agreement or mortgage from the Borrower or any Subsidiary is
described in Exhibit B, unless the same are immaterial (i.e., less than
$25,000.00 in amount);
(P) Except as described on Exhibit M hereto, the Borrower and
its Subsidiaries have no material lease, contract or commitment of any kind
(such as employment agreements; collective bargaining agreements; powers of
attorney; distribution arrangements; patent license agreements; contracts for
future purchase or delivery of goods or rendering of services; bonus, pension
and retirement plans; or accrued vacation pay, insurance and welfare agreements)
which would be required to be listed as an Exhibit to the Borrower's Annual
Report on Form 10-K; all parties (including the Borrower and Subsidiaries) to
all such material leases, contracts and other commitments to which the Borrower
or any Subsidiary is a party have
34
<PAGE>
complied with the provisions of such leases, contracts and other commitments; no
party is in default under any provision thereof; and no event has occurred
which, but for the giving of notice or the passage of time, or both, would
constitute a default;
(Q) Neither the Borrower nor any Subsidiary has made any
agreement or has taken any action which may cause anyone to become entitled to a
commission or finder's fee as a result of the making of the Loans;
(R) All Defined Benefit Pension Plans, as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of the
Borrower and each Subsidiary meet, as of the date hereof, the minimum funding
standards of Section 302 of ERISA, and no Reportable Event or Prohibited
Transaction, as defined in ERISA, has occurred with respect to any such Plan.
5.2 Survival. All of the representations and warranties set forth in
Paragraph 5.1 shall survive until all Obligations are satisfied in full.
SECTION VI. THE BORROWER'S COVENANTS
The Borrower does hereby covenant and agree with each Bank that, so
long as any of the Obligations remain unsatisfied, it will comply, and it will
cause its Subsidiaries to comply, with the following covenants:
6.1 Affirmative Covenants.
(A) The Borrower will use the proceeds of the Loans only for
the purposes described in Paragraph 2.2 and will furnish the Agent such evidence
as it may reasonably require with respect to such use.
(B) The Borrower will furnish the Banks:
(1) Within thirty (30) days after the close of each
calendar month in each fiscal year of the Borrower and its Subsidiaries: (a)
consolidated statements of cash flows of the Borrower and its Subsidiaries for
such month; (b) consolidated income statements of the Borrower and its
Subsidiaries for such month; and (c) consolidated balance sheets of the Borrower
and its Subsidiaries as of the end of such month -- all in reasonable detail,
subject to year-end audit adjustments, and certified by Borrower's president,
vice-president, chief financial officer, or corporate controller to have been
prepared in accordance with generally accepted accounting principles
consistently applied by the Borrower and its Subsidiaries, except for any
inconsistencies explained in such certificate;
(2) Within forty-five (45) days after the close of each
quarter-annual accounting period in each fiscal year of Borrower and its
Subsidiaries, a current Same Clinic Revenue and Income Report, together with the
following: (a) a consolidated statement of cash flows of the Borrower and its
Subsidiaries for such quarter annual period; (b)
35
<PAGE>
consolidated income statements of the Borrower and its Subsidiaries for such
quarter-annual period; and (c) consolidated balance sheets of the Borrower and
its Subsidiaries as of the end of such quarter-annual period--all in reasonable
detail, subject to year-end audit adjustments, compared to budget, and certified
by the Borrower's president, vice president, chief financial officer, or
corporate controller to have been prepared in accordance with generally accepted
accounting principles consistently applied by the Borrower and its Subsidiaries,
except for any inconsistencies explained in such certificate;
(3) Within one hundred twenty (120) days after the close
of each fiscal year of Borrower and its Subsidiaries: (a) consolidated
statements of cash flows of the Borrower and its Subsidiaries for such fiscal
year; (b) consolidated and consolidating income statements of the Borrower and
its Subsidiaries for such fiscal year; and (c) consolidated and consolidating
balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal
year--all in reasonable detail, including all supporting schedules, notes and
comments; the consolidated statements and balance sheets shall be audited by
Ernst & Young or another independent certified public accountant selected by the
Borrower and reasonably acceptable to the Banks, and certified by such
accountants to have been prepared in accordance with generally accepted
accounting principles consistently applied by the Borrower and its Subsidiaries,
except for any inconsistencies explained in such certificate, and the
consolidating statements shall be internally prepared by Borrower's controller
and certified to the Agent as true and correct. The Banks shall have the right,
from time to time, to discuss the Borrower's affairs directly with the
Borrower's independent certified public accountants after notice to the Borrower
and opportunity of the Borrower to be present at any such discussions;
(4) As soon as reasonably practicable but in any event
within forty-five (45) days after the close of each quarter-annual accounting
period in each fiscal year of the Borrower and its Subsidiaries, a certificate
of the president, vice president, chief financial officer or corporate
controller of the Borrower stating that: (i) such officer has individually
reviewed the provisions of this Agreement; (ii) a review of the activities of
the Borrower and its Subsidiaries during such year or quarter-annual period, as
the case may be, has been made by such officer or under such officer's
supervision, with a view to determining whether the Borrower has fulfilled all
its obligations under this Agreement; and (iii) to the best of such officer's
knowledge, the Borrower has observed and performed each undertaking contained in
this Agreement and is not in default in the observance or performance of any of
the provisions hereof or, if the Borrower shall be so in default, specifying all
such defaults and events of which he may have knowledge. Such certificate shall
further set forth (i) the calculations of the Borrowing Base, and (ii) the
financial ratios and covenants set forth in Paragraph 6.1(F), including without
limitation any antecedent calculations and the source of any information that
was used in such calculations;
(5) Within sixty (60) days of the close of the prior
fiscal year, a copy of Borrower's proposed income, expense and capital budget
for the present fiscal year, including within the capital budget a listing of
proposed non-financed Capital Expenditures;
36
<PAGE>
(6) Promptly after the sending or making available or
filing of the same, copies of all correspondence, reports, proxy statements and
financial statements that the Borrower sends or makes available to its
stockholders and all registration statements and reports that the Borrower files
with the Securities and Exchange Commission or any successor Person; and
(7) Within ten (10) days of receipt of the same by
Borrower or any Subsidiary, copies of all management letters and any other
reports which are submitted to the Borrower or any of its Subsidiaries by its
independent accountants in connection with any annual or interim audit of the
Records of the Borrower or its Subsidiaries by such accountants.
(C) The Borrower and its Subsidiaries will maintain their
respective Inventory, Equipment, Real Property and other properties in good
condition and repair (normal wear and tear excepted), and will pay and discharge
or cause to be paid and discharged when due, the cost of repairs to or
maintenance of the same, and will pay or cause to be paid all rental or mortgage
payments due on such Equipment or Real Property. The Borrower hereby agrees
that, in the event it or any Subsidiary fails to pay or cause to be paid any
such payment, the Banks may do so and be reimbursed by the Borrower therefor.
(D) The Borrower and its Subsidiaries will maintain, or cause
to be maintained, public liability insurance, medical malpractice insurance, and
fire and extended coverage insurance on all assets owned by them, all in such
form and amounts as are consistent with industry practices and with such
insurers as may be reasonably satisfactory to the Banks. Such policies shall
name the Banks as loss payees under a standard mortgagee loss payee clause and
as an additional insured, as their interests may appear, and shall contain a
provision whereby they cannot be canceled except after thirty (30) days' written
notice to the Agent. The Bor rower will furnish to the Agent such evidence of
insurance as the Banks may require. The Borrower hereby agrees that, in the
event it or any Subsidiary fails to pay or cause to be paid the premium on any
such insurance, the Banks may do so and be reimbursed by the Borrower therefor.
The Agent is hereby appointed the Borrower's attorney-in-fact (without requiring
the Agent to act as such) to endorse any check which may be payable to the
Borrower to collect such returned or unearned premiums or the proceeds of such
insurance, and any amounts so collected may be applied by the Agent toward
satisfaction of any of the Obligations.
(E) The Borrower and its Subsidiaries will pay or cause to be
paid when due, all taxes, assessments and charges or levies imposed upon them or
on any of their property or which any of them is required to withhold or pay
over, except where contested in good faith by appropriate proceedings with
adequate security therefor having been set aside in a manner satisfactory to
Banks. The Borrower and each Subsidiary shall pay or cause to be paid all such
taxes, assessments, charges or levies forthwith whenever foreclosure on any lien
that attaches (or security therefor) appears imminent.
(F) The Borrower will maintain the following financial ratios
and covenants:
37
<PAGE>
(1) Funded Debt to Cash Flow. At the end of each fiscal
quarter, a ratio of Funded Debt to Consolidated Cash Flow for the four (4)
quarters just ended of not greater than 2.25 to 1.0; provided, following the
completion of a Successful IPO, the ratio shall increase from 2.25 to 1.0 to
3.25 to 1.0.
(2) Current Ratio. A ratio of Consolidated Current
Assets to Consolidated Current Liabilities of not less than 2.00 to 1.00 at all
times.
(3) Shareholders Equity. At all times, Shareholders
Equity in the amount of not less than Seven Million Dollars ($7,000,000.00) plus
(i) eighty-five percent (85%) of Consolidated Net Income (no decreases for net
losses) on a cumulative basis from the date hereof and (ii) one hundred percent
(100%) of the amount of any new contributions to the capital of Borrower.
(4) Funded Debt to Consolidated Capital. At the end of
each fiscal quarter, a ratio of Funded Debt to Consolidated Capital of not more
than 0.5 to 1.0.
(5) Debt Service Coverage. At the end of each fiscal
quarter, a ratio of Adjusted Consolidated Cash Flow for the four (4) quarters
just ended divided by Debt Service for such four (4) quarter period of not less
than 1.25 to 1.0 from the Closing through March 31, 1997, and no less than 1.50
to 1.00 thereafter.
(6) Borrowing Base. Commencing as of the most recent
Borrowing Base Adjustment Date and continuing thereafter until the next
Borrowing Base Adjustment Date, the aggregate outstanding principal amount of
the Loans shall not at any time exceed the Borrowing Base then in effect. In the
event that the outstanding principal balance of the Loans exceeds the applicable
Borrowing Base, then Borrower shall immediately pay to Agent and in accordance
with Paragraph 2.10 such excess amounts by which the aggregate outstanding
principal amount of the Obligations exceeds such Borrowing Base.
(G) The Borrower and its Subsidiaries will, when requested so
to do, make available any of their Records for inspection during regular
business hours by duly authorized representatives of the Banks, and will furnish
the Banks any information regarding their business affairs and financial
condition within a reasonable time after written request therefor.
(H) The Borrower and its Subsidiaries will take all necessary
steps to renew, keep in full force and effect, and preserve their corporate
existence, good standing, and franchises, and will comply in all material
respects with all present and future Laws (including, but not limited to, Fraud
and Abuse Laws) applicable to them in the operation of their musculoskeletal
clinics and centers. The Borrower and any Subsidiary shall further use its best
efforts to assure the compliance by all Providers with all applicable Laws,
including, but not limited to, medical licensure and Fraud and Abuse Laws
relating to their providing of professional services. The Borrower and its
Subsidiaries will preserve, renew and keep in full force and effect all material
contracts, leases, governmental licenses, authorizations, consents
38
<PAGE>
and approvals, rights, privileges and franchises necessary in the normal course
of business, including without limitation maintaining in full force and effect
Medicare certification for all musculoskeletal centers and agencies.
(I) The Borrower and its Subsidiaries will collect their
Accounts and sell their Inventory only in the ordinary course of business. If
any Accounts should be evidenced by promissory notes, then the holders shall
immediately deliver the same to Agent, appropriately endorsed to Agent's order.
The Borrower and each Subsidiary hereby waive presentment, demand, notice of
dishonor, protest, notice of protest, and all other notices with respect
thereto.
(J) The Borrower and its Subsidiaries will keep accurate and
complete Records of their Accounts, Inventory and Equipment, consistent with
sound business practices.
(K) The Borrower and its Subsidiaries will give immediate
notice to the Agent of: (1) any litigation or proceeding in which any of them is
a party if an adverse decision therein would require them to pay over more than
Five Hundred Thousand Dollars ($500,000.00) or deliver assets the value of which
exceeds such sum (if such claim is not considered to be covered by insurance) or
pay over more than One Million Dollars ($1,000,000.00) (if such claim is
considered to be covered by insurance); and (2) the institution of any other
suit or proceeding involving any of them, or the overt threat thereof, that
might result in a Material Adverse Change.
(L) Within ten (10) days of the Agent's request therefor, the
Borrower will furnish the Agent with copies of federal income tax returns filed
by the Borrower.
(M) The Borrower and its Subsidiaries will pay when due (or
within applicable grace periods) all Indebtedness for borrowed money due any
Person, except when the amount thereof is being contested in good faith by
appropriate proceedings and with adequate security therefor being set aside in a
manner satisfactory to Banks. If default is made by the Borrower or any
Subsidiary in the payment of any principal (or installment thereof) of, or
interest on, any such Indebtedness, the Banks shall have the right, in their
discretion, to pay such interest or principal for the account of the Borrower or
such Subsidiary and be reimbursed by the Borrower therefor.
(N) The Borrower and its Subsidiaries will notify the Agent
immediately if any of them becomes aware of the occurrence of any Event of
Default or of any fact, condition or event that only with the giving of notice
or passage of time or both, could become an Event of Default, or of the failure
of the Borrower or any Subsidiary to observe any of their respective
undertakings hereunder.
(O) The Borrower and its Subsidiaries will notify the Agent
thirty (30) days in advance of any change in (i) the name of the Borrower or any
Subsidiary, (ii) the location of any Collateral, (iii) the location of any of
their places of business or (iv) of the establishment of any new, or the
discontinuance of any existing, place of business.
39
<PAGE>
(P) Borrower and its Subsidiary will (i) maintain compliance
with any applicable Environmental Laws, (ii) obtain and maintain, and cause each
of its Subsidiaries to obtain and maintain, any and all material permits
required by applicable Environmental Laws in connection with its or its
Subsidiaries' operations and (iii) dispose of, and cause each of its
Subsidiaries to dispose of, any and all Hazardous Materials only at facilities
and with carriers reasonably believed to possess valid permits under RCRA, if
applicable, and any applicable state and local Environmental Laws. The Borrower
shall use its best efforts, and cause each of its Subsidiaries to use its best
efforts, to obtain all certificates required by law to be obtained by the
Borrower and its Subsidiaries from all contractors employed by the Borrower or
any of its Subsidiaries in connection with the transport or disposal of any
Hazardous Materials.
(Q) If the Borrower or any of its Subsidiaries shall:
(1) receive written notice that any material violation
of any Environmental Laws may have been committed or is about to be committed by
the Borrower or any of its Subsidiaries;
(2) receive written notice that any administrative or
judicial complaint or order has been filed or is about to be filed against the
Borrower or any of its Subsidiaries alleging any material violation of any
Environmental Laws or requiring the Borrower or any of its Subsidiaries to take
any action in connection with the release or threatened release of Hazardous
Substances or solid waste into the environment; or
(3) receive written notice from a federal, state,
foreign or local governmental agency or private party alleging that the Borrower
or any of its Subsidiaries is liable or responsible for costs associated with
the response to cleanup, stabilization or neutralization of any environmental
activity;
then it shall provide the Agent with a copy of such notice within ten (10)
Business Days of the Borrower's or such Subsidiary's receipt thereof.
(R) Borrower agrees that Agent may from time to time, but not
more frequently than once per calendar year absent an Unmatured Default or an
Event of Default, request in writing the opinion of in-house counsel and/or
outside healthcare counsel to the Borrower as to the absence, except as
disclosed in the opinion, of such counsel's knowledge of any actual, threatened
or asserted violation of any Fraud and Abuse Law on the part of the Borrower,
any Subsidiary and/or the Providers, and the sufficiency of documentation then
in use for the acquisition of Practices as complying with Fraud and Abuse Laws.
Absent the existence of an Unmatured Default or and Event of Default, such
opinions shall require no special diligence on the part of the opining
attorney(s), but only requiring a report of matters then known to such
attorneys, unless Agent specifically inquires about facts that Agent reasonably
believes may raise a Fraud and Abuse Law issue. Such opinions shall be in form
and substance acceptable to Agent, shall be delivered to Agent at Borrower's
expense within fifteen (15) days of the date of request and shall address
specifically any facts inquired of in Agent's request.
40
<PAGE>
(S) The Borrower and its Subsidiaries will: (1) fund all their
Defined Benefit Pension Plans in accordance with no less than the minimum
funding standards of Section 302 of ERISA and Section 412 of the Internal
Revenue Code; (2) furnish the Agent, promptly after the filing of the same, with
copies of all reports or other statements filed with the United States
Department of Labor or the Internal Revenue Service with respect to all such
Plans; and (3) promptly advise the Agent of the occurrence of any Reportable
Event or Prohibited Transaction with respect to any such Plan.
6.2 Negative Covenants.
(A) Neither the Borrower nor any Subsidiary will enter into
any merger, consolidation, reorganization or recapitalization, or reclassify its
capital stock; provided, any Subsidiary may merge into the Borrower or into any
Subsidiary provided the Agent is given not less than thirty (30) days prior
written notice thereof and provided the surviving entity is the Borrower or a
Subsidiary which is a party to this Agreement.
(B) Neither the Borrower nor any Subsidiary will sell,
transfer, lease or otherwise dispose of all or any material part of its assets;
provided, however, Borrower and its Subsidiaries may in the ordinary course of
business sell or dispose of obsolete Equipment or Inventory, or may replace
damaged or worn Equipment with Equipment of similar value and use.
(C) Neither the Borrower nor any Subsidiary will mortgage,
pledge, grant or permit to exist a security interest in or lien upon any of its
assets of any kind, now owned or hereafter acquired, except for Permitted Liens.
(D) Neither the Borrower nor any Subsidiary will become
liable, directly or indirectly, as guarantor or otherwise, for any obligation of
any other Person, except for: (1) the endorsement of commercial paper for
deposit or collection in the ordinary course of business, (2) guarantees of
Permitted Acquisition Indebtedness, and (3) leases permitted under 6.2(E)(7).
(E) Neither the Borrower nor any Subsidiary will incur,
create, assume, or permit to exist any Indebtedness except: (1) the Loans; (2)
existing Indebtedness as set forth in Exhibit B; (3) trade Indebtedness incurred
in the ordinary course of business; (4) contingent Indebtedness permitted by
Paragraph 6.2(D); (5) Indebtedness, including Permitted Acquisition
Indebtedness, secured by Permitted Liens; (6) Indebtedness owed by any
Subsidiary of the Borrower to the Borrower, by the Borrower to any Subsidiary of
the Borrower, or by a Subsidiary of the Borrower to any other Subsidiary of the
Borrower, provided that if any such Indebtedness is evidenced by a document or
instrument, the same is pledged pursuant to an appropriate pledge agreement; (7)
lease obligations not otherwise prohibited by the financial ratios in Paragraph
6.1(F); and (8) Indebtedness assumed or incurred in connection with a Permitted
Acquisition and payable to parties other than the seller or the seller's owners
provided the aggregate outstanding amount of such Indebtedness does not exceed
at any time the lesser of Five Million Dollars ($5,000,000) or fifty percent
(50%) of Shareholders Equity.
41
<PAGE>
(F) The Borrower will not declare or pay any cash dividends,
or make any other cash payment or other distribution of an asset on account of
its capital stock.
(G) The Borrower will not redeem, purchase or retire any of
its capital stock, and no Subsidiary will issue, redeem, purchase or retire any
of its capital stock or grant or issue any warrant, right or option pertaining
thereto or other security convertible into any of the foregoing.
(H) Neither the Borrower nor any Subsidiary will form any
Subsidiary, make any investment in or make any loan in the nature of any
investment to any Person, except for: (1) any Permitted Investments, (2) the
formation of a Subsidiary in connection with making a Permitted Acquisition
which qualifies as such under Paragraph 6.2(M) below, (3) advances by the
Borrower to Subsidiaries of the Borrower, and (4) advances by Subsidiaries of
the Borrower to the Borrower.
(I) Neither the Borrower nor any Subsidiary will make any loan
or advance to any Provider or to any officer, shareholder, director or employee
of the Borrower or any Subsidiary, except for loans evidenced by recourse
promissory notes to Providers not to exceed in the aggregate Five Million
Dollars ($5,000,000.00) in face amount; provided however, that neither the
Borrower nor any Subsidiary will lend to the Providers in any Practice the total
sum of more than Two Million Dollars ($2,000,000.00) as evidenced by the face
amount of executed, recourse promissory notes. Neither the Borrower nor any
Subsidiary will make any temporary advances to any Provider or to any officer,
shareholder, director or employee of the Borrower or any Subsidiary, except for
temporary advances in the ordinary course of business not to exceed Fifty
Thousand Dollars ($50,000.00) individually or Two Hundred Fifty Thousand Dollars
($250,000.00) in the aggregate.
(J) Neither the Borrower nor any Subsidiary will prepay any
Subordinated Indebtedness, or Indebtedness for borrowed money (exclusive of
Permitted Acquisition Indebtedness), or enter into or modify any agreement as a
result of which the terms of payment of any of the foregoing Indebtedness are
waived or modified.
(K) Neither the Borrower nor any Subsidiary will enter into
any sale-leaseback transaction.
(L) Neither the Borrower nor any Subsidiary will purchase or
otherwise invest in or hold securities, non-operating real estate or other
non-operating assets, except: (1) Permitted Investments; (2) the present
investment in any such assets, including existing Subsidiaries; and (3)
operating assets that hereafter become non-operating assets.
(M) Neither the Borrower nor any Subsidiary will acquire the
stock of, or all or substantially all of the assets of, any Person without the
prior written consent of the Banks; provided however, with respect to any
permitted acquisition (hereinafter a "Permitted Acquisition"), the Borrower may
acquire either stock or assets of such Person and any Subsidiary may acquire
assets or merge with such Person (provided the Subsidiary is the
42
<PAGE>
surviving entity) without obtaining the Banks' approval if: (1) Borrower has
submitted to the Banks on a timely basis the information required by Paragraph
3.3 above; (2) the Permitted Acquisition Price does not exceed a multiple of
seven (7) times the Acquisition EBITDA of the Person to be acquired for the
twelve (12) months preceding the Acquisition, subject to such adjustments to
Acquisition EBITDA as shall be reasonable under the circumstances and approved
by the Majority Banks in their reasonable discretion, and such Person has not
had a negative Acquisition EBITDA in either of its last two fiscal years; (3)
the cash portion of the Permitted Acquisition Price together with all amounts
thereon due within six (6) months of the closing does not exceed three percent
(3%) of Borrower's Consolidated Assets or, prior to a Successful IPO, fifty
percent (50%) of the Permitted Acquisition Price; (4) the business of the
Permitted Acquisition is in the musculoskeletal service field; (5) the
acquisition is not opposed by the Permitted Acquisition's management and the
holders of a majority of its voting shares or partnership units, as applicable;
(6) the Borrower has not made more than two acquisitions in the current fiscal
quarter nor more than nine acquisitions in the current calendar year; (7) no
Event of Default has occurred hereunder and not been cured, or would otherwise
occur as a result of or in connection with the Permitted Acquisition, whether
immediately or on a projected basis; (8) in all cases, whether or not the Banks
have been requested to disburse funds, the Borrower must pledge or cause to be
pledged to the Agent for the benefit of the Banks a first priority lien on the
outstanding stock or ownership interests in the Permitted Acquisition and a
first priority lien (subject only to Permitted Liens) on all of the assets of
the Permitted Acquisition in form and substance satisfactory to the Banks; and
(9) if a new Subsidiary is formed or the Permitted Acquisition is a stock
purchase Acquisition, the new Subsidiary and/or the acquired corporation must
become a party to this Agreement and execute a Guaranty and Suretyship with
respect to the Obligations in form and substance satisfactory to the Banks. The
Banks shall be given not less than ten (10) Business Days written notice prior
to the closing of any Acquisition to prepare all necessary documentation, and
the legal structure of the Loans following any Permitted Acquisition must be
satisfactory to the Banks and the Agent's counsel. Notwithstanding the foregoing
or anything contained herein to the contrary, if Borrower has not completed a
Successful IPO by on or before March 31, 1997, all Acquisitions occurring after
March 31, 1997 must be approved by the Banks in their sole discretion and
without regard to what constitutes a Permitted Acquisition.
(N) Borrower shall not allow or suffer any change of
management effecting a material change in the duties or change in the personnel
presently staffing the positions of Chief Executive Officer, President or Chief
Financial Officer, as set forth in Exhibit N hereto. Notwithstanding the
foregoing, should any of the named managers cease such active participation in
Borrower's management due to their death or disability, Agent shall allow
Borrower a period of sixty (60) days thereafter in which a management succession
plan may be presented to Agent so that Agent may, in its discretion, elect to
accept new management in lieu of prior management, subject to such revisions of
this Agreement as Agent may require.
(O) Neither the Borrower nor any Subsidiary will furnish the
Agent or any Bank any certificate or other document that will contain any untrue
statement of material fact or that will omit to state a material fact necessary
to make it not misleading in light of the circumstances under which it was
furnished.
43
<PAGE>
(P) Neither the Borrower nor any Subsidiary will directly or
indirectly apply any part of the proceeds of the Loans to the purchasing or
carrying of any "margin stock" within the meaning of Regulation U of the Board
of Governors of the Federal Reserve System, or any regulations, interpretations
or rulings thereunder.
(Q) Borrower will not, and will not permit any of its
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction (including without limitation the purchase, sale, lease or exchange
of any property or the rendering of any service) with any Affiliate (other than
any Subsidiary which is wholly owned by Borrower) on terms that are less
favorable to the Borrower or its Subsidiaries than those that would be
obtainable at the time from any Person who is not an Affiliate. Borrower will
not, and will not permit any of its Subsidiaries to, pay or incur any obligation
to pay any management fee, consulting fee, service fee or similar fee or charge
to any Affiliate.
SECTION VII. DEFAULT
7.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default" hereunder:
(A) The Borrower shall fail to pay within two (2) days of the
date when due any installment of principal or interest payable hereunder, or
shall fail to pay within ten (10) days of written notice any fee payable
hereunder.
(B) The Borrower shall fail to achieve any of the financial
covenants contained in Paragraph 6.1(F).
(C) The Borrower, any Subsidiary, or Pledgor shall fail to
observe or perform any obligation or covenant to be observed or performed by any
of them, jointly or severally, under any of the Loan Documents; provided,
however, if such failure is not related to the payment of money, the breach of a
financial covenant contained in Paragraph 6.1(F), or the breach of any negative
covenant in Section 6.2, Borrower shall have thirty (30) days to cure such
failure before the Majority Banks and/or Agent exercise the rights and remedies
hereunder, with such thirty (30) day period commencing after notice of such
failure from the Agent or Banks.
(D) The Borrower or any Subsidiary shall fail to pay any
Indebtedness for borrowed money (whether direct or indirect, including
guarantees of borrowed money) due any Person and such failure shall continue
beyond any applicable grace period and shall equal or exceed, either
individually or in the aggregate, One Hundred Thousand Dollars ($100,000.00) in
amount.
(E) The Borrower or any Subsidiary shall suffer a Material
Adverse Effect from any event of default arising under any agreement binding the
Borrower or such Subsidiary.
44
<PAGE>
(F) Any financial statement, representation, warranty or
certificate made or furnished by the Borrower or any Subsidiary to the Agent or
any Bank in connection with this Agreement or the Loans, or as inducement to the
Banks to enter into this Agreement, or in any separate statement or document to
be delivered hereunder to the Agent or any Bank, shall be materially false,
incorrect, or incomplete when made.
(G) The Borrower or any Subsidiary shall admit its inability
to pay its debts as they mature, or shall make an assignment for the benefit of
its or any of its creditors.
(H) Proceedings in bankruptcy, or for reorganization of the
Borrower or any Subsidiary, or for the readjustment of any of their respective
debts, under the United States Bankruptcy Code, as amended, or any part thereof,
or under any other Laws, whether state or federal, for the relief of debtors,
now or hereafter existing, shall be commenced by the Borrower or any Subsidiary,
or shall be commenced against the Borrower or any Subsidiary.
(I) A receiver or trustee shall be appointed for the Borrower
or any Subsidiary or for any substantial part of their respective assets, or any
proceedings shall be instituted for the dissolution or the full or partial
liquidation of the Borrower or any Subsidiary, or the Borrower or any Subsidiary
shall discontinue business or materially change the nature of its business.
(J) The Borrower or any Subsidiary shall suffer final
judgments for payment of money aggregating in excess of Fifty Thousand Dollars
($50,000.00) and shall not discharge the same within a period of thirty (30)
days unless, pending further proceedings, execution has been effectively stayed.
(K) A judgment creditor of the Borrower or any Subsidiary
having a judgment in excess of Twenty Thousand Dollars ($20,000.00) shall obtain
possession of any of the Collateral by any means, including, but without
limitation, levy, distraint, replevin or self-help.
(L) Any obligee of Subordinated Indebtedness shall fail to
comply with the subordination provisions of the instruments evidencing such
Subordinated Indebtedness.
(M) Borrower or any Subsidiary shall default in any other
Indebtedness (excluding the Obligations) owed to the Banks, or any of them, or
under any other agreements for credit or borrowed money it may have with any
Bank, jointly or severally, directly or indirectly, whether matured or
unmatured.
(N) Receipt by the Borrower or any Subsidiary of a notice from
a Governmental Authority that it (i) intends to disallow requested
reimbursements, demand adjustment or repayment of past reimbursements in excess
of five percent (5%) of the gross revenues of Borrower and its Subsidiaries for
the previous four (4) fiscal quarters in the aggregate respecting amounts
submitted for reimbursement or collected by Borrower, any Subsidiary or a
Provider, or (ii) intends to impose civil money penalties or to seek to exclude
45
<PAGE>
Borrower, any Subsidiary or a Provider from participation in the Medicare or
Medicaid programs due to a failure to comply with Fraud and Abuse Laws.
7.2 Acceleration. Upon the occurrence of any of such Events of
Default, the Majority Banks may, at their option, immediately terminate the
obligation to make any further advances under the respective Commitments and/or
declare the principal and interest accrued on the Notes and all other
Obligations to be immediately due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest, or any notice
of any kind except as set forth above; provided, that in the case of the Events
of Default specified in clause (G), (H) or (I) above with respect to Borrower,
without any notice to Borrower or any act by Agent or the Banks, the Commitments
shall thereupon terminate and the Notes and all other Obligations shall become
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are waived by the Borrower. In addition, and
regardless of whether the Notes have been accelerated, the Majority Banks may
upon the occurrence of any Event of Default elect to charge interest at the
Default Rate set forth in the Notes.
7.3 Remedies. After any acceleration, as provided for in Paragraph
7.2, the Banks shall have, in addition to the rights and remedies given it by
the Loan Documents, all those allowed by all applicable Laws, including, but
without limitation, the UCC as enacted in any jurisdiction in which any
Collateral may be located. Without limiting the generality of the foregoing, the
Banks may immediately, without demand of performance and without other notice
(except as specifically required by the Loan Documents) or demand whatsoever to
the Borrower, all of which are hereby expressly waived, and without
advertisement, sell at public or private sale, in any manner and at any location
authorized by Laws, or otherwise realize upon, the whole or, from time to time,
any part of the Collateral, or any interest which the Borrower may have therein.
After deducting from the proceeds of sale or other disposition of the Collateral
all expenses (including all reasonable expenses for legal services), the Banks
shall apply such proceeds toward the satisfaction of the Obligations. Any
remainder of the proceeds after satisfaction in full of the Obligations shall be
distributed as required by applicable Laws. Notice of any sale or other
disposition shall be given to the Borrower at least five (5) days before the
time of any intended public sale or of the time after which any intended private
sale or other disposition of the Collateral is to be made, which the Borrower
hereby agrees shall be reasonable notice of such sale or other disposition. The
Borrower agrees to assemble, or to cause to be assembled, at its own expense,
the Collateral at such place or places as the Banks shall designate. At any such
sale or other disposition, the Banks may, to the extent permissible under
applicable Laws, purchase the whole or any part of the Collateral, free from any
right of redemption on the part of the Borrower, which right is hereby expressly
waived and released.
Without limiting the generality of any of the rights and
remedies conferred upon the Banks under this Paragraph 7.3, the Banks may, to
the full extent permitted by applicable Laws:
(A) Enter upon the premises of the Borrower, exclude therefrom
the Borrower, any Subsidiary or any Affiliate thereof, and take immediate
possession of the
46
<PAGE>
Collateral, either personally or by means of a receiver appointed by a court of
competent jurisdiction, using all necessary and lawful self-help to do so;
(B) At the Banks' option, use, operate, manage and control the
Collateral in any lawful manner;
(C) Collect and receive all receivables, rents, income,
revenue, earnings, issues and profits therefrom; and
(D) Maintain, repair, renovate, alter or remove the Collateral
as the Banks may determine in their discretion.
SECTION VIII. THE AGENT
This Section VIII is between and among the Agent and the Banks only.
Neither the Borrower nor any other creditor of the Borrower shall have any
rights under this section, whether as a third party beneficiary or otherwise.
8.1 Authorization. Each Bank authorizes the Agent to act on behalf
of such Bank or holder to the extent provided herein or in any document or
instrument delivered hereunder or in connection herewith and signed by such
Bank, and to take such other action as may be reasonably incidental thereto. The
Agent shall be considered as acting solely in an administrative and ministerial
capacity, not as trustee or other fiduciary of the Banks. The Agent shall not be
construed as having any agency or fiduciary relationship with the Borrower. The
Agent shall not have any duties or obligations to the Banks other than those
expressly provided for herein. The Agent shall not be required to exercise any
discretion or take any action, but shall be fully protected in so acting or in
refraining from acting, upon the instructions of the Majority Banks (except as
otherwise provided in Paragraph 9.3, for matters which require the consent of
all Banks), and such instructions shall be binding upon all Banks and holders of
the Notes, and the Agent shall not be liable to any party hereto for any
consequence of any such action or refraining from action. Notwithstanding any
instructions of the Majority Banks, the Agent shall not be required to take any
action that exposes the Agent to personal liability or that is contrary to any
loan document or applicable law.
8.2 Standard of Care. Neither the Agent nor any of its officers,
directors, agents, employees or representatives shall be liable for any action
taken or omitted to be taken by it or any of them under or in connection with
this Agreement, except for its or their own gross negligence or willful
misconduct. Without limitation of the generality of the foregoing, the Agent:
(a) may treat the payee of any Notes as the holder thereof and as a Bank
hereunder until the Agent receives written notice of the assignment or transfer
thereof signed by such payee and in form satisfactory to the Agent (which notice
shall be binding on all parties hereto); (b) may consult with legal counsel
(including counsel for the Borrower), independent public accountants and other
experts and advisors selected by it and shall not be liable for any action taken
or omitted to be taken in good faith by it in accordance with the advice of such
counsel, accountants, experts or other advisors; (c) makes no warranty or
representation to any Bank and
47
<PAGE>
shall not be responsible to any Bank for any statements, warranties or
representations made in or in connection with this Agreement or for any failure
or delay in performance by the Borrower or any Bank under this Agreement; (d)
shall not have any duty to ascertain or to inquire as to the performance or
observance of any of the terms, covenants or conditions of this Agreement; (e)
shall not be responsible to any Bank for the due execution, legality, validity,
enforceability, perfection, collectability, genuineness, sufficiency or value of
this Agreement, the Notes, or any other instrument or document furnished
pursuant thereto or for the accuracy or completeness of any credit or other
information provided to the Banks; (f) shall incur no liability under or in
respect of this Agreement by acting upon any notice, consent, certificate or
other instrument or writing (which may be by telecopier, telegram, cable or
telex) believed by it to be genuine and signed or sent by the proper party or
parties; and (g) shall incur no liability for relying upon any matters of fact
that might reasonably be expected to be within the knowledge of the Borrower,
upon a certificate or other writing signed by Borrower, or upon telephone
communications with Borrower which are reasonably believed to be true and valid.
8.3 No Waiver of Rights. With respect to the Notes, the Agent shall
have the same rights and powers hereunder as any other Bank and may exercise the
same as though it were not the Agent, and the Agent may accept deposits from,
and generally engage in any kind of business with, the Borrower.
8.4 Payments. The Agent shall use its best efforts to deliver to
each Bank on the same day as received by Agent in immediately available funds
such Bank's pro rata share of all payments received by the Agent for the benefit
of the Banks, but in the event Agent is unable to deliver such payments to any
Bank on the same day of receipt, Agent agrees to pay such Bank interest on the
payment for each day the Agent is unable to deliver the payments after the date
of its receipt based on the overnight federal funds rate of interest. Any
payment due for any reason under this Agreement that is required to be made on a
date on which the Agent is not open for business shall be extended until the
next day on which the Agent is open for the transaction of business.
8.5 Indemnification. The Agent shall not be required to do any act
hereunder or under any other document or instrument delivered hereunder or in
connection herewith or take any action toward the execution or enforcement of
the agency hereby created, or to prosecute or defend any suit in respect of this
Agreement or the Notes or to advance funds hereunder upon the failure by any
Bank to fund its pro rata share of the Commitment hereunder, unless ratably
indemnified to its satisfaction (to the extent not reimbursed by Borrower) by
the holders of the Notes against loss, cost, liability and expense (including
reasonable fees and out-of-pocket expenses of counsel), claim, demand, action,
loss or liability (except such as result from Agent's gross negligence or
willful misconduct) that Agent may suffer or incur in connection with this
Agreement or any action taken or omitted by Agent hereunder. If any indemnity
furnished to the Agent for or against any loss, cost, liability, and expense or
for any purpose shall, in the opinion of the Agent, be insufficient or become
impaired, the Agent may call for additional indemnity and not commence or cease
to do the acts indemnified against until such additional indemnity is furnished.
Each Bank agrees to reimburse the Agent promptly upon
48
<PAGE>
demand for such Bank's pro rata share of any expenses referred to in Paragraph
9.4 incurred by the Agent to the extent that the Agent is not reimbursed for
such expenses by the Borrower.
8.6 Exculpation. Neither Agent nor any of its directors, officers,
employees or agents shall be liable for any action taken or not taken by it in
connection herewith (a) with the consent or at the request of the Banks or
Majority Banks, as appropriate, or (b) in the absence of its own gross
negligence or willful misconduct. Neither Agent nor any of its directors,
officers, employees or agents shall (i) be responsible for any recitals,
representations or warranties contained in, or for the execution, validity,
genuineness, effectiveness or enforceability of this Agreement, any Note or any
other instrument or document delivered hereunder or in connection herewith, or
(ii) be under any duty to inquire into or pass upon any of the foregoing
matters, or to make any inquiry concerning the performance by Borrower or any
other obligor of its obligations.
8.7 Credit Investigation. Each Bank acknowledges that it has made
such inquiries and taken such care on its own behalf as would have been the case
had the Commitment been granted and the Loan made directly by such Bank to the
Borrower. Each Bank agrees and acknowledges that the Agent makes no
representations or warranties about the creditworthiness of the Borrower or any
other party to this Agreement or with respect to the legality, validity,
sufficiency or enforceability of this Agreement, the Notes or the value of any
security therefor and that each Bank has not entered into this Agreement in
reliance upon any action, statement, representation, or warranty of any other
Bank or Agent. Each Bank agrees that it will, independently and without reliance
upon the Agent or any other Bank and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under this Agreement. Neither the Agent nor any
other Bank shall have any obligation whatsoever to make any such credit analysis
or decisions for a Bank or to provide any credit or other information with
respect to the Borrower now or in the future in the possession of the Agent or
such other Bank, except that the Agent shall promptly forward to the Banks a
copy of any notice received by the Agent from the Borrower of the occurrence of
an Event of Default hereunder and copies of all material documents delivered to
it by the Borrower pursuant to the terms hereof.
8.8 Resignation. The Agent may resign at any time as the Agent under
this Agreement by giving written notice thereof to the Banks and the Borrower,
which resignation shall be effective upon a successor Agent's acceptance of its
appointment. Upon any such resignation, the Majority Banks shall have the right
to appoint a successor Agent hereunder. If no such successor Agent shall have
been so appointed by the Majority Banks, or Borrower shall have reasonably
rejected such appointment, within thirty (30) days after the retiring Agent's
giving of notice of resignation, then the retiring Agent may, on behalf of the
Banks, appoint a successor Agent, which shall be a commercial bank organized
under the laws of the United States of America or of any State thereof having
assets of at least One Billion Dollars ($1,000,000,000.00) and which shall be
reasonably acceptable to the Borrower. Upon the acceptance of any appointment as
Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Agent, and the retiring Agent shall be discharged from its
duties and obligations
49
<PAGE>
hereunder. After any retiring Agent's resignation as an Agent hereunder, the
provisions of this Section VIII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was an Agent under the Loan
Documents.
8.9 Proration of Payments. Except as may be provided in other
sections of this Agreement, all funds received by Banks, or any of them, shall
be allocated pro rata among all Banks in proportion to their respective
Commitment Percentages as set forth in Paragraph 2.1 hereof. If any Bank or
other holder of any Notes shall obtain any payment or other recovery (whether
voluntary, involuntary, by application of offset or otherwise) on account of
principal of or interest on the Note then held by it in excess of its pro rata
share of payments and other recoveries obtained by all Banks or other holders on
account of principal of and interest on the Note then held by them, such Bank or
other holder shall purchase from the other Banks or holders such participation
in the Note held by them as shall be necessary to cause such purchasing Bank or
other holder to share the excess payment or other recovery ratably with each of
them; provided, however, if all or any portion of the excess payment or other
recovery is thereafter recovered from such purchasing holder, the purchase shall
be rescinded and the purchase price restored to the extent of such recovery, but
without interest. Notwithstanding the foregoing, no Bank shall have any
obligation to account for or share any amount, property or profit of any kind
received by it for its own account arising out of a banking or other
relationship with the Borrower apart from the obligations under the Loan
Documents.
8.10 No Liability For Errors. The Agent shall not be liable for any
error in computing the amounts payable to any Bank in respect of any amounts due
to the Banks hereunder or in making payment of such amounts. In the event of an
error in computing any amount payable to any Bank or in the making of a payment,
the Agent, the Borrower and such Bank shall, forthwith upon discovery of such
error, make such adjustment as shall be required to correct such error,
including the payment of interest on any amounts that were incorrectly paid or
not paid from the date paid or of the date due to the date returned or paid, all
as the case may be, at the average daily rate for the overnight sale of federal
funds by the Agent in effect for such period.
8.11 Offset. In addition to and not in limitation of all rights of
offset that any Bank or other holder of any Note may have under applicable Laws,
each Bank or other holder of a Note shall, upon the occurrence of any Event of
Default described in this Agreement or in the Note in question, have the right
to appropriate and apply to the payment of such Notes any and all balances,
credits, deposits, accounts or moneys of the Borrower then or thereafter with
such Bank or other holder; provided, however, all funds received as a result of
such offsets shall be applied pro rata among the Banks in proportion to their
respective Commitment Percentages as set forth in Paragraph 2.1 hereof. Each
Bank agrees to notify the Borrower and other Banks immediately after the
exercise by it of this right of offset.
50
<PAGE>
SECTION IX. MISCELLANEOUS
9.1 Construction. The provisions of this Agreement shall be in
addition to those of any guaranty, pledge or security agreement, note or other
evidence of liability held by the Banks, all of which shall be construed as
complementary to each other; provided, in the event of any inconsistency, the
provisions of this Agreement shall control. Nothing herein contained shall
prevent the Banks from enforcing any or all other notes, guaranties, pledge or
security agreements in accordance with their respective terms.
9.2 Further Assurance. From time to time, the Borrower will execute
and deliver to the Banks such additional documents and will provide such
additional information as the Banks may reasonably require to carry out the
terms of this Agreement and be informed of the Borrower's operations, business
and condition.
9.3 Enforcement and Waiver by the Banks. The Majority Banks shall
have the sole and exclusive right to administer, amend, or modify the Loan
Documents, and are hereby empowered to act for the Banks with regard to the
aggregate Commitments and the documentation thereof as if said Majority Banks
were the sole lenders or extenders of credit under the Loan Documents; provided,
however, that it shall take an affirmative vote of all Banks to: (i) increase
any of the several Acquisition Loan Commitments or Working Capital Commitments;
(ii) decrease any of the interest rates on the Loans; (iii) extend the
Acquisition Loan Termination Date or the Working Capital Loan Termination Date;
(iv) approve prepayments of the Subordinated Indebtedness; (v) amend the
definition of Majority Banks; and (vi) amend this Paragraph 9.3. The Banks shall
have the right at all times to enforce the provisions of the Loan Documents in
strict accordance with the terms thereof, notwithstanding any conduct or custom
on the part of the Banks and/or Agent in refraining from so doing at any time or
times. The failure of the Banks at any time or times to enforce their rights
under such provisions, strictly in accordance with the same, shall not be
construed as having created a custom in any way or manner contrary to specific
provisions of the Loan Documents or as having in any way or manner modified or
waived the same. All rights and remedies of the Banks are cumulative and
concurrent and the exercise of one right or remedy shall not be deemed a waiver
or release of any other right or remedy.
9.4 Expenses of the Banks. The Borrower will, on demand, reimburse
the Agent for all out-of-pocket expenses, including the reasonable fees and
expenses of legal counsel for the Agent, incurred by the Agent in connection
with the preparation, administration, amendment, modification, or enforcement of
the Loan Documents and the collection or attempted collection of the Notes;
provided, the expenses and legal counsel fees of all Banks will be reimbursed in
connection with the enforcement of this Agreement and other Loan Documents.
9.5 Notices. Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered when delivered in
person, or when sent by certified mail, postage prepaid, return receipt
requested, by overnight courier service, or by
51
<PAGE>
facsimile to the address and/or telecopy number as follows, unless such address
or number is changed by written notice hereunder:
(A) If to the Borrower:
Specialty Care Network, Inc.
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
Attention: Chief Financial Officer
Telecopy: 303-716-1298
(B) If to the Agent:
NationsBank of Tennessee, N.A., Agent
One NationsBank Plaza
Nashville, Tennessee 37239
Attention: Healthcare Group
Telecopy: 749-4951 (615)
(C) If to the Banks:
NationsBank of Tennessee, N.A.
One NationsBank Plaza
Nashville, Tennessee 37239
Attention: Healthcare Group
Telecopy: 749-4951 (615)
9.6 Waiver and Release. To the maximum extent permitted by
applicable Laws, the Borrower and each Subsidiary:
(A) Waive: (1) protest of all commercial paper at any time
held by the Banks on which the Borrower or any Subsidiary is in any way liable;
and (2) notice and opportunity to be heard, after acceleration in the manner
provided in Paragraph 7.2, before exercise by the Banks of the remedies of
self-help, set-off, or of other summary procedures permitted by any applicable
Laws or by any agreement with the Borrower or any Subsidiary, and, except where
required hereby or by any applicable Laws, notice of any other action taken by
the Banks; and
(B) Release the Banks and their officers, directors,
attorneys, employees, and agents from all claims for loss or damage caused by
any act or omission on the part of any of them except for gross negligence,
recklessness or willful misconduct.
9.7 Indemnification. Borrower and each Subsidiary hereby indemnify
and hold the Banks and their officers, directors, attorneys, employees and
agents free and harmless
52
<PAGE>
from and against any and all actions, causes of action, suits, losses,
liabilities and damages, and expenses in connection therewith, including without
limitation counsel fees and disbursements, incurred by the Banks or any of them
as a result of, or arising out of, or relating to the execution, delivery,
performance or enforcement of the Loan Documents or any instrument contemplated
therein, except for any Bank's gross negligence or willful misconduct. If and to
the extent that the foregoing undertaking may be unenforceable for any reason,
Borrower and each Subsidiary hereby agree to make the maximum contribution to
the payment and satisfaction of such liabilities and costs permitted under
applicable Laws.
9.8 Participations and Assignments.
(A) This Agreement and the other Loan Documents shall be
binding upon and inure to the benefit of Borrower, Banks, and Agent and their
respective successors and assigns; provided, however, that Borrower may not
assign, transfer or delegate any of its rights, duties or obligations under this
Agreement or the other Loan Documents without the prior written consent of Agent
and Banks. Banks may assign, sell and transfer their interests, rights and
obligations under this Agreement and the other Loan Documents only in accordance
with this Paragraph 9.8.
(B) With the prior written consent of the Agent and the
Borrower, not to be unreasonably withheld, any Bank may assign to one or more
Eligible Assignees all, or a proportionate part of all, of its interests, rights
and obligations under this Agreement and the other Loan Documents; provided,
however, that (i) each such assignment shall be of a constant, and not a
varying, percentage of all of the assigning Bank's interests, rights and
obligations under this Agreement, (ii) the amount of each such assignment
(determined as of the date the Assignment and Acceptance with respect to such
assignment) shall not be less than the lesser of (A) the entire amount of such
Bank's Loans or (B) the principal amount of $3,000,000 or an integral multiple
of $1,000,000 in excess thereof, (iii) no more than three (3) Banks may be
parties hereto without first obtaining the prior written consent of the Agent
and Borrower; and (iv) the parties to each such assignment shall execute and/or
deliver to Agent, for its acceptance and recording in the Register, an
Assignment and Acceptance, together with the Notes subject to such assignment,
and a processing and recordation fee of $2,500 payable to Agent. Upon such
execution, delivery, acceptance and recording, from and after the "Effective
Date" specified in the Assignment and Acceptance, which "Effective Date," unless
Agent otherwise agrees, shall be not earlier than five Business Days after the
date of acceptance and recording by Agent (provided, however, that, as between
the assigning Bank and the assignee thereunder only, the effective date shall be
the effective date of execution and delivery as between such Persons as
specified in the Assignment and Acceptance), (A) the assignee thereunder shall
be a Bank under this Agreement and, to the extent provided in such Assignment
and Acceptance, have the interests, rights and obligations of a Bank hereunder
and (B) the assigning Bank thereunder shall, to the extent provided in such
Assignment and Acceptance, be released from its contractual obligations under
this Agreement (and, in the case of an Assignment and Acceptance covering all or
the remaining portion of the assigning Bank's interests, rights and obligations
under this Agreement, such assigning Bank shall cease to be a Bank under this
Agreement). Each Bank shall, in a reasonably prompt fashion after it has engaged
in any material discussions with an
53
<PAGE>
Eligible Assignee that may lead to an assignment referred to in this Paragraph
9.8, notify Agent and Borrower of the identity of such Eligible Assignee so that
they will have sufficient time to determine if they are willing to consent.
(C) By executing and delivering an Assignment and Acceptance,
the assigning Bank thereunder and the Eligible Assignee thereunder shall be
deemed to confirm to and agree with each other and the other parties hereto as
follows: (i) such assignee is an Eligible Assignee; (ii) other than as provided
in the Assignment and Acceptance, such assigning Bank makes no representation or
warranty and assumes no responsibility with respect to any representations,
warranties or other statements made in or in connection with this Agreement or
any other Loan Document or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement or any other Loan Document
or any Collateral; (iii) such assigning Bank makes no representation or warranty
and assumes no responsibility with respect to the financial condition of
Borrower or any Subsidiary or the performance or observance by Borrower or any
Subsidiary of any of its obligations under this Agreement or any other Loan
Document; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent Financial Statements and such
other agreements, documents, instruments, certificates and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
such Assignment and Acceptance; (v) such assignee will independently and without
reliance upon Agent, such assigning Bank or any other Bank and based on such
agreements, documents, instruments, certificates and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents;
(vi) such assignee appoints and authorizes Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; (vii) such assignee agrees that it
will perform in accordance with their terms all the obligations which by the
terms of this Agreement and the other Loan Documents are required to be
performed by it as a Bank; and (viii) such assignee makes loans in the ordinary
course of its business.
(D) Upon its receipt of an Assignment and Acceptance executed
by an assigning Bank and an Eligible Assignee and the required processing and
recordation fee, Agent shall, if such Assignment and Acceptance is duly
completed and is in the required form, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt notice thereof to Banks and Borrower. Within five Business
Days after its receipt of any such notice from Agent, Borrower, at its own
expense, shall execute and deliver to Agent, in exchange for the surrendered
Note or Notes, a new Note or Notes payable to the order of such assignee in the
appropriate principal amount(s) evidencing such assignee's assigned Loans and
Commitments, and, if the assignor Bank has retained a portion of its Loans and
Commitments, a new Note or Notes payable to the order of such assignor in the
appropriate principal amount(s) evidencing such assignor's Loans and Commitments
retained by it. Such new Note(s) shall be dated the date of the surrendered
Note(s) which they replace and shall otherwise be in substantially the form of
the surrendered Notes, as appropriate.
54
<PAGE>
(E) Each Bank may, without the consent of Borrower, any
Subsidiary or Agent, sell participations to one or more banks in all or a
portion of its interests, rights and obligations under this Agreement (including
all or a portion of its Loans or Commitments) held by it; provided, however,
that (i) such Bank shall remain a Bank for all purposes of this Agreement and
the transferee of such participation shall not constitute a Bank under this
Agreement, (ii) such Bank's obligations under this Agreement shall remain
unchanged, (iii) such Bank shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iv) the participating banks or
other entities shall be entitled to the benefit of the provisions contained in
Paragraphs 2.8 and 2.9 to the same extent as if they were Banks, except that no
such participant shall be entitled to receive any greater benefit or amounts
pursuant to Paragraph 2.8 than its assignor Bank would have been entitled to
receive with respect to the rights participated, and (v) Borrower, Subsidiaries,
Agent and the other Banks shall continue to deal solely and directly with such
Bank in connection with such Bank's interests, rights and obligations under this
Agreement, and such Bank shall retain the sole right to enforce the obligations
of Borrower and its Subsidiaries relating to the Loans and to approve any
amendment, modification or waiver of any provision of this Agreement, provided
that such participation agreement may provide that such Bank will not agree to
any amendment, modification or waiver of this Agreement or the other Loan
Documents, without the consent of such participant, that would (A) reduce the
principal or the rate of interest payable by Borrower on any Loan or reduce any
fees payable by Borrower, (B) postpone any date fixed for the payment of
principal of or interest on the Loans or any fees payable by Borrower, (C)
increase any Commitment of any Bank or subject any Bank to any obligation to
make Loans, or (D) amend Paragraph 9.3, 9.8(E) or any other provision of this
Agreement requiring the consent or other action of all Banks.
(F) Any Bank may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Paragraph
9.8, disclose to the assignee or participant or proposed assignee or participant
any information relating to Borrower or any Subsidiary, the Collateral or the
Loan Documents furnished to such Bank by or on behalf of the Borrower or any
Subsidiary; provided, however, that, prior to any such disclosure, each such
assignee or participant or proposed assignee or participant shall execute an
agreement whereby such assignee or participant shall agree (subject to customary
exceptions) to preserve the confidentiality of any non-public information
received from such Bank.
(G) If (i) any Bank has demanded compensation under Paragraph
2.8 in an aggregate amount exceeding $5,000 during any calendar year, (ii) it
becomes unlawful, impossible or impractical for any Bank to make or continue to
maintain Eurodollar Loans pursuant to Paragraph 2.9 and such circumstance is not
applicable to NationsBank, or (iii) any Bank is or becomes insolvent or a
receiver, conservator or similar authority is appointed for any Bank, then Agent
and/or Borrower shall have the right, but not the obligation, upon notice to
such Bank and Borrower or Agent, as applicable, to designate, with the consent
of such assignee, an assignee for any such Bank, which assignee shall be an
Eligible Assignee mutually satisfactory to Agent and Borrower, to purchase such
Bank's Loans and Commitments and assume such Bank's obligations; provided,
however, that Borrower shall not have the right to designate any assignee for
NationsBank. Within ten Business Days after any such notice to such
55
<PAGE>
Bank and Borrower or Agent, as applicable, such Bank shall be obligated to sell
its Loans and Commitments, and such assignee shall be obligated to purchase such
Loans and assume such Bank's obligations, pursuant to an Assignment and
Acceptance. The purchase price therefor shall be an amount equal to the sum of
(A) the outstanding principal amount of the Loans payable to such Bank, plus (B)
all accrued and unpaid interest on such Loans, plus (C) all accrued and unpaid
fees and other amounts due to such Bank pursuant to this Agreement.
(H) Notwithstanding anything to the contrary contained in this
Paragraph 10.6, any Bank may at any time or from time to time assign as
collateral all or any portion of its rights under this Agreement with respect to
its Loans, Commitments and Notes to a Federal Reserve Bank. No such assignment
shall release the assigning Bank from its obligations under this Agreement.
9.9 Applicable Laws. The Laws of the State of Tennessee shall govern
the construction of this Agreement and the rights and remedies of the parties
hereto.
9.10 Binding Effect, Assignment and Entire Agreement. This Agreement
shall inure to the benefit of, and shall be binding upon, the respective
successors and permitted assigns of the parties hereto. The Borrower has no
right to assign any of its rights or obligations hereunder without the prior
written consent of the Banks. This Agreement and the documents executed and
delivered pursuant hereto constitute the entire agreement between the parties,
and supersede all prior agreements and understandings among the parties hereto.
This Agreement may be amended only by a writing signed on behalf of each party.
9.11 Severability. If any provision of this Agreement shall be held
invalid under any applicable Laws, such invalidity shall not affect any other
provision of this Agreement that can be given effect without the invalid
provision, and, to this end, the provisions hereof are severable.
9.12 Counterparts. This Agreement may be executed by the parties
independently in any number of counterparts, all of which together shall
constitute but one and the same instrument which is valid and effective as if
all parties had executed the same counterpart.
9.13 Arbitration. Any controversy or claim between or among the
parties hereto including but not limited to those arising out of or relating to
this Instrument, Agreement or document or any related instruments, agreements or
documents, including any claim based on or arising from an alleged tort, shall
be determined by binding arbitration in accordance with the Federal Arbitration
Act (or if not applicable, the applicable state law), the Rules of Practice and
Procedure for the Arbitration of Commercial Disputes of Judicial Arbitration and
Mediation Services, Inc. (J.A.M.S.), and the "Special Rules" set forth below. In
the event of any inconsistency, the Special Rules shall control. Judgment upon
any arbitration award may be entered in any court having jurisdiction. Any party
to this Agreement may bring an action, including a summary or expedited
proceeding, to compel arbitration of any controversy or claim to which this
agreement applies in any court having jurisdiction over such action.
(a) Special Rules. The arbitration shall be conducted in the
city of the Borrower's domicile at the time of the execution of this instrument,
agreement or document and
56
<PAGE>
administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable
or legally precluded from administering the arbitration, then the American
Arbitration Association will serve. All arbitration hearings will be commenced
within 90 days of the demand for arbitration; further, the arbitrator shall
only, upon a showing of cause, be permitted to extend the commencement of such
hearing for up to an additional 60 days. In any such arbitration, the prevailing
party will be awarded attorney's fees, costs of arbitration and all
out-of-pocket expenses against the defaulting party.
(b) Reservation of Rights. Nothing in this instrument,
agreement or document shall be deemed to (i) limit the applicability of any
otherwise applicable statutes of limitation or repose or any waivers contained
in this Agreement; or (ii) be a waiver by the Agent or Banks of the protection
afforded to them by 12 U.S.C. ss. 91 or any substantially equivalent state law;
or (iii) limit the right of the Agent or Banks hereto (A) to exercise self help
remedies such as (but not limited to) setoff, or (B) to foreclose against any
real or personal property collateral, or (C) to obtain from a court provisional
or ancillary remedies such as (but not limited to) injunctive relief, writ of
possession or the appointment of a receiver. The Agent or Banks may exercise
such self help rights, foreclose upon such property, or obtain such provisional
or ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this instrument, agreement or document. Neither
this exercise of self help remedies nor the institution or maintenance of an
action for foreclosure or provisional or ancillary remedies shall constitute a
waiver of the right of any party, including the claimant in any such action, to
arbitrate the merits of the controversy or claim occasioning resort to such
remedies.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
AGENT BORROWER
- ----- --------
NATIONSBANK OF TENNESSEE, N.A., SPECIALTY CARE NETWORK, INC.
as Agent
BY: [ILLEGIBLE] BY: [ILLEGIBLE]
-------------------------------- --------------------------------
TITLE: AVP TITLE: Vice President of Finance
----------------------------- -----------------------------
BANKS GUARANTORS AND SUBSIDIARIES
- ----- ---------------------------
NATIONSBANK OF TENNESSEE, N.A. SCN OF PRINCETON, INC.
BY: [ILLEGIBLE] BY: [ILLEGIBLE]
-------------------------------- --------------------------------
TITLE: AVP TITLE: Vice President
----------------------------- -----------------------------
57
<PAGE>
EXHIBIT A
Exhibit 10.27
1997 AMENDMENT TO THE
SPECIALTY CARE NETWORK, INC.
1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
Specialty Care Network, Inc. (the "Company") hereby amends the Specialty
Care Network, Inc. 1996 Incentive and Non-Qualified Stock Option Plan (the
"Plan") as follows:
1. The definition of "Change in Control" in Section 2.1 of the Plan is
hereby amended in its entirety to read as follows:
"Change in Control" shall be deemed to have occurred if:
(a) After January 1, 1997, any "person' (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) becomes
a "beneficial owner" (as defined in Rule 1+d-3 under the
Exchange Act), directly or indirectly, of securities of the
Company representing 35% or more of the voting power of the
then outstanding securities of the Company, except where the
acquisition is approved by the Board; or
(b) The shareholders of the Company approve (or, if
shareholder approval is not required, the Board approves) an
agreement providing for (i) the merger or consolidation of the
Company with another corporation where the shareholders of the
Company, immediately prior to the merger or consolidation,
will not beneficially own, immediately after the merger or
consolidation, shares entitling such shareholders to a
majority of all votes to which all shareholders of the
surviving corporation would be entitled in the election of
directors, or where the members of the Board, immediately
prior to the merger or consolidation, would not, immediately
after the merger or consolidation, constitute a majority of
the board of directors of the surviving corporation, or (ii) a
sale or other disposition of all or substantially all of the
assets of the Company.
2. In all other respects, the Plan is hereby ratified and confirmed.
3. This amendment shall be effective as of January 2, 1997.
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officers to
execute and attest this amendment.
SPECIALTY CARE NETWORK, INC.
By:
Date:__________________________________
Attest:
___________________________
___________________________
Date
-2-
Exhibit 21
SCN of Princeton, Inc., a New Jersey corporation
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated November 12, 1996, except Note 9, as to which the
date is January 17, 1997, (Specialty Care Network, Inc.), July 12, 1996
(Reconstructive Orthopaedic Associates, Inc.), August 28, 1996 (Princeton
Orthopaedic Associates, P.A.), October 15, 1996 (Tallahassee Orthopedic Clinic,
Inc.), October 11, 1996 (Greater Chesapeake Orthopaedic Associates, LLC) and
August 20, 1996 (Vero Orthopaedics, P.A.) in Amendment No. 2 to the Registration
Statement (Form S-1) and related Prospectus of Specialty Care Network, Inc.
dated January 21, 1997.
/s/ Ernst & Young LLP
-----------------
ERNST & YOUNG LLP
Denver, Colorado
February 4, 1997
