SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): April 4, 1997
SPECIALTY CARE NETWORK, INC.
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(Exact Name of Registrant Specified in Charter)
Delaware 0-22019 62-1623449
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(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification No.)
Incorporation)
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303) 716-0041
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(Former Name or Former Address, if Changed Since Last Report)
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Item 2. Acquisition or Disposition of Assets.
On April 4, 1997, Specialty Care Network, Inc. (the "Company") acquired,
through merger, substantially all of the assets and certain liabilities (the
"Merger") of The Orthopaedic and Sports Medicine Center, P.A., a Maryland
professional association ("OSMC"), pursuant to the terms of a Merger Agreement,
dated March 24, 1997, among the Company, OSMC, Marshall K. Steele, III, M.D.,
Stephen E. Faust, M.D., Robert M. Verklin, M.D., Thomas J. Harries, M.D., Edward
S. Holt, M.D. and Thomas R. Dennis, M.D. (the "Agreement"). OSMC is an
orthopaedic practice with headquarters in Annapolis, Maryland and additional
offices in Prosten and Severna Park, Maryland. In connection with the Merger,
the common stock of OSMC was exchanged for $3,246,630 in cash and 493,909 shares
of Company Common Stock, valued at $9.86 per share (the average of the closing
share prices of Company Common Stock during the two weeks preceding the
execution of the Agreement). The cash portion of the consideration paid for the
assets pursuant to the Agreement was from the Company's funds.
The assets acquired from OSMC pursuant to the Merger include certain
equipment used by OSMC in the practice of orthopaedic medicine. In connection
with the Acquisition, the Company entered into a service agreement with The
Orthopaedic and Sports Medicine Center II, P.A., a new orthopaedic practice
formed by the former shareholders of OSMC, pursuant to which the Company has
agreed to provide management, administrative and development services to the new
practice. The Company will make available to the new practice the equipment it
acquired in the Merger.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(b) Pro Forma Financial Information (unaudited).
To be filed on Form 8-K/A as soon as practicable, but not later than
60 days after this Form 8-K is filed
(c) Exhibits.
2.1* Merger Agreement, dated March 24, 1997, among the Company, OSMC,
Marshall K. Steele, III, M.D., Stephen E. Faust, M.D., Robert M.
Verklin, M.D., Thomas J. Harries, M.D., Edward S. Holt, M.D. and
Thomas R. Dennis, M.D.
2.2**Service Agreement dated April 4, 1996 among the Company, The
Orthopaedic and Sports Medicine Center II, P.A., Marshall K.
Steele, III, M.D., Stephen E. Faust, M.D., Robert M. Verklin,
Jr., M.D., Thomas J. Harries, M.D., Edward S. Holt, M.D.,
and Thomas R. Dennis, M.D.
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* Incorporated herein by reference to Exhibit 10.28 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
** 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.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SPECIALTY CARE NETWORK, INC.
(Registrant)
By /s/ D. Paul Davis
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D. Paul Davis
Vice President of Finance/Controller
Dated: April 21, 1997
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EXHIBIT INDEX
2.1* Merger Agreement, dated March 24, 1997, among the Company, OSMC, Marshall
K. Steele, III, M.D., Stephen E. Faust, M.D., Robert M. Verklin, M.D.,
Thomas J. Harries, M.D., Edward S. Holt, M.D. and Thomas R. Dennis, M.D.
2.2** Service Agreement dated April 4, 1996 among the Company, The Orthopaedic
and Sports Medicine Center II, P.A., Marshall K. Steele, III, M.D.,
Stephen E. Faust, M.D., Robert M. Verklin, Jr., M.D., Thomas J. Harries,
M.D., Edward S. Holt, M.D., and Thomas R. Dennis, M.D.
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* Incorporated herein by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
** 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.
EXHIBIT 2.2
SERVICE AGREEMENT
BY AND BETWEEN
SPECIALTY CARE NETWORK, INC.,
THE ORTHOPAEDIC AND SPORTS MEDICINE CENTER II, P.A.
MARSHALL K. STEELE, III, M.D.,
STEPHEN E. FAUST, M.D.,
ROBERT M. VERKLIN, JR., M.D.,
THOMAS J. HARRIES, M.D.,
EDWARD S. HOLT, M.D.,
THOMAS R. DENNIS, M.D.,
PETER NORMAN OVE, M.D.,
AND
NICHOLETTE M. MARTIN, M.D.
Dated as of April 1, 1997
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TABLE OF CONTENTS Page
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ARTICLE I.
DEFINITIONS...........................................................- 1 -
1.1. Definitions.....................................................- 1 -
ARTICLE II.
RELATIONSHIP OF THE PARTIES...........................................- 4 -
2.1. Independent Relationship........................................- 4 -
2.2. Responsibilities of the Parties.................................- 4 -
2.3. OSMC II Matters.................................................- 4 -
2.4. Patient Referrals...............................................- 4 -
2.5. Professional Judgment...........................................- 4 -
ARTICLE III.
PRACTICE OFFICES TO BE PROVIDED BY SCN................................- 5 -
3.1. Practice Offices................................................- 5 -
3.2. Use of Practice Offices.........................................- 5 -
ARTICLE IV.
DUTIES OF THE POLICY BOARD............................................- 5 -
4.1. Formation and Operation of the Policy Board.....................- 5 -
4.2. Duties and Responsibilities of the Policy Board.................- 5 -
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY SCN.........................- 6 -
5.1. Performance of Management Functions.............................- 6 -
5.2. Financial Planning and Goals....................................- 6 -
5.3. Audits and Financial Statements.................................- 7 -
5.4. Inventory and Supplies..........................................- 7 -
5.5. Management Services and Administration..........................- 7 -
5.6. Personnel.......................................................- 9 -
5.7. Events Excusing Performance.....................................- 9 -
5.8. Compliance with Law and Business Standards......................- 9 -
5.9. Quality Assurance...............................................- 9 -
5.10. New Medical Services and Additional Practice Offices............- 9 -
5.11. Collection of Certain Patient Receipts and
Payment of Clinic Expenses...................................- 10 -
5.12. Other OSMC II Accounts..........................................- 10 -
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ARTICLE VI.
OBLIGATIONS OF OSMC II AND PHYSICIAN OWNERS..........................- 10 -
6.1. Professional Services..........................................- 10 -
6.2. Medical Practice...............................................- 11 -
6.3. Employment of Physician Employees..............................- 11 -
6.4. Professional Dues and Education Expenses.......................- 11 -
6.5. Professional Insurance Eligibility.............................- 11 -
6.6. Events Excusing Performance....................................- 11 -
6.7. Fees for Professional Services.................................- 11 -
6.8. Peer Review....................................................- 11 -
6.9. Credentialing..................................................- 12 -
ARTICLE VII.
RESTRICTIVE COVENANTS AND ENFORCEMENT................................- 12 -
7.1. Exclusive Arrangement..........................................- 12 -
7.2. Restrictive Covenants..........................................- 12 -
7.3. Enforcement....................................................- 14 -
7.4. Modification of Restrictive Covenants..........................- 14 -
7.5. Rights of SCN..................................................- 14 -
7.6. Excluded Activities............................................- 14 -
7.7. Termination of Restrictive Covenants...........................- 14 -
ARTICLE VIII.
FINANCIAL ARRANGEMENTS...............................................- 15 -
10.1. Insurance to be Maintained by OSMC II.........................- 16 -
10.2. Insurance to be Maintained by SCN.............................- 16 -
10.3. Additional Insureds...........................................- 16 -
10.4. Indemnification...............................................- 16 -
ARTICLE XI.
TERM, TERMINATION AND RETIREMENT.....................................- 17 -
11.1. Term of Agreement.............................................- 17 -
11.2. Extended Term.................................................- 17 -
11.3. Termination by OSMC II for Cause..............................- 17 -
11.4. Termination by SCN for Cause..................................- 18 -
11.5. Termination by Physician Owners...............................- 19 -
11.6. Closing of Purchase by OSMC II and
Effective Date of Termination...............................- 20 -
11.7. Tail Policy...................................................- 20 -
ARTICLE XII.
DAMAGE AND LOSS; CONDEMNATION........................................- 20 -
12.1. Use of Insurance Proceeds.....................................- 20 -
12.2. Temporary Space...............................................- 20 -
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ARTICLE XIII.
REPRESENTATIONS AND WARRANTIES OF OSMC II AND PHYSICIAN OWNERS.......- 20 -
13.1. Validity......................................................- 20 -
13.2. Litigation....................................................- 20 -
13.3. Permits.......................................................- 21 -
13.4. Authority.....................................................- 21 -
13.5. Compliance with Applicable Law................................- 21 -
13.6. Health Care Compliance........................................- 21 -
13.7. Fraud and Abuse...............................................- 21 -
13.8. OSMC II Compliance............................................- 22 -
13.9. Rates and Reimbursement Policies..............................- 22 -
13.10. Accounts Receivable...........................................- 22 -
13.11. Full Disclosure...............................................- 24 -
13.12. Exhibits......................................................- 24 -
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF SCN................................- 24 -
14.1. Organization..................................................- 24 -
14.2. Authority.....................................................- 24 -
14.3. Absence of Litigation.........................................- 24 -
14.4. Transactions with Affiliates..................................- 24 -
ARTICLE XV.
COVENANTS OF OSMC II AND PHYSICIAN OWNERS............................- 24 -
15.1. Merger, Consolidation and Other Arrangements..................- 24 -
15.2. Necessary Authorizations/Assignment of Licenses and Permit....- 24 -
15.3. Transaction with Affiliates...................................- 25 -
15.4. Compliance with All Laws......................................- 25 -
15.5. Third-Party Payor Programs....................................- 25 -
15.6. Change in Business or Credit and Collection Policy............- 25 -
15.7. Treatment of Accounts Receivable..............................- 25 -
15.8. Security Interest.............................................- 25 -
ARTICLE XVI.
GENERAL PROVISIONS...................................................- 26 -
16.1. Assignment....................................................- 26 -
16.2. Whole Agreement; Modification.................................- 26 -
16.3. Notices.......................................................- 26 -
16.4. Binding on Successors.........................................- 27 -
16.5. Waiver of Provisions..........................................- 27 -
16.6. Governing Law Venue...........................................- 27 -
16.7. No Practice of Medicine.......................................- 27 -
16.8. Severability..................................................- 27 -
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16.9. Additional Documents..........................................- 27 -
16.10. Attorneys' Fees...............................................- 28 -
16.11. Time is of the Essence........................................- 28 -
16.12. Confidentiality...............................................- 28 -
16.13. Contract Modifications for Prospective Legal Events...........- 28 -
16.14. Remedies Cumulative...........................................- 28 -
16.15. Language Construction.........................................- 28 -
16.16. No Obligation to Third Parties................................- 28 -
16.17. Communications................................................- 29 -
EXHIBIT 3.1 - LEASE AGREEMENT........................................3.1-1
EXHIBIT 4.1 - POLICY BOARD GOVERNANCE RULES..........................4.1-1
EXHIBIT 8 - FINANCIAL MATTERS......................................... 8-1
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SERVICE AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") dated and effective as of April 1,
1997, by and among SPECIALTY CARE NETWORK, INC., a Delaware corporation ("SCN"),
THE ORTHOPAEDIC AND SPORTS MEDICINE CENTER II, P.A., a Maryland professional
association, ("OSMC II") and MARSHALL K. STEELE, III, M.D., STEPHEN E. FAUST,
M.D., ROBERT M. VERKLIN, JR., M.D., THOMAS J. HARRIES, M.D., EDWARD S. HOLT,
M.D., THOMAS R. DENNIS, M.D., PETER NORMAN OVE, M.D. and NICHOLETTE M. MARTIN,
M.D. ("Physician Owners"), citizens and residents of Maryland.
W I T N E S S E T H:
WHEREAS, SCN is in the business of managing musculoskeletal medical
practices and providing support services to and furnishing these practices with
the necessary equipment, personnel, supplies and support staff; and
WHEREAS, OSMC II and Physician Owners desire to obtain the services of SCN
in performing such management functions so as to permit OSMC II and Physician
Owners to devote OSMC 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.
DEFINITIONS
1.1. Definitions. For the purpose of this Agreement, the following
definitions shall apply:
"Account Debtor" shall have the meaning as defined in Exhibit 8.
"Accounts Receivable" shall have the meaning as defined in Exhibit 8.
"Acquired A/R" means the Accounts Receivable acquired from OSMC by SCN
pursuant to the Merger Agreement.
"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.
"Agent" shall have the meaning as defined in Section 16.1.
"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.
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"Banks" shall have the same meaning as defined in Section 16.1.
"Base Service Fee" shall have the meaning as defined in Exhibit 8.
"OSMC II Operating Account" shall mean that certain operating account
established by OSMC II at a bank selected by OSMC II in OSMC II's sole
discretion as more fully described in Section 5.11.
"CHAMPUS" shall have the meaning as defined in Exhibit 8.
"Clinic Expenses" shall have the meaning as defined in Exhibit 8.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Disabled" or "Disability" shall mean that a Physician Owner or Physician
Employer, as applicable, suffers from a mental or physical condition resulting
in such Physician Owner's or 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 OSMC 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 Owner or Physician Employee will remain disabled
for at least two (2) years following the commencement of such disability.
"Excluded Activities" shall have the meaning as defined in Exhibit 8.
"Excluded Expenses" shall have the meaning as defined in Exhibit 8.
"Excluded Revenue" shall have the meaning as defined in Exhibit 8.
"Fair Market Value" shall have the meaning as defined in Exhibit 8.
"Merger" shall mean the acquisition of The Orthopaedic and Sports Medicine
Center P.A. ("OSMC") pursuant to the Merger Agreement.
"Merger Agreement" means that certain Merger Agreement, dated March 24,
1997, by and among SCN, OSMC and Physician Owners.
"GAAP" shall have the meaning as defined in Exhibit 8.
"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" shall have the meaning as defined in Exhibit 8.
"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.
(section)1395nn and 42 U.S.C. (section) 1320a-7b.
"Leases" shall have the meaning as defined in Section 3.1.1.
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"Leased Premises" shall mean the real property described in the Lease.
"Lender" shall have the meaning as defined in Exhibit 8.
"Main Office" shall have the meaning as defined in Section 3.1.
"Medicaid" shall have the meaning as defined in Exhibit 8.
"Medicare" shall have the meaning as defined in Exhibit 8.
"Necessary Authorizations" means with respect to OSMC II, all certificates
of need, authorization, certifications, consents, approvals, permits, licenses,
notices, accreditations and exemptions, filings and registrations, and reports
required by Applicable Law, which are required, necessary or reasonably useful
to the lawful ownership and operation of OSMC II's business.
"New Lease" shall have the meaning as defined in Section 3.1.
"Person" shall mean an individual, corporation, partnership, association,
limited liability company, trust or unincorporated organization, or a government
or any agency or political subdivision thereof including, without limitation,
Third-Party Payors.
"Physician Employees" shall have the meaning as defined in Exhibit 8.
"Physician Extender Employees" shall have the meaning as defined in Exhibit
8.
"Physician Owners" shall mean those Physician Employees who own an
interest, directly or indirectly, in the equity of OSMC II.
"Pledged Assets" shall have the meaning as defined in Section 16.1.
"Practice Assets" shall have the meaning as defined in Section 11.3.5.
"Policy Board" shall mean a board established pursuant to Section 4.1.
"Practice Net Revenue" shall have the meaning as defined in Exhibit 8.
"Practice Offices" shall mean (i) the Main Office and (ii) all of the
Satellite Offices.
"Professional Services Revenue" shall have the meaning as defined in
Exhibit 8.
"Purchase Price" shall have the meaning as defined in Exhibit 8.
"Purchased A/R" shall have the meaning as defined in Exhibit 8.
"Retirement Buyout Price" shall have the meaning as defined in Exhibit 8.
"Satellite Offices" shall have the meaning as defined in Section 3.1.
"SCN" shall mean Specialty Care Network, Inc., a Delaware corporation,
together with its successors and assigns.
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"SCN Expenses" shall have the meaning as defined in Exhibit 8.
"Settlement Date" shall have the meaning as defined in Exhibit 8.
"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 Exhibit 8.
"Technical Employees" shall have the meaning as defined in Exhibit 8.
"Third-Party Payors" shall have the same meaning as defined in Exhibit 8.
"Third-Party Payor Programs" shall have the meaning as defined in Exhibit
8.
"Withdrawal Buyout Price" shall have the meaning as defined in Exhibit 8.
ARTICLE II.
RELATIONSHIP OF THE PARTIES
2.1. Independent Relationship. OSMC II, Physician Owners and SCN 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 SCN
herein, SCN, OSMC II, and Physician Owners agree that OSMC II and Physician
Owners shall retain all authority to direct the medical, professional, and
ethical aspects of OSMC II's and Physician Owners' medical practice. 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; it
being understood that SCN shall provide service to OSMC II to assist OSMC II in
satisfying its obligations described above.
2.2. Responsibilities of the Parties. As more specifically set forth
herein, SCN shall provide OSMC II with offices and facilities, equipment,
supplies, certain support personnel, management and financial advisory services.
As more specifically set forth herein, OSMC 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. (section) 1395nn, including any amendments or successors
thereto, shall be provided by SCN under this Agreement. SCN shall neither
exercise control over nor interfere with the physician-patient relationship,
which shall be maintained strictly between the physicians of OSMC II and their
patients.
2.3. OSMC II Matters. Matters involving the internal agreements and
finances of OSMC 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 OSMC II.
2.4. Patient Referrals. The parties agree that the benefits to OSMC 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 SCN to any of OSMC II's patients in
any facility operated by SCN.
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2.5. Professional Judgment. Each of the parties acknowledges and agrees
that the terms and conditions of this Agreement pertain to and control solely
the business and financial relationship between and among the parties and do not
pertain to and do not control the professional and clinical relationship between
and among OSMC II, Physician Owners, Physician Employees, OSMC II Employees and
OSMC 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 OSMC II, Physician Owners, Physician Employees and OSMC 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 III.
PRACTICE OFFICES TO BE PROVIDED BY SCN
3.1. Practice Offices.
3.1.1. As a result of the consummation of the transactions contemplated by
the Merger Agreement, SCN has received a leasehold interest in certain offices
and locations which comprise the main office of OSMC II (the "Main Office")
and/or any satellite offices of OSMC II (the "Satellite Offices"). Copies of
such leases (the "Leases") are attached hereto as Exhibit 3.1.
3.1.2. SCN shall provide offices and facilities at the Office Location(s)
(or comparable facilities in the event the Leases are terminated) to OSMC II.
Such facilities shall include all personal property necessary to operate the
facility. If the Leases are terminated for any reason, SCN shall enter into a
lease of a new facility comparable to the Office Location(s) whose lease is
terminated (the "New Lease") with the consent of the Policy Board. SCN shall not
enter into a New Lease without the approval of the Policy Board.
3.1.3. OSMC II shall comply fully with the terms of all Leases or New
Leases, as applicable.
3.2. Use of Practice Offices. OSMC II shall not use or occupy the Main
Office or Satellite Offices for any purpose which is prohibited by the 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 OSMC II. No party shall
have the authority to undertake any actions described in Section 4.2 below
without the authority of the Policy Board. The Policy Board shall consist of
four (4) members. SCN shall designate, in its sole discretion, two (2) members
of the Policy Board. OSMC II shall designate, in OSMC II's sole discretion, two
(2) 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:
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4.2.1. Capital Improvements and Expansion. The Policy Board shall review
all requests by OSMC 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 SCN 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
SCN in accordance with Section 5.2 of this Agreement, shall be subject to the
review and approval of the Policy Board.
4.2.3. Marketing. All advertising and other marketing of the services
performed at any Practice Office(s) 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 OSMC II and SCN, to the extent allowed by Applicable
Law, the Policy Board shall review and advise OSMC II as to an appropriate fee
schedule for all physician and ancillary services rendered by OSMC II, which fee
schedule shall ultimately be determined by OSMC II in OSMC II's sole discretion.
In addition, the Policy Board shall approve the credit collection policies of
OSMC II.
4.2.5. OSMC 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 OSMC II in the future, shall be made by the Policy Board in
consultation with OSMC II.
4.2.6. Strategic Planning. The Policy Board shall develop long-term
strategic planning objectives.
4.2.7. 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 of
this Agreement.
4.2.8. 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.
4.2.9. Exceptions to Inclusion in Practice Net Revenue Calculation. The
exclusion of any revenue from Practice Net Revenue, not already defined as
Excluded Revenue, whether new or in the future, shall be subject to the approval
of the Policy Board, and the treatment of any expense as a Clinic Expense which
is not otherwise addressed herein or in any budget shall be subject to the
approval of the Policy Board.
ARTICLE V.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY SCN
5.1. Performance of Management Functions. SCN 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. SCN 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. SCN 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 Leases for
each of the Practice Offices, including, without limitation, performance of some
of the business office functions at locations other than the Main Office. OSMC
II will not act in a manner which would
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prevent SCN from efficiently managing the day-to-day operations of the Main
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, SCN shall prepare annual capital and operating budgets reflecting in
reasonable detail the anticipated revenues and expenses, and sources and uses of
capital for growth in OSMC 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.
During the first year of operations pursuant to this Agreement, SCN and the
Policy Board shall agree upon a budget within ninety (90) days of the effective
date of this Agreement. In subsequent years, SCN shall provide such budgets not
later than thirty (30) days prior to the end of the fiscal year, the Policy
Board and SCN shall agree upon a budget for the upcoming fiscal year. The
budget, as described in Section 4.2.2., shall be binding upon SCN and OSMC II.
SCN shall consult with OSMC II and the Policy Board in the preparation of all
budgets. SCN and OSMC II acknowledge and agree that once a budget has been
approved, neither SCN nor OSMC 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. SCN shall prepare annual financial
statements for the operations of OSMC II and, in its sole discretion, may cause
the financial statements to be audited by a certified public accountant selected
by SCN. OSMC II shall cooperate fully in such audit. The cost of such audit
shall be a SCN Expense. If SCN 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 OSMC II and SCN. If SCN elects
not to have OSMC II's financial statements so audited, OSMC II shall have the
option to obtain such an audit, by a certified public accountant with a mutually
acceptable accounting firm. SCN shall fully cooperate in such audit. The cost of
such audit shall be a SCN Expense. In such event, SCN and OSMC 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, SCN shall prepare monthly unaudited financial statements
containing a balance sheet and statements of income from OSMC II's operations,
which shall be delivered to OSMC II within thirty (30) business days after the
close of each calendar month.
5.4. Inventory and Supplies. SCN shall order and purchase inventory and
supplies and such other ordinary, necessary or appropriate materials which SCN
shall deem to be necessary in the operation of the Practice Offices and which
are requested by OSMC II and are within the budget for the applicable fiscal
period. SCN shall not purchase inventory, goods or supplies from any Affiliate
of SCN 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. OSMC II hereby appoints SCN as OSMC II's sole and exclusive manager
and administrator of all day-to-day business functions. OSMC II agrees that the
purpose and intent of this Agreement is to relieve OSMC II and Physician
Employees to the maximum extent possible of the administrative, accounting,
personnel and business aspects of their practice, with SCN assuming
responsibility and being given all necessary authority to perform these
functions including, without limitation, the authority to incur obligations in
the name of OSMC II to be paid by OSMC II as Clinic Expenses in accordance with
the policies and procedures adopted by the Policy Board. OSMC II hereby appoints
SCN for the term of this Agreement to be its true and lawful attorney-in-fact to
incur such expenses in the name and on behalf of OSMC II. SCN agrees that OSMC
II and only OSMC II will perform the medical functions of OSMC II's practice.
SCN will have no authority, directly or indirectly, to perform, and will not
perform, any medical function. SCN may, however, advise OSMC II as to the
relationship between OSMC II's performance of medical functions and the overall
administrative and business functioning of OSMC II's practice. To the extent
that a SCN 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, SCN, except as may
be specifically authorized by SCN.
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5.5.2. SCN shall, on behalf of OSMC II, bill patients and collect the
professional fees for medical services rendered by OSMC II, Technical Employees
and/or any Physician Employee, regardless of when or where such services are
rendered. All billings for Technical Employees' and Physician Employees'
services shall be made in the name of and under the provider number of OSMC II.
OSMC II hereby appoints SCN to be OSMC II's true and lawful attorney-in-fact,
for the following purposes: (i) to bill patients in OSMC II's name and on OSMC
II's behalf; (ii) to collect Accounts Receivable resulting from such billing in
OSMC II's name and on OSMC 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 OSMC 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 OSMC II to collect any accounts and
monies owed to OSMC II, Technical Employee or any Physician Employee, to enforce
the rights of OSMC 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. All
adjustments made for uncollectible accounts, professional courtesies and other
activities that do not generate a collectible fee shall be done in a reasonable
and consistent manner approved by SCN's independent certified public
accountants. Except for cash proceeds from the collection of Accounts Receivable
purchased from OSMC II by SCN, SCN shall deposit any cash receipts collected on
behalf of OSMC II into the OSMC II Operating Account described in Section 5.11.
5.5.3. SCN shall design, supervise and maintain possession of all files and
records relating to the operation of OSMC II, including but not limited to
accounting, billing, patient medical records, and collection records. While the
SCN shall maintain custody, patient medical records shall at all times be and
remain the property of OSMC 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. SCN 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; provided, however, in no event shall a breach of said confidentiality be
deemed a default under this Agreement.
5.5.4. SCN shall supply to OSMC II or arrange for 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 Office Locations.
5.5.5. Subject to the provisions of Section 4.2.3., SCN shall supervise the
design and implementation of an adequate and appropriate public relations
program on behalf of OSMC 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 governing
advertising by the medical profession and applicable canons of principles of
professional ethics of OSMC II and the Physician Employees.
5.5.6. SCN shall provide the data necessary for OSMC II to prepare OSMC
II's annual income tax returns. SCN shall have no responsibility for the
preparation of OSMC II's federal or state income tax returns or the payment of
such income taxes. SCN shall prepare or cause to be prepared on OSMC II's
behalf, necessary employment tax returns. OSMC II shall be obligated to pay any
taxes due on such employment tax returns with respect to the Physician Owners.
5.5.7. SCN shall assist OSMC 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, OSMC II shall interview and make the
ultimate decision as to the suitability of any
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physician to become associated with OSMC II. All physicians recruited by
SCN and accepted by OSMC II shall be the sole employees of OSMC II, to the
extent such physicians are hired as employees. Subject to Section 6.3, any
expenses incurred in the recruitment of Physicians, including, but not limited
to, employment agency fees, relocation and interviewing expenses, shall be
budgeted Clinic Expenses and shall be paid by OSMC II.
5.5.8. SCN shall negotiate managed care contracts on behalf of OSMC II and
shall administer all managed care contracts in which OSMC II participates. OSMC
II, at its discretion, shall have the right to enter into or reject such
contracts negotiated by SCN.
5.5.9. Subject to the provisions of Section 5.3 and Section 5.5.6, SCN
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, OSMC II shall have the authority to
arrange for legal and accounting services relating to matters other than
day-to-day management of OSMC II; such other matters including but not limited
to issues relating to OSMC II governance issues, compensation of Physician
Owners, and issues which arise between OSMC II and SCN; provided, however, such
fees shall be considered Excluded Expenses.
5.5.10. SCN 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, SCN shall make payment for the cost of professional
licensure fees and board certification fees of physicians associated with OSMC
II.
5.5.12. SCN shall negotiate for and cause premiums to be paid with respect
to the insurance provided for in Section 10.1.
5.6. Personnel. SCN 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. SCN shall determine and cause
to be paid the salaries and fringe benefits of all such personnel. Such
personnel shall be employees of SCN, with those personnel performing patient
care services subject to the professional direction and supervision of Physician
Employees. If OSMC II is dissatisfied with the services of any person, OSMC II
shall consult with SCN. SCN 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
SCN'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 OSMC II disagrees with an assignment, OSMC II may
appeal such assignment to the Policy Board. SCN shall maintain established
working relationships wherever possible and SCN shall make every effort
consistent with sound business practices to honor the specific requests of OSMC
II with regard to the assignment of SCN's employees.
5.7. Events Excusing Performance. SCN shall not be liable to OSMC 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 SCN 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. SCN shall comply with
Applicable Law including, without limitation, Health Care Law including, without
limitation, federal, state, and local laws and regulations affecting billing
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and reimbursement, referrals, patient privacy and confidentiality, and
management of hazardous materials and infectious waste. SCN shall discharge its
obligations under this Agreement consistent with applicable business and
industry standards and practices.
5.9. Quality Assurance. SCN shall assist OSMC II in fulfilling OSMC 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 OSMC II
desires to have a new medical service provided at any of the Practice Offices or
desires to establish a new Practice Office, 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, SCN, at its option, shall have the exclusive right to: (i) provide
services necessary to support OSMC II in OSMC II's delivery of such new medical
services at the Practice Office or new clinic, as applicable, and (ii) invest
and have ownership in any new services for which facility fees may be generated;
provided, however, if the type of service is an ancillary service that would be
improper under any rules, regulations or laws for SCN to offer to OSMC II
patients, then SCN shall not have the option to provide such service. Should SCN
decline to provide the necessary support service or ownership for the new
service or new clinic, OSMC II shall be entitled to perform such service at OSMC
II's own expense and the revenues therefrom shall not be included in the
calculation of SCN's Service Fees under Exhibit 8 of this Agreement; provided,
however, that SCN shall have the option to: (i) assume performance of the
necessary support services for providing such new service or new clinic or
(ii) acquire ownership in such new service, by buying out OSMC II's investment
in the service at the fair market value at anytime within eighteen (18) months
of the date such new service is first provided. For the purpose of the preceding
sentence, fair market value will be determined jointly by OSMC II and SCN or as
set forth in the following sentences of this Section 5.10. If OSMC II and SCN
are unable to reach agreement regarding the fair market value within fifteen
(15) days after the date on which negotiations regarding the fair market value
commence but agree upon an appraiser to determine such fair market value, then
such appraiser shall determine the fair market value, and such appraisal shall
govern. If OSMC II and SCN do not agree as to such fair market value or as to a
single appraiser to determine the fair market value, within fifteen (15) days
after the date on which negotiations regarding the fair market value commence,
then SCN shall, by notice to OSMC II, appoint one appraiser, and OSMC II shall,
by notice to SCN, appoint one appraiser. If either SCN or OSMC II shall fair to
appoint such appraiser within five (5) days after the lapse of such fifteen (15)
day period, then the appraiser appointed by the party which does appoint an
appraiser shall make the appraisal of the fair market value, and such appraisal
shall govern. If said two (2) appraisers cannot reach agreement within thirty
(30) days after the appointment of the last appraiser to be appointed, the two
(2) appraisers selected shall promptly appoint a third appraiser, and the
unanimous decision of the three (3) appraisers shall govern or, if the three (3)
appraisers cannot unanimously agree as to the fair market value, then the
average of the two (2) appraisals closest in amount shall be considered the fair
market value. All appraisal reports shall be rendered to SCN and OSMC II in
writing and shall be signed by the appraiser(s). The fair market value,
determined as herein provided, shall be final and conclusive on SCN and OSMC II
and shall be enforceable in any court having jurisdiction over a proceeding
brought to seek such enforcement. SCN and OSMC II each will pay one-half (1/2)
of the expenses of such appraisal(s).
5.11. Collection of Certain Patient Receipts and Payment of Clinic
Expenses. OSMC II agrees to establish and maintain a bank account, which shall
be referred to as the OSMC II Operating Account, for the purpose of
(a) depositing proceeds from the sale of OSMC II's Accounts Receivable pursuant
to Exhibit 8 and (b) paying (i) any Service Fees owed pursuant to Exhibit 8 of
this Agreement, (ii) expenses which are solely the obligation of OSMC II
(Excluded Expenses), and (iii) compensation or distributions to Physician
Owners, and the distributions shall be made in that order of payment. OSMC II
shall designate a SCN employee as a signatory on the OSMC II Operating Account.
After the payment of any Service Fees owed pursuant to Exhibit 8 of this
Agreement, and expenses which are solely the obligation of OSMC II, OSMC II may
withdraw amounts for distributions to Physician Owners.
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5.12. Other OSMC II Accounts. OSMC II shall have the right to open or
create bank accounts in addition to the OSMC II Operating Account described in
Section 5.11 of this Agreement.
ARTICLE VI.
OBLIGATIONS OF OSMC II AND PHYSICIAN OWNERS
6.1. Professional Services.
6.1.1. OSMC II, its Physician Owners and Physician Employees shall provide
professional services to patients in a manner and amount consistent with
practices of OSMC II's predecessor at the time of entering into this Agreement.
6.1.2. OSMC 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
OSMC II's professional practice. OSMC II shall also make all reports and
inquiries to the National Practitioners Data Bank and/or any state data bank
required by Applicable Law. OSMC II shall use its best efforts to determine that
each Physician Employee and Technical Employee associated with OSMC II who
provides medical care to patients of OSMC 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, OSMC II shall
immediately provide SCN with copies of any third-party documents (not otherwise
privileged) served on OSMC II or letters delivered to OSMC II. Such information
shall be deemed confidential information and shall, notwithstanding such
disclosure, remain subject to all privileges and immunities provided by
Applicable Law. SCN shall take all steps reasonably necessary to assure that
such privileges and immunities remain intact. OSMC 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.
6.1.3. OSMC II shall promptly provide SCN with all billing information
requested by SCN to enable SCN to bill and collect OSMC II's charges, and OSMC
II shall procure consents to assignments and other approvals and documents
necessary to enable SCN to obtain payment or reimbursement from Payors and/or
patients. SCN shall obtain, with the assistance of SCN, all provider numbers
necessary to obtain payment or reimbursement for its services.
6.2. Medical Practice. OSMC 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 OSMC II,
and no other physician or medical practitioner shall be permitted to use or
occupy the Main Office without the prior written consent of SCN.
6.3. Employment of Physician Employees. OSMC II shall have complete control
of and responsibility for the hiring, compensation, supervision, evaluation and
termination of Physician Employees, although at the request of OSMC II, SCN
shall consult with OSMC II respecting such matters. OSMC II shall be
responsible, subject to Exhibit 8, 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, OSMC II shall only employ and contract with licensed physicians
meeting applicable credentialing guidelines established by OSMC II.
6.4. Professional Dues and Education Expenses. Physician Owners shall be
solely responsible for the cost of membership in professional associations and
the cost of continuing professional education. OSMC II shall ensure that each
Physician Employee participates in such continuing medical education as is
necessary for such physician to remain licensed.
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6.5. Professional Insurance Eligibility. OSMC 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. OSMC II and Physician Owners shall not be
liable to SCN 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 OSMC 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. OSMC II shall be solely responsible
for legal, accounting and other professional services fees (Excluded Expenses)
incurred by OSMC II, except as otherwise determined by the Policy Board. Section
5.5.9.
6.8. Peer Review. OSMC II agrees to cooperate with SCN in establishing a
system of peer review within and among the provider practices as necessary to
obtain provider contracts. In connection therewith, OSMC II agrees to assist in
the formulation of provider guidelines and/or protocols 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. OSMC 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, OSMC II agrees to
cooperate with SCN 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 OSMC II and other practices that
are part of the peer review process, and shall not be promulgated, established
or enforced independently by SCN. 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. Credentialing. To the extent permitted by applicable law, SCN shall
assist OSMC 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 SCN shall be
feasible only if OSMC II operates an active medical practice to which both OSMC
II and the physicians associated with OSMC II devote their full time and
attention. To that end:
7.1. Exclusive Arrangement. During the term of this Agreement, SCN shall be
OSMC II's and Physician Owners' sole provider of the management services
described in this Agreement and neither OSMC II, Physician Owners nor any of
OSMC II's or Physician Owners' employees shall provide such management services
during the term of this Agreement. OSMC II and the Physician Owners agree that
during the term of this Agreement, neither OSMC II nor Physician Owners will
enter into any similar agreements with any physician practice management company
or entity. OSMC 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, imagining centers, physical therapy, rehabilitation centers or
provides management services of the nature provided by SCN pursuant to this
Agreement, within Anne Arundel County, 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 OSMC II at any time during the term of this Agreement.
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7.2. Restrictive Covenants.
7.2.1. Restrictive Covenants By Current Physician Employees. OSMC 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 OSMC II, except on OSMC II's
behalf, within Anne Arundel County, 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 thereafter at the time of termination of employment with
OSMC II and for a period of twenty-four (24) months after any termination of
employment with OSMC II. Such agreements shall be a condition to employment and
shall be in a form satisfactory to SCN and shall provide that SCN is a
third-party beneficiary to such agreements and that such third-party beneficiary
rights may be assigned to SCN's Lender. This Section 7.2.1 shall relate solely
to Physician Employees who are not also Physician Owners.
7.2.2. Restrictive Covenants By Future Physician Employees. OSMC 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 OSMC II except on
OSMC II's behalf, within Anne Arundel County, 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 OSMC 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 SCN and shall provide that SCN is a third-party beneficiary
to such agreements and that such third-party beneficiary rights may be assigned
to any Lender. This Section 7.2.2 shall relate solely to Physician Employees who
are not also Physician Owners.
7.2.3. Restrictive Covenants 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 SCN, which such
written request includes a reasonable explanation or basis for the request, OSMC
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 Section 7.2.4. Such agreements shall provide that SCN is a
third-party beneficiary to such agreements and that such third-party beneficiary
rights may be assigned to any Lender. OSMC II agrees to enforce the restrictive
covenants. The cost and expense of such enforcement shall be a Company Expense,
and all damages and other amounts recovered thereby shall be included in
Professional Services Revenue. In the event that after a request by SCN, OSMC 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 SCN, OSMC II shall assign
to SCN 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 SCN
with respect thereto; in which case, all costs and expenses incurred in
connection therewith shall be borne by SCN and shall be included in SCN
Expenses, and SCN shall be entitled to all damages and other amounts recovered
thereby. The above described restrictive covenants between OSMC II and Physician
Owners shall be in addition to and not in place of the restrictive covenants
described in Section 7.2.4 between SCN and the Physician Owners.
7.2.4. Physician Owner and OSMC II Restrictive Covenants. OSMC 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, of this Agreement). OSMC 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:
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7.2.4.1. Subject to the provisions of Section 7.4 below, establish, operate
or provide professional medical services at any medical office, clinic or other
health care facility at any location within Anne Arundel County, Maryland or
contiguous counties or 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 SCN provides services to any practice at the time of such termination;
7.2.4.2. Subject to the provisions of Section 7.4 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 Anne Arundel
County, 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 (i) the Main Office; (ii) any of the Satellite Offices;
or (iii) any location at which SCN provides services to any practice at the time
of such termination;
7.2.4.3. Solicit, induce or attempt to induce, in connection with any
business competitive with that being serviced by SCN, patients of any physician
(including OSMC II and/or the Physician Owner(s)) associated or affiliated with
SCN to leave the care of physicians associated or affiliated with SCN; or
7.2.4.4. Solicit, induce or attempt to induce any employee, consultant or
other persons associated or affiliated with SCN or any Affiliate of SCN to leave
the employment of, or to discontinue their association with, SCN or such
Affiliate of SCN.
7.2.5. If OSMC II and/or the Physician Owner(s) violate the covenants set
forth in Section 7.2.4 of this Article VII, then the duration of the
restrictions contained in Section 7.2.4 shall be extended an additional month
for each month during which such violation occurred but was not discovered by
SCN, beginning upon the date that SCN learns of the violation and so notifies
OSMC II and/or the Physician Owners in writing.
7.2.6. OSMC II and the Physician Owner(s) acknowledge and agree that if
OSMC II and/or the Physician Owner(s) breach the covenants contained in Section
7.2.4 and SCN 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 OSMC II and/or the Physician Owner(s), it will be difficult
to calculate the precise amount of SCN's damages. As a result, the parties have
determined that, in the event of such a breach, SCN's damages shall be equal to
300% of the total amount of Professional Service Revenues attributable to the
applicable Physician Owner(s) during the twelve (12) months prior to the
termination of the Agreement; provided, however, that if this Agreement has not
been in effect for twelve (12) months prior to its termination, SCN's damages
shall be equal to 300% of the total annualized amount of Professional Service
Revenues anticipated to be attributable to the applicable Physician Owner(s).
7.3. Enforcement. OSMC II and the Physician Owners acknowledge and agree
that the covenants contained in this Article VII are necessary to protect the
business and goodwill of the SCN and that a breach of these covenants will
result in irreparable harm and continuing damage to SCN. As a result, OSMC II
and the Physician Owners 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, SCN 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. The parties have attempted
to limit the provisions of Section 7.2 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 Section 7.2 is adjudged by any
court of competent jurisdiction to
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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.
7.4. 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 this Article VII. In the event that the
individuals representing OSMC II on the Policy Board can reasonably demonstrate
that a modification to the restrictive covenant will not have a material adverse
effect on SCN's or OSMC II's practice operations, earnings or cash flow, then
the individuals representing SCN shall consent to the proposed modifications.
7.5. Rights of SCN. Except as limited in this Section 7.5, SCN 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 8.5.3 of
Exhibit 8, in the event that SCN 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 the
Main Office or any Satellite Office, then the Policy Board must first approve
SCN entering into such agreement. In the event that the individuals representing
SCN on the Policy Board can reasonably demonstrate that entering into such
agreement will not have a material adverse effect on OSMC II's practice
operations, earnings or cash flow, then the individuals representing OSMC II
shall consent to SCN entering into such agreement.
7.6. Excluded Activities. The restrictive covenants contained in this
Article VII shall not apply to or restrict Excluded Activities defined in
Schedule 8.
7.7. Termination of Restrictive Covenants. After the fifth anniversary of
the commencement of this Service Agreement (unless this Service Agreement shall
have been terminated earlier), the restrictive covenants contained in this
Article VII will terminate and no longer be enforceable in the following events:
7.7.1. Termination of Restrictive Covenants with respect to Individual
Physician Owners. In the event that an individual Physician Owner shall
terminate this Agreement pursuant to Section 11.5.1, then the foregoing
restrictive covenants shall be of no further force and effect with respect to
such Physician Owner and SCN shall thereafter take no action against such
Physician Owner to enforce same.
7.7.2. Termination of Restrictive Covenants with respect to Physician
Owners Acting in Concert. In the event that Physician Owners acting in concert
shall terminate this Agreement pursuant to Section 11.5.2, then the foregoing
restrictive covenants shall be of no further force and effect with respect to
such Physician Owners and SCN shall thereafter take no action to enforce same
against any such Physician Owner.
ARTICLE VIII.
FINANCIAL ARRANGEMENTS
SEE EXHIBIT 8
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ARTICLE IX.
INTELLECTUAL PROPERTY AND RECORDS
9.1. Know-How. OSMC II acknowledges that SCN possesses significant
proprietary and confidential know-how, technology and business information,
including but not limited to, utilization protocols, practice guidelines and
proprietary management software and data, which OSMC II has developed and will
continue to develop on its own, in its relationship with vendors, practitioner
groups, integrated delivery systems and other providers. OSMC II and SCN
acknowledge that one of their mutual objectives is the development of
utilization protocols, practice guidelines, other know-how and intellectual
property to be used in connection with SCN's operations or which SCN intends to
use or license in its relationship with third parties, including other medical
groups, integrated delivery systems and other providers. In addition, OSMC II
acknowledges that as of the Closing Date, by virtue of execution and delivery of
the Merger Agreement, SCN will have acquired all of the existing know-how and
intellectual property of OSMC II. Therefore, the parties agree that SCN shall
own all new know-how, as well as existing know-how, regardless of whether the
new know-how is developed by one or more physicians in OSMC II, SCN or
Affiliates. OSMC II agrees to execute and deliver such documentation as may be
requested by SCN from time to time to evidence such ownership. SCN shall license
and provide access to both the existing know-how and new know-how to OSMC II
pursuant to this Agreement.
9.2. Ownership of SCN's Business Records and Systems. All business records,
information, software and systems of SCN relating to the provision of its
services under this Agreement shall remain the property of SCN and may be
removed by SCN from supporting OSMC II upon any termination of this Agreement;
provided, however, that OSMC II shall be entitled, upon reasonable written
request, to access such records and make copies or extracts thereof to the
extent necessary to prosecute or defend against any tax or other liabilities
imposed on OSMC II by any governmental authority or other party.
9.3. Maintenance of Records. Except as otherwise provided in this
Agreement, the parties shall safeguard all records maintained by them pursuant
to this Agreement for a period of time specified by the Policy Board from the
date of the last activity recorded in such records and, prior to destruction of
any such records, shall give the other party notice of such destruction and, if
the other party so elects and applicable law so permits, shall deliver such
records to the other party in lieu of destroying them. In particular, the
parties agree, to the extent necessary to permit receipt of reimbursement for
services by OSMC II, to make available to the Secretary of the United States
Department of Health and Human Services, the Comptroller General at the General
Accounting Office, or their authorized representatives, any books, documents and
records in their possession relating to the nature and extent of the costs of
services hereunder for a period of four (4) years after the provision of such
services. Each party further agrees that, if it contracts with any third party
to provide services that are valued in excess of $10,000, it shall require such
contract party to comply with the requirements of the previous sentence. Nothing
in this Section 9.4 constitutes the waiver of any attorney-client privilege, and
neither party shall be required hereunder to give the other party documents if,
as a result, an existing attorney-client privilege would be waived.
9.4. Access to Records. Each party shall at all reasonable times during the
term of this Agreement and thereafter permit the other party to have reasonable
access at reasonable times to its documents, books and records relating to this
Agreement.
9.5. Patient Records. All patient records shall remain the property of OSMC
II, provided that SCN shall have the right to analyze and obtain information
from such records. Upon termination of this Agreement, OSMC II shall retain such
records, but SCN shall be entitled to retain any information it has acquired
from such records; provided, however, that SCN shall take all action reasonably
necessary to ensure the confidentiality of the patient records in accordance
with applicable laws and shall indemnify OSMC II and any of its physician
employees (who are deemed hereby to be third party beneficiaries for this
purpose) for breach of any applicable confidentiality requirements.
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ARTICLE X.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by OSMC II. Throughout the term of this
Agreement, OSMC II shall maintain comprehensive professional liability and
worker's compensation insurance for OSMC II and all employees of OSMC II in
amounts approved by the Policy Board. Not in limitation of the foregoing, OSMC
II shall maintain general liability coverage with a One Million Dollars
($1,000,000) limit as currently maintained by OSMC II (with deductible
provisions not to exceed $25,000 per occurrence), the cost of which shall be
paid by SCN as a Clinic Expense. In lieu of the foregoing, SCN may provide as a
Clinic Expense group insurance for malpractice and/or worker's compensation
insurance. Notwithstanding the foregoing, in the event that SCN procures such
group insurance for malpractice and/or worker's compensation insurance, OSMC II
must first approve the amount of coverage, the carrier and the terms of any such
coverage for OSMC II.
10.2. Insurance to be Maintained by SCN. Throughout the term of this
Agreement, SCN 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 SCN who work at the Practice
Offices with limits as determined reasonable by SCN, 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 SCN.
10.3. Additional Insureds. OSMC II and SCN 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 SCN's expense. Further, on any
insurance where SCN will be named as an additional insured, OSMC II will assist
SCN to obtain appropriate riders to insure payment of any party indemnified by
SCN.
10.4. Indemnification.
10.4.1. OSMC II shall indemnify, hold harmless and defend SCN, 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 omissions
by OSMC II and/or OSMC II's Physician Owners, agents, employees and/or
subcontractors (other than SCN) during the term hereof or as a result of a
breach of the representations and warranties contained in Article XIII of this
Agreement or the breach of any covenant contained in Article XV of this
Agreement. In addition, in consideration for the assets transferred pursuant to
the Merger Agreement, OSMC II shall guarantee payment of, and act as collecting
agent for, and indemnify, hold harmless and defend SCN, its Affiliates,
officers, directors, shareholders and employees, from and against any and all
liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees) caused by any claim against SCN based upon:
(a) any inaccuracy in or breach of any representation, warranty, covenant
or agreement made by the Physician Owners or OSMC in the Merger Agreement;
(b) any claims of malpractice against OSMC or OSMC II in excess of
insurance coverage limits (including without limitation self-insurance coverages
and reserves);
(c) any liabilities of OSMC resulting from the activities of OSMC prior to
the effective date of the Merger which were not disclosed to SCN in the Merger
Agreement;
(d) OSMC's transactional costs and expenses incidental to the preparation
and carrying out of the Merger Agreement; and
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(e) any liability of SCN or OSMC for taxes resulting from or assessed in
connection with the Merger and the transactions contemplated thereby, but only
to the extent that such taxes result from actions taken by OSMC II or the OSMC
II Stockholders (as defined in the Merger Agreement) after the effective date of
the Merger;
10.4.2. SCN shall indemnify, hold harmless and defend OSMC II, the
Physician Owners, OSMC 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 SCN and/or its shareholders,
agents, employees and/or subcontractors (other than OSMC II and the Physician
Owners) during the term of this Agreement or as a result of a breach of the
representations or warranties set forth in Article XIV of this Agreement.
10.4.3. 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 March 31, 2037 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 OSMC II for Cause. OSMC 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 SCN, or upon other action taken or
suffered, voluntarily or involuntarily, under any federal or state law for the
benefit of debtors by SCN, except for the filing of a petition in involuntary
bankruptcy against SCN which is dismissed within thirty (30) days thereafter,
OSMC II may give notice of the immediate termination of this Agreement.
11.3.2. In the event SCN 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 SCN by OSMC II; provided, however, that if such default is not cured
within ninety (90) days, but is capable of being cured within a reasonable
period of time in excess of ninety (90) days, then a default under this
Agreement shall not be deemed to have occurred if SCN commences the cure of such
default within the first ninety (90) day period and thereafter diligently and in
good faith continues to cure such default until completion; or SCN shall fail to
remit the payments due as provided in Exhibit 8 hereof and such failure to remit
shall continue for a period of thirty (30) days after written notice thereof,
OSMC II may terminate this Agreement.
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11.3.3. In the event SCN shall, intentionally or in bad faith, misapply
funds or assets of OSMC II or commit a similar act which causes material harm to
OSMC II, OSMC II may terminate this Agreement.
11.3.4. In the event that SCN 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 OSMC II, OSMC II may terminate this
Agreement.
11.3.5. In the event that this Agreement is terminated by OSMC 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, or (ii) by SCN
for cause as set forth in Section 11.4, then upon such termination, OSMC II
shall purchase from SCN all assets, both tangible and intangible, owned by SCN
and used or made available for OSMC II's use ("Practice Assets") for the fair
market value of such assets on a going concern basis without regard to this
Agreement. In addition thereto, OSMC II shall assume all debt (including any
balance of any remaining debt incurred by the SCN to acquire the assets under
the Merger Agreement) and all contracts, payables and leases which are
obligations of SCN which relate to the SCN's obligations which are performed at
the Office Locations under this Agreement. The fair market value of the Practice
Assets shall be determined by an independent appraiser selected by two (2)
independent accountants practicing with "big six" accounting firms, one (1)
selected by OSMC II and one (1) selected by SCN and neither of which is
providing or has for a period of two (2) years provided services to SCN or OSMC
II. In the event that OSMC II terminates this Agreement pursuant to Sections
11.3.1 through 11.3.4, inclusive, then upon the closing of the purchase of the
Practice Assets, OSMC II and its Physician Employees shall, except as OSMC 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 of this Agreement.
11.4. Termination by SCN for Cause. SCN 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 OSMC II, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by OSMC II, except for the filing of a petition in
involuntary bankruptcy against OSMC II which is dismissed within thirty (30)
days thereafter, SCN may give notice of the immediate termination of this
Agreement.
11.4.2. In the event OSMC 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 OSMC II by SCN; provided, however, that if such default is not cured
within ninety (90) days, but is capable of being cured within a reasonable
period of time in excess of ninety (90) days, then a default under this
Agreement shall not be deemed to have occurred if SCN commences the cure of such
default within the first ninety (90) day period and thereafter diligently and in
good faith continues to cure such default upon completion, SCN may terminate
this Agreement.
11.4.3. In the event OSMC II's Medicare or Medicaid Number shall be
terminated or suspended as a result of the action or inaction of OSMC II or a
Physician Employee, and such termination or suspension shall continue for thirty
(30) days, SCN may give notice of the immediate termination of this Agreement,
unless OSMC 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 OSMC II to
reverse such termination or suspension, if such termination or suspension shall
not be reversed within one hundred twenty (120) days after occurrence, SCN shall
have the right to terminate this Agreement immediately.
11.4.4. In the event this Agreement is terminated by SCN pursuant to
Section 11.4.1, Section 11.4.2, or Section 11.4.3, SCN, at its option, may
require OSMC II to purchase from SCN all Practice Assets for the fair market
value of such assets on a going concern basis, without regard to this Agreement.
In addition thereto, OSMC II shall
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assume all debt (including any balance of any remaining debt incurred by
the SCN to acquire the assets under the Merger Agreement) and all contracts,
payables and leases which are obligations of SCN which relate to the SCN's
obligations which are performed at the Office Locations under this Agreement.
The fair market value of the Practice Assets shall be determined by an
independent appraiser selected by two (2) independent accountants practicing
with "big six" accounting firms, one (1) selected by OSMC II and one (1)
selected by SCN and neither of which is providing or has for a period of two (2)
years provided services to SCN or OSMC II.
11.4.5. In addition to the payment for the Practice Assets, in the event
SCN 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 OSMC II's Physician Owners shall (i) pay to SCN 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 SCN to OSMC II pursuant to
the Merger Agreement or (ii) surrender to SCN for cancellation one-third (1/3)
of the shares of stock and cash consideration issued by SCN to OSMC II pursuant
to the Merger Agreement. All expenses of any appraisal shall be paid by OSMC II.
In the event that SCN terminates this Agreement pursuant to Sections 11.4.1
through 11.4.3, inclusive, and SCN requires OSMC II to purchase the Practice
Assets, then upon the closing of the purchase of the Practice Assets, OSMC II
and its Physician Employees shall be released from the restrictive covenants
provided for under Article VII of this Agreement.
11.5. Termination by Physician Owners. After the fifth anniversary of the
effective date of this Agreement, Physician Owners may terminate this Agreement
in the following events and on the following conditions:
11.5.1. Termination by Physician Owners, Individually. After the fifth
(5th) anniversary of the Service Agreement, a Physician Owner may retire or
assume full-time teaching responsibilities provided he shall comply with the
provisions of Section 8.5.2 of Exhibit 8.
11.5.2. Termination by Physician Owners, as a Group. On the fifth
anniversary of the Agreement, in the event that more than one (1) Physician
Owner desires to retire from OSMC II, all, but not less than all, of the
Physician Owners may, at that time, terminate this Agreement and be released
from the restrictive covenants contained in Article 7, provided that the
Physician Owners shall pay to SCN, jointly and severally, an amount (the
"Withdrawal Buyout Price") as set forth in Section 8.1 of Exhibit 8. The
Withdrawal Buyout Price shall be payable (A) in cash or, at the election of the
Physician Owners, by delivery of shares of SCN common stock valued at the price
upon which the conversion ratio in the Merger Agreement was determined, and/or
the Physician Owners' forgiveness of all or part of the principal amount owed on
indebtedness then-owed by SCN to the Physician Owners; and (B) by assumption of
all SCN indebtedness secured by Practice Assets. The Physician Owners shall give
SCN at least one year's advance written notice of their intention to terminate
the Agreement, and shall give SCN at least forty-five days advance notice of the
manner in which the Withdrawal Buyout Price shall be paid. The Withdrawal Buyout
Price shall be paid to SCN on or before the effective date of such termination.
Upon receipt of the Withdrawal Buyout Price, the parties shall close the
transfer of Practice Assets and the assumption of SCN liabilities in the manner
set forth in Section 11.6 below. In the event that a transaction is effected
pursuant to this Section 11.5.2, then each Physician Owner shall provide SCN,
upon request, with copies of his individual federal income tax returns for each
year commencing with the year which this Agreement becomes effective and the
year such transaction is effected.
11.6. Closing of Purchase by OSMC II and Effective Date of Termination.
OSMC II shall, except as provided below, 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 SCN assumed by OSMC II and shall also be reduced by any
payment SCN has failed to make under this Agreement, provided that such payments
or obligations are not otherwise accounted for in the liabilities assumed by
OSMC II in connection with the purchase described herein. The closing date for
the purchase shall be determined by OSMC II, but shall in no event occur later
than one hundred eighty (180) days from the date of the notice of termination.
At the closing, SCN shall deliver a bill of sale, assignment or other
appropriate instrument of transfer of the Practice Assets to the purchasing
parties, and
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OSMC II or the Physician Owners, as applicable, will execute and
deliver to SCN such assumption agreements, assignments and other documents or
instruments necessary or proper to effect their assumption of contracts, leases,
indebtedness and other liabilities of SCN incident to the transfer of Practice
Assets. The termination of this Agreement shall become effective upon the
closing of the sale of the assets and OSMC II and SCN shall be released from the
restrictive covenants provided for in Article VII on the closing date. SCN shall
give OSMC II credit towards the purchase price of the assets for the Fair Market
Value of any SCN common stock tendered to the SCN in exchange for such assets.
11.7. Tail Policy. OSMC 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
OSMC II.
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 OSMC 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, SCN 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 OSMC II AND PHYSICIAN OWNERS
OSMC II and Physician Owners jointly and severally represent, warrant,
covenant and agree with SCN that:
13.1. Validity. OSMC II is a Maryland Professional association. OSMC II has
the full power and authority to own OSMC II's property, to carry on OSMC 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 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 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 OSMC II or any Physician Employee, or to the best of OSMC II's and
each Physician Owner's knowledge, any provider or other health care professional
associated with or employed by OSMC II as pertains to any claim involving the
providing of health care related services, and there is no basis for any of the
foregoing.
13.3. Permits. OSMC II and all health care professionals associated with or
employed by OSMC 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 OSMC II's business; and are not in violation of any of said
permitting or licensing requirements.
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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 OSMC II and each
Physician Owner, enforceable in accordance with its terms. OSMC 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 OSMC 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 OSMC II or any Physician Owner is a
party;
13.4.2. violate any order, writ, injunction, decree, statute, rule or
regulation applicable to either OSMC II or any Physician Owner.
13.5. Compliance with Applicable Law. To the best of OSMC II's and each
Physician Owner's knowledge and belief, OSMC II and each Physician Owner has
operated in compliance with all federal, state, county and municipal laws,
ordinances and regulations applicable thereto and neither OSMC II nor any
provider associated with or employed by OSMC 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. (section)
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. OSMC 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
OSMC 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.
OSMC II is in full compliance with the material requirements of all such
Third-Party Payor Programs applicable thereto.
13.7. Fraud and Abuse. OSMC II and persons and entities providing
professional services for OSMC II, have not, to the knowledge of OSMC 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 OSMC 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. OSMC II Compliance. OSMC 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 OSMC II issued by any
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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, OSMC 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 OSMC 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 OSMC
II. OSMC II does not have any rate appeal currently pending before any
Governmental Authority or any administrator of any Third-Party Payor Program.
OSMC 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 OSMC II is located which could have a material adverse
effect on OSMC II or may result in the imposition of additional Medicaid,
Medicare, charity, free care, welfare, or other discounted or government
assisted patients at OSMC II or require OSMC II to obtain any necessary
authorization which OSMC 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 SCN with respect to such Accounts Receivable are true and
correct; OSMC II has billed the applicable Account Debtor and OSMC 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, OSMC II will promptly correct the same
and, if necessary, rebill or, if requested by SCN, cooperate with SCN to rebill
such Accounts Receivable.
13.10.2. The Purchased A/R are exclusively owned by OSMC II and there is no
security interest or lien in favor of any third party, or the recording or
filing against OSMC 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 OSMC II with respect thereto shall be vested in SCN, free and clear
of any lien, security interest, claim or encumbrance of any kind, and OSMC 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 Exhibit 8, by the
Account Debtor identified by OSMC 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 OSMC 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 OSMC 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
OSMC 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 OSMC II to an Affiliate of OSMC II, (v) from an Account Debtor who is
also a creditor of OSMC 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
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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 OSMC 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 SCN with all appropriate
endorsements in favor of SCN, or (ix) other than a complete bona fide
transaction which requires no further act under any circumstances on the part of
OSMC II to make the Accounts Receivable payable by the Account Debtor.
13.10.5. OSMC 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 SCN, 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 OSMC 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 OSMC 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 OSMC 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 OSMC 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 OSMC II,
or from OSMC II to SCN, (ii) has been duly authorized by OSMC II and to the
knowledge of OSMC 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 OSMC 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 OSMC II that the Purchased A/R will be collected by SCN. OSMC II
shall not be responsible for any damages for any breach of a representation or
warranty under this Section 13.10 until SCN has suffered a loss on the purchase
of OSMC II's Accounts Receivable. Damages for such breach shall be limited to
the amount of SCN's loss on the purchase of such Accounts Receivable.
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13.11. Full Disclosure. When considered in the context of all information
contained herein, to the knowledge of OSMC II no representation or warranty made
by OSMC 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 OSMC II as though recited in this
Article XIII.
ARTICLE XIV.
REPRESENTATIONS AND WARRANTIES OF SCN
SCN represents, warrants, covenants and agrees with OSMC II as follows:
14.1. Organization. SCN is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. SCN 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. SCN 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 SCN 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 SCN 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 SCN's
knowledge, threatened with respect to the transactions contemplated by this
Agreement.
14.4. Transactions with Affiliates. SCN 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 OSMC II or SCN, other than on terms
and conditions substantially as favorable to SCN as would be obtainable by SCN
at the time in a comparable arm's-length transaction with a person not an
Affiliate.
ARTICLE XV.
COVENANTS OF OSMC II AND PHYSICIAN OWNERS
15.1. Merger, Consolidation and Other Arrangements. OSMC II shall not
incorporate, merge or consolidate with any other entity or individual or
liquidate or dissolve or wind-up OSMC 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. OSMC 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 OSMC II or any Physician Owner
assign, transfer, or remove or permit any other individual or entity to assign,
transfer or remove any records of OSMC 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).
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15.3. Transaction with Affiliates. Neither OSMC 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 OSMC II or
SCN, other than on terms and conditions substantially as favorable to OSMC II or
the Physician Owner, as would be obtainable by OSMC 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. OSMC II and each Physician Owner shall use
their best efforts to comply with all laws and regulations relating to OSMC 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 OSMC II nor any Physician Owner shall
intentionally violate any Governmental Rules and Regulations.
15.5. Third-Party Payor Programs. OSMC II shall maintain OSMC II's
compliance with the requirements of all Third-Party Payor Programs in which OSMC
II is currently participating or authorized to participate.
15.6. Change in Business or Credit and Collection Policy. OSMC II shall not
make any change in the character of OSMC 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. OSMC II will (i) treat transfers to
SCN 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 SCN; (ii) not treat any such
Accounts Receivable as an asset on OSMC II's books and records; (iii) record in
OSMC II's books, records and computer files pertaining thereto that such
Accounts Receivable have been sold to SCN; (iv) pay all taxes, if any, relating
to the transfer of such Accounts Receivable after the same have been purchased
by SCN; (v) not impede or interfere with SCN'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 SCN, or any servicing entity retained by SCN, 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 SCN
has been advised in writing of a change prior to the purchase of such Accounts
Receivable. SCN or its designated representatives from time to time may verify
the Accounts Receivable, inspect, check, take copies or extracts from OSMC II's
books, records and files, and OSMC II will make the same available to SCN or
such representatives at any reasonable time for such purposes.
15.8. Security Interest. If, contrary to the mutual intent of OSMC II and
SCN, any purchase of Purchased A/R is not characterized as a sale, OSMC II
shall, effective as of the date hereof, be deemed to have granted (and OSMC II
does hereby grant) to SCN 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 OSMC 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, SCN may at its option exercise from time to time any and
all rights and remedies available to it under the UCC or otherwise. OSMC 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.
OSMC II represents and warrants that the location of OSMC II's principal place
of business, and all locations where OSMC II maintains records with respect to
its accounts are set forth under its name in Section 16.3 hereof. OSMC II agrees
to notify SCN in writing thirty (30) days prior to any change in any such
location. The exact name of OSMC II is as set forth at the beginning of this
Agreement, and except as set forth on the signature page hereof, OSMC II has not
changed its name in the last five (5) years, and during such period OSMC II did
not use, nor does OSMC II now use, any fictitious or trade name. OSMC II shall
notify SCN in writing thirty (30) days prior to any change in any such name.
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ARTICLE XVI.
GENERAL PROVISIONS
16.1. Assignment. SCN shall have the right to assign its rights hereunder
to any person, firm or corporation under common control with SCN and to any
lending institution from which SCN obtains financing, including but not limiting
the restrictive covenants included in Article VII (covenant not to compete), for
security purposes or as collateral. OSMC II agrees to, and acknowledges, SCN's
right to assign SCN's rights under this Agreement to any Lender and further
agrees that upon receipt of written notice from such Lender, OSMC II shall pay
to Lender or cause to be paid to Lender all amounts which are otherwise payable
to SCN 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 SCN nor OSMC 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, OSMC II acknowledges that, as collateral for
certain obligations, SCN 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 SCN, OSMC II (i) acknowledges that the collateral
assignment to the Agent covers all rights of SCN hereunder, including, but not
limited to, rights arising from warranties and representations made by OSMC II,
rights to enforce covenants made by OSMC II, and rights to receive all payments
due SCN; (ii) agrees to regard the Agent as the owner of any or all of the
assigned rights upon written notice to OSMC 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 SCN 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 SCN'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 OSMC II
terminates this Agreement; (v) agrees that the rights of OSMC 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 OSMC II under this Section shall be
given to the Agent at the foregoing address unless OSMC 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 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 SCN: Specialty Care Network, Inc.
44 Union Boulevard
Suite 600
Lakewood, Colorado 80228
Attention: Kerry Hicks
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With a copy to: Baker, Donelson, Bearman & Caldwell
165 Madison Avenue
Suite 2000
Memphis, Tennessee 38103
Attention: David T. Popwell, Esq.
To OSMC II: The Orthopaedic and Sports Medicine Center
108 Forbes Street
Annapolis, Maryland 21401-1594
Attention: Marshall K. Steele II, M.D.
With a copy to: Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk, L.L.P.
3500 City Center Tower II
301 Commerce Street
Fort Worth, Texas 76102
Attention: John W. Michener, 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 Venue. The validity, interpretation and performance of
this Agreement shall be governed by and construed in accordance with the laws of
the State of Maryland. Each of the parties submits to the jurisdiction of any
state or federal court sitting in Denver, Colorado, in any action or proceeding
arising out of or relating to this Agreement and agrees that all claims in
respect of the action or proceeding may be heard and determined in any such
court. Each party also agrees not to bring any action or proceeding arising out
of or relating to this Agreement in any other court. Each of the parties waives
any defense of inconvenient forum to the maintenance of any action or proceeding
so brought and waives any bond, surety, or other security that might be required
of any other party with respect thereto.
16.7. No Practice of Medicine. The parties acknowledge that SCN 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 SCN 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 SCN 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.
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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 OSMC II, OSMC 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 (SCN shall provide OSMC II with copies of any information regarding OSMC
II provided by SCN 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,
OSMC II and SCN 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 OSMC II and SCN.
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 OSMC 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 SCN or OSMC II under this Agreement shall
in any way or in any manner be deemed to create any obligation of SCN or of OSMC
II to, or any rights in, any person or entity not a party to this Agreement.
16.17. Communications. OSMC II and SCN 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 OSMC II's practice at the
Practice Offices.
- 29 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
SCN:
SPECIALTY CARE NETWORK, INC.
By: /s/ John Neal
--------------------------------------
Title: Manager, Finance and Development
--------------------------------
OSMC II:
THE ORTHOPAEDIC AND SPORTS MEDICINE
CENTER II, P.A.
By: /s/ Marshall K. Steele
--------------------------------------
Title: President
-----------------------------------
PHYSICIAN OWNERS:
/s/ Marshall K. Steele, III
--------------------------------------
MARSHALL K. STEELE, III, M.D.
/s/ Stephen E. Faust
--------------------------------------
STEPHEN E. FAUST, M.D.
/s/ Robert M. Verklin, Jr.
--------------------------------------
ROBERT M. VERKLIN, JR., M.D.
/s/ Thomas J. Harries
--------------------------------------
THOMAS J. HARRIES, M.D.
/s/ Edward S. Holt
--------------------------------------
EDWARD S. HOLT, M.D.
/s/ Thomas R. Dennis
--------------------------------------
THOMAS R. DENNIS, M.D.
/s/ Peter Norman Ove
--------------------------------------
PETER NORMAN OVE, M.D.
/s/ Nicholette M. Martin
--------------------------------------
NICHOLETTE M. MARTIN, M.D.
- 30 -
EXHIBIT 3.1
LEASE AGREEMENT
3.1-1
<PAGE>
EXHIBIT 4.1
POLICY BOARD GOVERNANCE RULES
4.1.1. Number, Tenure and Qualifications. The Policy Board shall
consist of four (4) members. SCN shall designate, in its sole discretion, two
(2) members of the Policy Board. OSMC II shall designate, in OSMC II's sole
discretion, two (2) members of the Policy Board. The initial Policy board shall
be chosen at the time of the closing of the Merger. 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.
4.1.2. 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.
4.1.3. 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.
4.1.4. 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.
4.1.5. 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.
4.1.6. 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.
4.1.7. 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.
4.1.8. Vacancies. Any vacancy occurring in the Policy Board shall be
filled by the party which chose such vacated Policy Board Member(s).
4.1.9. Removal. Any Policy Board Member may be removed without cause by
the party which chose such Policy Board Member.
4.1-1
<PAGE>
4.1.10. 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.
4.1.11. 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 SCN and OSMC 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.
4.1.12. 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>
CONFIDENTIAL TREATMENT REQUESTED
EXHIBIT 8
FINANCIAL MATTERS
8.1. Definitions Relating to Financial Matters. For purposes of this
agreement.
"Base Service Fee" shall equal [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
per year, payable in monthly payments of
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
"Clinic Expenses" shall mean all operating and non-operating expenses
of OSMC II arising hereunder unless expressly provided otherwise, including,
without limitation:
(a) salaries, benefits and other direct costs of all Clinic
employees including SCN's employees and Physician Extender Employees
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.
(b) obligations of SCN 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
SCN's assets utilized by OSMC II in the Practice Offices from and after
the date of this Agreement,
(e) interest expense on indebtedness incurred by SCN to (i)
satisfy the obligations of OSMC II, if any, assumed under the Merger
Agreement, (ii) provide working capital for SCN's performance of any of
its obligations to OSMC 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 OSMC II 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 SCN and used in OSMC II's
Office Locations by OSMC II to be billed to OSMC II on a monthly basis
and paid to SCN at the same time SCN pays for OSMC II's Accounts
Receivable pursuant to Section 8.4,
(i) direct costs of all employees or consultants of SCN
engaged to provide services at or in connection with OSMC II or who
actually provide services at or in connection with the Practice Office
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 OSMC II shall be included in Clinic Expenses,
8-1
<PAGE>
(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) any and all other ordinary and necessary expenses incurred
by OSMC II or approved by the Policy Board and reasonably incurred by
the SCN for the direct benefit of OSMC II in carrying out their
respective obligations under this Agreement.
Clinic Expenses shall not include Excluded Expenses or SCN Expenses.
Excluded Expenses shall be the sole obligation of OSMC II. SCN Expenses shall be
the sole obligation of SCN. All Clinic Expenses shall be incurred in the name of
SCN, unless OSMC II is required by law to incur such expenses, in which case SCN
shall indemnify OSMC II against any such expenses. SCN shall pay all Clinic
Expenses as they become due; provided, however, that SCN may, in the name and on
behalf of OSMC 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 OSMC II's service fee, SCN shall be required to
deposit into the OSMC II Operating Account described in Section 5.11 an amount
of money necessary for OSMC II to pay the compensation and benefits associated
with the Technical Employees and Physician Employees (other than Physician
Owners) employed by OSMC II.
"SCN Expenses" shall mean, pursuant to GAAP applied on a consistent
basis:
(a) Any corporate overhead charges of SCN and other items
incurred by SCN that are not incurred specifically for the purpose of
providing services to OSMC II or are not directly attributable to OSMC
II, as reasonably determined by SCN, including, without limitation,
salaries and benefits of executive officers of SCN, 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 SCN in
connection with the Merger; and
(e) All taxes of SCN, 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
OSMC II, property taxes on assets used by OSMC II and other taxes
specifically included in Clinic Expenses.
"Excluded Activities" shall mean: (i) teaching at any educational
institution and 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, and (iv) serving as a medical
director of any organization offering medical care, but not providing clinical
services.
"Excluded Expenses" shall be the sole obligation of OSMC II and shall
mean, pursuant to GAAP applied on a consistent basis:
8-2
<PAGE>
(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 subparagraph (j) of the definition
of Clinic Expenses, expenses of Physician Owners 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 the
following items:
i) Accounting, legal and other professional
fees attributed to OSMC II or to Physician
Employees; provided, however, legal and
accounting expenses incurred in the ordinary
course of OSMC II's business, approved by
the Policy Board will be Clinic Expenses.
ii) 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.
iii) Automobile expenses including payments, repairs and
maintenance, mileage, depreciation, etc.
iv) Entertainment expenses of any kind.
v) Physician Owner benefits including insurance (health,
life (except to the extent allowed under subparagraph
(f) of the definition of Clinic Expenses, dental,
disability (except to the extent allowed under
subparagraph (f) of the definition of Clinic
Expenses, 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.
vi) Employment tax expenses including Federal and State
Unemployment taxes, FICA taxes, Medicare taxes, etc.
vii) 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.
viii) Meal expenses.
ix) Medical supplies and drugs either used or distributed
by a Physician Employee without billing for such
supplies and drugs at standard rates.
x) Presentation expenses of any kind including
professional services, slide production,
travel, meals, entertainment, etc.
xi) Personal postage expenses.
xii) Personal laundry expenses.
xiii) Personal assistant expenses (including the time staff
spends on personal errands for Physician Employees).
8-3
<PAGE>
"Excluded Revenue" shall mean revenue earned by Physician Owners from
Excluded Activities.
"Fair Market Value" with respect to SCN common stock means the average
closing bid price for the SCN common stock as reported on a securities exchange
or quoted on a national quotation system for the ten (10) trading days
immediately preceding the date valuation is required.
"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 SCN or OSMC II as applicable.
"Practice Net Revenue" shall mean Professional Services Revenue, less
Clinic Expenses.
"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 OSMC 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 Excluded Revenue.
"Physician Extender Employees" shall mean physician assistants, nurse
practitioners who do not provide billable services, and other such persons who
are employees of SCN, but expressly excluding any Technical Employees.
"Physician Employees" shall mean only those individuals who are
doctors of medicine (including Physician Owners) and who are employed by OSMC II
or are otherwise under contract with OSMC 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.
"Purchase Price" shall have the meaning set forth in Section 8.4.2.
"Purchased A/R" shall have the meaning set forth in Section 8.4.7.
"Retirement Buyout Price" shall mean an amount equal to the product of
the following formula:
P=(C-T)-(S-B)
wherein, (i) P equals the payment to be made pursuant to Section 8.5.2; (ii) C
equals the sum of (A) cash received at closing of the Merger, (B) the sum of
principal payments made to the Physician Owner in respect of any note, debenture
or other obligation delivered to the Physician Owner as consideration in the
Merger, (C) the gross proceeds (less brokerage commissions) from the sale of any
shares of SCN common stock received by the Physician Owner in the Merger and (D)
the then-current fair market value of a all shares of SCN common stock received
by the Physician
8-4
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
Owner in the Merger and still held at the time of such retirement by the
Physician Owner; (iii) T equals the sum of capital gains taxes paid by the
Physician Owner on account of dispositions of SCN common stock described in
Clause C above plus capital gains taxes that would be payable (computed at the
then-current tax rate on long-term capital gains) on the gain upon disposition
of the shares of SCN common stock described in clause (D) above; (iv) S equals
the Base Service Fee or percentage service fee paid or allocated to such
Physician Owner to the date of such retirement; and (v) B equals S multiplied by
average maximum individual federal income tax rate for the five years ending
immediately prior to the year of such retirement.
"Settlement Date" shall have the meaning set forth in Section 8.4.3.
"Technical Employees" shall mean individuals who provide billable
services on behalf of OSMC II and are employees of OSMC II.
"Withdrawal Buyout Price" shall mean an amount equal to the sum of
(i) the unamortized amount of intangible assets reflected on the books of SCN as
of the last day of the month prior to termination of this Agreement pursuant to
Section 11.5, (ii) the then-book value of all remaining assets (including OSMC
II accounts receivable owned by SCN) of SCN utilized in the practice of OSMC II
(items (i) and (ii) being determined in accordance with GAAP, and (iii) the
aggregate profit (if any) earned or unearned, realized or unrealized, by the
Physician Owners with respect to the aggregate number of shares of SCN common
stock received by them (adjusted, as appropriate, for stock splits, stock
dividends, and other changes in SCN's capital structure affecting SCN's issued
and outstanding common stock) in connection with the merger of The Orthopaedic
and Sports Medicine Center, P.A. with and into SCN. In addition to the
foregoing, the Withdrawal Buyout Price shall include the assumption by the
withdrawing Physician Owners, jointly and severally, of all contracts and
operating leases that are not reflected as assets or liabilities on the books of
account of SCN.
8.2. Service Fees. During the first thirty-six (36) months of the term
of this Agreement, SCN shall receive a service fee equal to (a) the greater of
(i) [xxxxxxxxxxxxxxxxxxxxxxxxx]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, SCN shall receive a service fee equal to
[xxxxxxxxxxxxxxxxxxxxxxxxxxx] 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 OSMC II's service fees
payable as further described under Section 8.6.1 of this Agreement. In the event
that a Physician Owner either dies or becomes Disabled during such thirty-six
(36) month period, OSMC II, or the applicable Physician Owner, as the case may
be, shall be entitled to satisfy the amount owed by transferring to SCN an
amount of SCN common stock having a Fair Market Value equal to the amount owed
or paying to SCN cash in the amount owed (or a combination thereof).
8.3. Payment of Service Fee. The amounts to be paid to SCN under this
Exhibit 8 shall be payable monthly, at the time that SCN pays OSMC II for the
Accounts Receivable previously purchased by SCN as described in Section 8.4
below. The amount payable shall be estimated based upon the previous month's
operating results of OSMC II. Adjustments to the estimated payments shall be
made to reconcile actual cumulative amounts due under this Exhibit 8, by the end
of the following month during each calendar year. In the event that, after
reduction by the amount of Clinic Expenses accrued hereunder, the amount payable
by SCN for the Accounts Receivable pursuant hereto is less than the monthly Base
Service Fee for a particular month, then the amount of Base Service Fee owed
shall be recorded by SCN as an advance to OSMC II, and shall be recorded by OSMC
II as a payable to SCN. At the end of any calendar quarter, the Physician Owners
shall, jointly and severally, be obligated to pay SCN, in cash, the entire
remaining amount payable to SCN by OSMC II by reason of the foregoing accrual
method. The Physician Owners shall pay such accrued amount, in cash, upon five
(5) days written notice from SCN. 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 SCN or
OSMC 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 SCN's fiscal year. The Physician Owners acknowledge
and agree that
8-5
<PAGE>
they are parties, individually, to this Agreement and that if OSMC II fails to
pay the Service Fee herein described, SCN shall have the right to collect said
Service Fee from the Physician Owners on a joint and several basis. The Policy
Board shall establish: (i) the allocable share of the Base Service Fee
applicable to each Physician Owner, and (ii) the relative amount of the
percentage based Service Fee applicable to each Physician Owner. In the event
that a Physician Owner dies or becomes disabled, then SCN agrees to collect any
unpaid Base Service Fee from the disabled Physician Owner, or his estate, as
applicable, and not from OSMC II or the other Physician Owners. In the event
that any percentage based Service Fees are owed by OSMC II but unpaid because of
a breach of this Agreement by one (1) Physician Owner, SCN agrees to look to the
breaching Physician Owner and not OSMC II or the other Physician Owners for
collection of the unpaid Service Fees.
8.4. Purchase of Accounts Receivable.
8.4.1 In addition to the definitions contained in Article II of this
Agreement and Section 8.1 of this Exhibit 8, for purposes of this Agreement, the
following terms shall be applicable:
"Account Debtor" means an account debtor or any other Person
obligated in respect of an Account Receivable.
"Accounts" means, with respect to OSMC 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 OSMC II, including, but not limited to, accounts
receivable, proceeds of any letters of credit naming OSMC 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.
"Accounts Receivable" means, with respect to OSMC 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 OSMC II, including, but not limited to,
accounts receivable, proceeds of any letters of credit naming OSMC 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.
"CHAMPUS" means the Civilian Health and Medical Program of the
Uniformed Services.
"Collecting Bank" means the main office of
_____________________ located at ___________________________, or such
other financial institution agreed to by SCN.
"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 OSMC II into which all proceeds of OSMC II's
Governmental Receivables are remitted.
"Governmental Receivables" means an Account Receivable of OSMC
II which (i) arises in the ordinary course of business of OSMC 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 OSMC II as a healthcare
provider. Governmental Receivables shall not, however, refer to
8-6
<PAGE>
amounts payable by private insurers under contract to provide benefits
under the Federal Employee Health Benefit Program.
"Lender" shall mean any lender to SCN 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 OSMC
II as to Accounts which are not Governmental Receivables, in a form
acceptable to counsel for SCN.
"Main Account" means SCN's operating account established and
maintained at the Collecting Bank.
"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.
"Non-Governmental Lockbox Account" means the account
established by the SCN with the Collecting Bank into which all proceeds
from OSMC 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 OSMC
II to Third-Party Payors informing such Third-Party Payors that all
proceeds due under OSMC II's Accounts are to be remitted to the
NonGovernmental Lockbox Account or the Governmental Lockbox Account, as
the case may be, substantially in a form acceptable to counsel for SCN.
"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.
8.4.2. OSMC II hereby agrees to sell and assign to SCN and SCN agrees
to buy, all of OSMC II's Accounts Receivable each month during which this
Agreement is in existence which are owing to OSMC II arising out of the delivery
of medical, surgical, diagnostic or other professional medical goods or
services. Accounts Receivable shall not include, and SCN shall not purchase, any
cash, checks or receivables created by credit cards. SCN shall bear the risk of
collection and any overage or underage resulting from any purchased Accounts
Receivable.
8.4.3. 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 SCN. It is the intent of the parties that the
Purchase Price reflect the actual net realizable value of the Accounts
Receivable.
8-7
<PAGE>
8.4.4. OSMC II will sell all Accounts Receivable to SCN, 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. SCN 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"). SCN shall pay OSMC II for all Accounts Receivable purchased by check,
wire transfer or intrabank transfer to the OSMC II Operating Account described
in Section 5.11. The purchase of Accounts Receivable shall be evidenced by
sending SCN (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) SCN 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 OSMC II to
sell such Accounts Receivable or SCN to buy such Accounts Receivable. As
consideration for the purchase of Accounts Receivable by SCN pursuant to this
Section 8.4, SCN 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, OSMC II will be deemed to have sold to SCN all of
OSMC II's right, title and interest in such Accounts Receivable and in any
proceeds thereof, and SCN will be the sole and absolute owner thereof and will
own all of OSMC 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 SCN will have obtained all of OSMC
II's rights under all guarantees, assignments and securities with respect to
each such Accounts Receivable.
8.4.5. Upon expiration or termination of this Agreement for any reason,
(i) all Accounts Receivable purchased by SCN shall remain the property of SCN
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 SCN pursuant to Section 8.2 of this
Agreement.
8.4.6. In connection with the initial purchase of Accounts Receivable
by SCN, OSMC II will execute such financing statements or amendments under the
UCC (naming SCN as secured party and Lender as assignee) as SCN may reasonably
request with respect to any Accounts Receivable that may be purchased pursuant
to this Agreement.
8.4.7. OSMC II agrees to cooperate with SCN in the collection of the
Accounts Receivable sold by OSMC II, transferred pursuant to Section 8.4. At the
option of and upon the request of SCN, OSMC II shall execute any and all
documentation necessary for the transfer of amounts constituting Accounts
Receivables and/or the establishment of lockboxes as follows:
8.4.7.1 Collection of Governmental Receivables. With respect to
payments on Governmental Receivables, at the request and option of SCN, OSMC II
agrees that the following procedures shall apply:
(i) OSMC II shall enter into a Lockbox Agreement applicable to
Governmental Receivables in a form acceptable to counsel for SCN and reasonably
acceptable to OSMC II and establish a Governmental Lockbox Account. Governmental
Lockbox Account shall be an account in the name of OSMC II. All payments in
respect of OSMC II's Governmental Receivables are to be made directly to such
account. In the event SCN exercises this option, OSMC II shall instruct each
Account Debtor in respect of OSMC II's Governmental Receivables to remit all
such payments directly to such Governmental Lockbox Account pursuant to a
Notification Letter. In addition, OSMC 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. OSMC 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 SCN. OSMC 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.
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(ii) In accordance with the Lockbox Agreement pertaining to
Governmental Receivables, OSMC II shall instruct the Collecting Bank to transfer
automatically all amounts deposited in Governmental Lockbox Account constituting
good funds to SCN's Main Account. OSMC II shall have no right or interest in the
Main Account. OSMC 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 SCN, 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 SCN shall be entitled
to all remedies at law and in equity, including obtaining an injunction.
(iii) OSMC II will cooperate with SCN 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.
(iv) OSMC II agrees to pay, on demand, a finance charge equal to the
Finance Charge Rate, on any payment on a Governmental Receivable received by
OSMC II that is not deposited in Governmental Lockbox Account within forty-eight
(48) hours after receipt by OSMC II.
8.4.7.2 Collection of Non-Governmental Receivables. With respect to
payments on Non-Governmental Receivables, if requested by SCN and at SCN's
option, OSMC II agrees that the following procedures shall apply:
(i) Prior to the sale of any Non-Governmental Receivable hereunder,
SCN, 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 SCN and SCN shall establish Non-Governmental Lockbox
Account. The NonGovernmental Lockbox Account shall be an account in the name of
SCN. All payments in respect of OSMC II's Non-Governmental Receivables are to be
made directly to such account. If SCN exercises its option herein, at request of
SCN, OSMC II shall instruct each Account Debtor in respect of OSMC II's
Non-Governmental Receivables to remit all such payments directly to such
Non-Governmental Lockbox Account pursuant to a Notification Letter. In addition,
OSMC 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. OSMC 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 SCN. OSMC 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.
(ii) In accordance with the Lockbox Agreement pertaining to
Non-Governmental Receivables, SCN shall instruct the Collecting Bank to transfer
automatically all amounts deposited in the Non-Governmental Lockbox Account
constituting good funds to SCN's Main Account. OSMC II shall have no right or
interest in the NonGovernmental Lockbox Account nor to the Main Account and such
accounts shall be in the name of and under the control of SCN. OSMC 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 SCN, 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 SCN shall be
entitled to all remedies at law and in equity, including obtaining an
injunction.
(iii) OSMC II will cooperate with SCN 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.
(iv) OSMC II agrees to pay, on demand, a finance charge equal to the
Finance Charge Rate, on any Non-Governmental Receivable received by OSMC II that
is not deposited in Non-Governmental Lockbox Account within forty-eight (48)
hours after receipt by OSMC II.
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8.4.7.3 Procedures Without Lockbox. In the event that SCN elects to
forego the procedures established in Sections 8.4.7.1 and 8.4.7.2, OSMC II shall
instruct the Collecting Bank to transfer automatically all amounts constituting
good funds in the account or accounts of OSMC II established for the collection
of Governmental Receivables and Non-Governmental Receivables to SCN's Main
Account at _____________ __________, ____________________________, Account
______________ (the "Main Account") pursuant to a standing order in a form
acceptable to SCN's legal counsel. OSMC II shall have no right or interest in
SCN's Main Account and such account shall be in the name of and under the
control of SCN. OSMC 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 SCN, 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 SCN shall be entitled to all remedies at law and in equity, including
obtaining an injunction.
8.4.7.4 Misdirected Payments. (i) 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 OSMC II otherwise receives
payments on Accounts that are purchased by SCN under the terms of this Agreement
("Misdirected Payments"), OSMC 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 SCN, (ii) segregate such payment, (iii) use
its best efforts not to commingle such payment with OSMC 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.
(ii) OSMC II agrees to pay, on demand, the Finance Charge Rate on any
Misdirected Payment received by OSMC II that is not deposited in the SCN Main
Account within forty-eight (48) hours after receipt by OSMC II.
8.4.8. All Accounts Receivable of OSMC II purchased by SCN ("Purchased
A/R") pursuant to this Section 8.4 hereof will, as such Purchased A/R are
purchased, be treated as Professional Service Revenues for accounting and
financial purposes.
8.5. Payments on Early Termination of Physician Owners. The Physician
Owners hereby acknowledge that 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:
8.5.1 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:
8.5.1.1 to give SCN 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 8.5.1.1,
SCN 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;
8.5.1.2 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)");
8.5.1.3 to pay to SCN 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 8.5.1.3, the amount
of the loss shall be calculated as follows:
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(i) The Policy Board shall calculate the retiring Physician
Owner's contribution to the payment of OSMC 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 8.5.1.1, the Policy Board
shall calculate such Physician Employee(s) contribution to the
payment of OSMC 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 8.5.1.3(i) plus the
amount calculated pursuant to Section 8.5.1.3(ii) and (ii) the
amount calculated pursuant to Section 8.5.1.3(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
8.5.1.3(i) and (ii) the amount calculated pursuant to Section
8.5.1.3(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 SCN
within fifteen (15) days of the date of the delivery of the notice of the amount
of loss;
8.5.1.4 to (i) pay to SCN 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 SCN to the retiring Physician Owner pursuant to the Merger
Agreement or (ii) surrender to SCN for cancellation one-third (1/3) of the stock
issued by SCN to the retiring Physician Owner pursuant to the Merger Agreement.
(All expenses of any appraisal shall be paid by such Physician Owner.); and
8.5.1.5 to honor and comply with the restrictive covenants provided for
under Section 7.2.4.
8.5.2 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 SCN 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, SCN 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 7.2.4 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. In the event that the Service Agreement has been in
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effect for at least five (5) years, a Physician Owner may buy-out the
noncompetition restriction applicable to him or her by paying to SCN an amount
equal to the Retirement Buyout Price. The terminating Physician Owner may pay
the the Retirement Buyout Price owed by transferring to SCN an amount of SCN
common stock having a fair market value equal to the amount owed or pay to SCN
cash in the amount owed (or a combination of cash and common stock). No more
than twenty percent (20%) per year of the Physician Owners then practicing with
OSMC II shall have the right to withdraw from OSCM II and exercise the right to
buy-out the restrictive covenant (as described above). In the event that a
transaction is effected pursuant to this Section 8.5.2, then the Physician Owner
effecting such transaction shall provide SCN, upon request, with copies of his
individual federal income tax returns for each year commencing with the year
which this Agreement becomes effective and the year such transaction is
effected.
8.5.3 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 OSMC II, then the terminating Physician Owner may join or
establish another group/practice which has or will enter into a Service
Agreement with SCN 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 OSMC II and Physician Owners, be released from any obligation
under this Service Agreement. SCN shall have the right to enter into such new
Service Agreement without satisfying the requirements of Section 7.4. In the
event that (i) OSMC II consents to SCN entering into the new Service Agreement,
(ii) entering into the new Service Agreement will not adversely affect the
operations and earnings of SCN, and (iii) the new group/practice can satisfy the
representations and warranties set forth in Article XIII of this Agreement, then
SCN 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 SCN, then SCN, at
its option, may terminate this Agreement solely with respect to the terminating
Physician Owner, and the provisions of Section 7.2.4 shall apply. In the event
that SCN does not enter into a new Service Agreement, then SCN shall terminate
this Agreement with respect to such Physician Owner, and the terminating
Physician Owner shall be obligated as described in Sections 8.5.1.1, and 8.5.1.5
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 8.5.1.1 through 8.5.1.5,
inclusive.
8.5.4 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 Section 7.2.4 shall remain in force.
Notwithstanding the foregoing, the parties acknowledge and agree that if such
event occurs during the first three (3) years of this Agreement, the Base
Service Fee shall be due and payable. In the event of such circumstances, OSMC
II, the disabled Physician Owner, or the estate of the deceased Physician Owner,
as those parties may agree among themselves, may satisfy the obligation to pay
the Base Service Fee by tendering to SCN shares of SCN common stock having a
fair market value equal to the Base Service Fee owed.
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