AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1997
REGISTRATION NO. 333-17627
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SPECIALTY CARE NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8011 62-1623449
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
44 UNION BOULEVARD, STE. 600
LAKEWOOD, COLORADO 80228
(303) 716-0041
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
KERRY R. HICKS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SPECIALTY CARE NETWORK, INC.
44 UNION BOULEVARD, STE. 600
LAKEWOOD, COLORADO 80228
(303) 716-0041
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
ALAN SINGER, ESQUIRE MICHAEL D. NATHAN, ESQUIRE
MORGAN, LEWIS & BOCKIUS LLP SIMPSON THACHER & BARTLETT
2000 ONE LOGAN SQUARE 425 LEXINGTON AVENUE
PHILADELPHIA, PA 19103 NEW YORK, NY 10017
(215) 963-5000 (212) 455-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number ofthe
earlier effective registration statement for the same offering. / / ___________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(1) Registration
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Common Stock,
Par Value $.001 Per Share $41,800,000 $13,063(2)
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(1) Estimated solely for the purpose of calulating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
(2) The Registrant paid $12,435 of the filing fee, with its initial filing of
this Registration Statement on December 11, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JANUARY 21, 1997
3,350,000 Shares
SPECIALTY CARE NETWORK, INC.
Common Stock
($.001 par value)
------------------
Of the shares of Common Stock (the 'Common Stock') of Specialty Care Network,
Inc. (the 'Company') offered hereby, 3,000,000 shares are being sold by the
Company and 350,000 shares are being sold by the Selling Stockholders named
under 'Principal and Selling Stockholders.' The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders. Prior to this
offering, there has been no public market for the Common Stock. It is
anticipated that the initial public offering price will be between $9 and $11
per share. For information relating to the factors considered in determining the
initial public offering price, see 'Underwriting.' The Common Stock has been
approved for listing on The Nasdaq Stock Market's National Market ('NNM') under
the symbol 'SCNI.'
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE 'RISK FACTORS'
COMMENCING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
Total(2)............................ $ $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $1,110,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 450,000
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ and Proceeds to
Company will be $ .
The Shares are offered by the several Underwriters when, as and if delivered to
and accepted by the Underwriters and subject to their right to reject orders in
whole or in part. It is expected that the shares will be ready for delivery on
or about , 1997, against payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
Prospectus dated , 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM 10b-6, 10b-7,
AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, all information in this
Prospectus assumes: (i) no exercise of the Underwriters' over-allotment option
and (ii) no exercise of outstanding options to purchase Common Stock. Unless the
context otherwise requires, all references to the 'Company,' 'Specialty Care
Network' or 'SCN' refer to Specialty Care Network, Inc., a Delaware corporation,
and its subsidiaries. See 'Risk Factors' for a discussion of certain factors
that should be considered in connection with an investment in the Common Stock
offered hereby. This Prospectus contains forward-looking statements that
address, among other things, acquisition and expansion strategy, use of
proceeds, projected capital expenditures, liquidity, proposed specialties of
physicians with whom the Company intends to affiliate, possible third party
payor arrangements, cost reduction strategies, possible effects of changes in
government regulation and availability of insurance. These statements may be
found under 'Prospectus Summary,' 'Risk Factors,' 'Use of Proceeds,'
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Business' as well as in the Prospectus generally. Actual events
or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation those
discussed in 'Risk Factors' and matters set forth in the Prospectus generally.
THE COMPANY
Specialty Care Network is a physician practice management company that
focuses exclusively on musculoskeletal disease-state management. SCN's goal is
to build the leading musculoskeletal physician practice management company in
the United States. The Company's strategy consists of three components: (i)
affiliating with leading musculoskeletal practices in targeted markets
throughout the United States; (ii) assisting each of its affiliated practices in
managing and expanding its business by providing comprehensive operational
support, including proprietary clinical and financial information systems; and
(iii) developing integrated regional musculoskeletal networks around its
affiliated practices. As a first step in implementing this strategy, on November
12, 1996, the Company, through the entry into service agreements and the
acquisition of practice assets, affiliated with a select group of five practices
encompassing 49 physicians located in Pennsylvania, New Jersey, Georgia,
Maryland and Florida. These practices were selected based on a variety of
factors, including, but not limited to, physician credentials and reputation;
competitive market position; specialty and subspecialty mix of physicians;
historical financial performance and growth potential; and willingness to
embrace SCN's corporate philosophy. The Company also manages one outpatient
surgery center and one outpatient magnetic resonance imaging ('MRI') center
owned by two of its affiliated practices.
The practices with which the Company has affiliated offer a broad spectrum
of musculoskeletal care, which is the treatment of conditions relating to bones,
joints, muscles and related connective tissues. The Company's affiliated
physicians are trained in a variety of musculoskeletal disciplines, including
general orthopaedics, joint replacement surgery, sports medicine, spinal care,
hand and upper extremity care, foot and ankle care, pediatric orthopaedics,
physiatry, trauma and adult neurology. In order to build networks of providers
that offer access to a full range of musculoskeletal care, the Company intends
to affiliate and otherwise contract with physicians trained in other
musculoskeletal subspecialties, including occupational medicine, neurosurgery,
plastic surgery, rehabilitation therapy and rheumatology.
Expenditures for musculoskeletal care in the United States are significant,
with total direct costs associated with the delivery of musculoskeletal care
exceeding $60 billion in 1988, according to the American Academy of Orthopaedic
Surgeons ('AAOS'). Of this amount, approximately $7 billion represents fees paid
for physician services.
The Company was incorporated in the State of Delaware in December 1995. The
Company's principal executive offices are located at 44 Union Boulevard,
Lakewood, Colorado 80228, and the Company's telephone number is (303) 716-0041.
3
<PAGE>
INITIAL AFFILIATED PRACTICES
On November 12, 1996, the Company, through a series of transactions (the
'Initial Affiliation Transactions'), including an asset purchase, a share
exchange and three mergers, acquired substantially all of the assets and certain
liabilities of the predecessors of the practices with which the Company has
affiliated (the 'Predecessor Practices'). In the Initial Affiliation
Transactions, the Company issued an aggregate of 7,659,115 shares of Common
Stock and paid $1,537,872 in cash to physician owners of the Predecessor
Practices. Following the Initial Affiliation Transactions, the physician owners
of the Predecessor Practices, other than Greater Chesapeake Orthopaedic
Associates, LLC ('GCOA') in Baltimore, Maryland, which survived the Initial
Affiliation Transactions, formed new entities through which to practice
medicine. The new entities (together with GCOA, the 'Initial Affiliated
Practices') are Reconstructive Orthopaedic Associates II, P.C. ('ROA') in
Philadelphia, Pennsylvania; Princeton Orthopaedic Associates II, P.A. ('POA') in
Princeton, New Jersey; TOC Specialists, P.L. ('TOC') in Tallahassee, Florida and
Bainbridge, Georgia; and Vero Orthopaedics II, P.A. ('VO') in Vero Beach,
Florida.
Under the service agreements between the Company and each of the Initial
Affiliated Practices (the 'Initial Service Agreements') the Company provides
management, administrative and development services to the Initial Affiliated
Practices. The Initial Affiliated Practices will retain, among other things,
sole responsibility for all aspects of the practice of medicine. Under the
Initial Service Agreements, the Company receives service fees equal to (i) a
percentage of pre-tax earnings of the Initial Affiliated Practices before
physician compensation and most fringe benefits and excluding certain expenses
of the Initial Affiliated Practices and (ii) reimbursement for operating
expenses of the Initial Affiliated Practices to be paid by the Company. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview,' 'Business -- Contractual Agreements with Affiliated
Practices' and 'Certain Transactions.' As used in this Prospectus, the term
'Affiliated Practices' includes the Initial Affiliated Practices and other
practices with which the Company may affiliate in the future.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company.......................................................... 3,000,000 shares
Selling Stockholders................................................. 350,000 shares
Total.......................................................... 3,350,000 shares
Common Stock to be outstanding after the offering......................... 14,044,955 shares(1)
Proposed Nasdaq National Market symbol.................................... SCNI
Use of proceeds........................................................... Repayment of certain indebtedness,
funding for possible future
affiliations and general corporate
and working capital purposes. See
'Use of Proceeds.'
</TABLE>
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(1) Excludes 1,908,748 shares of Common Stock issuable upon exercise of
outstanding options to purchase Common Stock and 450,000 shares of Common
Stock issuable upon exercise of the Underwriters' over-allotment option.
At the request of the Company, the Underwriters are reserving up to 150,000
shares of Common Stock (approximately 4.5% of the shares to be offered) for sale
to employees, directors and friends of the Company. The number of shares
available for sale to the general public in this offering will be reduced to the
extent such persons purchase such reserved shares. Shares purchased by
employees, directors and friends of the Company will be at the public offering
price as set forth on the cover page of this Prospectus. Any reserved shares not
so purchased will be offered by the Underwriters to the general public in this
offering.
4
<PAGE>
RISK FACTORS
An investment in the shares offered hereby involves a high degree of risk,
including, among others, risks related to lack of operating history, integration
of assets and personnel, affiliation and expansion strategy, dependence on
affiliated practices and physicians, termination of service agreements, changes
in payment for medical services, government regulation and dependence on
information systems. See 'Risk Factors.'
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following table sets forth certain unaudited pro forma financial data
for the Company giving effect to the Initial Affiliation Transactions, which
were accounted for using historical cost in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 48 ('SAB 48'), and the Initial
Service Agreements. The pro forma statement of income data for the year ended
December 31, 1995 and the nine months ended September 30, 1996 assume that the
Company was incorporated, the Initial Affiliation Transactions had occurred and
the Initial Service Agreements were entered into on January 1, 1995.
The unaudited pro forma as adjusted financial data further include the sale
by the Company of 3,000,000 shares of Common Stock offered hereby with estimated
net proceeds of $26,790,000 and the repayment of certain indebtedness as
described under 'Use of Proceeds.' The pro forma as adjusted balance sheet data
give effect to the transactions described above as if they occurred on September
30, 1996.
The unaudited pro forma financial data may not be indicative of the results
that actually would have occurred if the Initial Affiliation Transactions had
been effected, and the Initial Service Agreements had been entered into, on the
dates indicated or the results that may be obtained in the future. This data is
qualified in its entirety by, and should be read in conjunction with, the
Unaudited Pro Forma Financial Statements and Notes thereto, the financial
statements for the Company and each of the Predecessor Practices and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA (1)(2)
<TABLE>
<CAPTION>
<S> <C> <C>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
STATEMENT OF INCOME DATA
- ------------------------
Revenue (3) ....................................... $31,493,723 $25,132,937
Operating expenses:
Salaries and benefits ........................... 14,214,984 10,599,417
Supplies, general and administrative expenses ... 10,930,793 9,579,454
Depreciation and amortization ................... 713,481 602,396
Costs to evaluate and acquire physician practices 94,903 71,177
----------- -----------
Income from continuing operations ................. 5,539,562 4,280,493
Interest expense and other, net ................... (74,306) (22,648)
----------- -----------
Income from continuing operations before income tax 5,465,256 4,257,845
Income tax expense ................................ (2,076,797) (1,617,981)
----------- -----------
Net income ........................................ $ 3,388,459 $ 2,639,864
----------- -----------
----------- -----------
Total weighted average number of common shares
outstanding (4) ................................. 12,491,897 12,491,897
----------- -----------
----------- -----------
Income per share amount (5) ....................... $ 0.27 $ 0.21
----------- -----------
----------- -----------
SEPTEMBER 30, 1996
------------------
BALANCE SHEET DATA (6)
Total assets............................................................... $14,744,983
Total debt................................................................. 2,836,012
AS ADJUSTED BALANCE SHEET DATA (7)
- ---------------------------------------------------------------------------
Total assets............................................................... $39,607,091
Total debt................................................................. 1,158,262
</TABLE>
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(1) The Initial Affiliation Transactions were accounted for using historical
cost in accordance with SAB 48. Accordingly, the Company will record the net
assets acquired at the Predecessor Practices' historical cost basis.
(2) Excluded from the summary financial data above are the discontinued
operations of Vero Orthopaedics, P.A. for the year ended December 31, 1995.
(3) Revenue generally consists of service fees equal to (i) a percentage of
pre-tax earnings of the Initial Affiliated Practices before physician
compensation and most fringe benefits and excluding certain expenses of the
Initial Affiliated Practices and (ii) reimbursement for operating expenses
of the Initial Affiliated Practices to be paid by the Company. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview.'
(4) The computation of income per share based upon 12,491,897 weighted average
common shares outstanding and common stock equivalents. See Note 15 to the
Unaudited Pro Forma Financial Statements included elsewhere in this
Prospectus for further discussion of the weighted average number of shares.
(5) See Note 2 to the financial statements of the Company for a description of
the computation of income (loss) per share amount.
(6) See Selected Unaudited Pro Forma Financial Data included elsewhere in this
Prospectus for the pro forma balance sheet data as of September 30, 1996.
(7) As Adjusted Balance Sheet Data reflects the sale by the Company of 3,000,000
shares of Common Stock offered hereby (assuming an initial public offering
price of $10.00 per share) and the application of the net proceeds
therefrom.
6
<PAGE>
RISK FACTORS
The following risk factors, as well as the other information contained in
this Prospectus, should be considered carefully before purchasing the Common
Stock offered hereby. This Prospectus contains forward-looking statements that
involve risks and uncertainties. See 'Prospectus Summary.' Actual events or
results may differ materially from those discussed in forward-looking statements
as a result of various factors, including, but not limited to, those discussed
below.
LACK OF OPERATING HISTORY; RISKS RELATED TO INTEGRATION OF ASSETS AND PERSONNEL
The Company was incorporated in December 1995 and, prior to its affiliation
with the Initial Affiliated Practices in November 1996, had no history of
operations or earnings. As a result of acquiring certain assets of the
Predecessor Practices, and entering into the Initial Service Agreements with the
Initial Affiliated Practices, the Company is now responsible for most
non-medical aspects of the operations, and manages most non-physician employees,
of the Initial Affiliated Practices. Prior to their affiliation with the
Company, the Predecessor Practices operated as separate independent entities,
and there can be no assurance that the Company will be able to integrate and
manage successfully the assets and personnel of, or provide services profitably
to, the Initial Affiliated Practices or other Affiliated Practices in the
future. In addition, there can be no assurance that the Company's affiliation
with the Initial Affiliated Practices or other Affiliated Practices will not
result in a loss of patients by any of the Affiliated Practices or other
unanticipated adverse consequences. Any of these events could have a material
adverse effect on the Company. There can be no assurance that the Company's
personnel, systems and infrastructure will be sufficient to permit effective and
profitable management of the Initial Affiliated Practices under the Initial
Service Agreements or to implement effectively the Company's strategies. See
'Business -- Strategy' and 'Management.'
RISKS ASSOCIATED WITH AFFILIATION AND EXPANSION STRATEGY
A primary element of the Company's strategy is to acquire certain assets
of, and affiliate through service agreements with, selected musculoskeletal
practices in targeted markets. The Company's strategy also involves assisting
Affiliated Practices in recruiting physicians and, to the extent permitted by
applicable law, contracting with ancillary musculoskeletal facilities, such as
outpatient occupational medicine, physical therapy and surgery centers and MRI
centers, and with associated providers. Identifying appropriate physician group
practices, individual physicians and ancillary providers and facilities and
proposing, negotiating and implementing economically attractive affiliations
with such practices, physicians and providers can be a lengthy, complex and
costly process. In addition, the Company is a party to a credit facility that
places certain limitations upon the number of affiliations the Company can enter
into in any quarter or year and the terms of any future affiliations. The
failure of the Company to identify and effect additional affiliations would have
a material adverse effect on the Company. Moreover, there can be no assurance
that future affiliations, if any, will contribute to the Company's profitability
or otherwise facilitate the successful implementation of the Company's overall
strategy. See 'Business -- Strategy.'
The Company's ability to expand is also dependent upon factors such as its
and the Affiliated Practices' ability to (i) adapt the Company's arrangements
with Affiliated Practices to comply with current or future legal requirements,
including state prohibitions on fee-splitting, corporate practice of medicine
and referrals to facilities in which physicians have a financial interest and
state anti-kickback provisions, (ii) obtain regulatory approval and certificates
of need, where necessary, and (iii) comply with licensing requirements
applicable to physicians and to facilities operated, and services offered, by
physicians. There can be no assurance that application of current laws or
changes in legal requirements will not adversely affect the Company or that the
Company and the Affiliated Practices will be able to obtain and maintain all
necessary regulatory approvals and comply with applicable laws, regulations and
licensing requirements. See '-- Government Regulation' and 'Business --
Government Regulation and Supervision.'
7
<PAGE>
DEPENDENCE ON AFFILIATED PRACTICES AND PHYSICIANS; RISK OF TERMINATION OF
SERVICE AGREEMENTS
The Company's operations are entirely dependent on its continued
affiliation through service agreements with the Initial Affiliated Practices and
on the success of the Initial Affiliated Practices. There can be no assurance
that the Initial Affiliated Practices will maintain successful practices, that
service agreements will not be terminated or that any of the key physicians in a
particular Initial Affiliated Practice will continue affiliation with such
practice. Two of the Initial Affiliated Practices, ROA and POA, are expected to
contribute approximately 30% each of the fees to be paid to the Company by all
of the Initial Affiliated Practices, based on their historical net patient
revenue and expenses. The termination of any of the Initial Service Agreements
would, and termination of service agreements with any additional Affiliated
Practices could, have a material adverse effect on the Company. For a
description of the Initial Service Agreements, including a description of their
termination provisions and non-competition arrangements with affiliated
physicians, and an agreement regarding a contemplated division of ROA into two
Affiliated Practices, see 'Business -- Contractual Agreements with Affiliated
Practices.' For a discussion of circumstances under which a service agreement
may be rendered unenforceable, see '-- Government Regulation.'
Some of the Initial Affiliated Practices derive, and other Affiliated
Practices may derive, a significant portion of their revenue from a limited
number of physicians. Particularly because none of the physicians at the Initial
Affiliated Practices has previously entered into service arrangements similar to
those embodied in the Initial Service Agreements, there can be no assurance that
the Company or the Affiliated Practices will maintain cooperative relationships
with key members of a particular Affiliated Practice. In addition, there can be
no assurance that key members of an Affiliated Practice will not retire, become
disabled or otherwise become unable or unwilling to continue practicing their
profession. The loss by an Affiliated Practice of one or more key members would
have a material adverse effect on the revenue of such Affiliated Practice and on
the Company. Neither the Company nor the Initial Affiliated Practices maintains
insurance on the lives of any affiliated physicians for the benefit of the
Company. The loss of revenue by any Affiliated Practice would have a material
adverse effect on the Company.
RISK OF CHANGES IN PAYMENT FOR MEDICAL SERVICES
The health care industry is experiencing a trend toward cost containment as
government and private third party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced capitated payment schedules with service
providers. Further reductions in payments to health care providers or other
changes in reimbursement for health care services could have a material adverse
effect on the Affiliated Practices and, as a result, on the Company. These
reductions could result from changes in current reimbursement rates or from a
shift in clinical protocols to non-surgical solutions to orthopaedic conditions.
There can be no assurance that the Company will be able to offset successfully
any or all of the payment reductions that may occur.
The federal government has implemented, in annual increments through
December 31, 1996, through the Medicare program, a resource-based relative value
scale ('RBRVS') payment methodology for health care provider services. RBRVS is
a fee schedule that, except for certain geographical and other adjustments, pays
similarly situated health care providers the same amount for the same services.
The RBRVS is adjusted each year and is subject to increases or decreases at the
discretion of Congress. To date, the implementation of RBRVS has reduced payment
rates for certain of the procedures historically provided by the Initial
Affiliated Practices. Further reductions could significantly affect the Initial
Affiliated Practices, each of which derives a significant portion of its revenue
from Medicare. For the nine months ended September 30, 1996, the net practice
revenue from Medicare constituted 22.3% of the aggregate net practice revenue of
the Predecessor Practices. RBRVS types of payment systems have also been adopted
by certain private third party payors and may become a predominant payment
methodology. Wider-spread implementation of such programs would reduce payments
from private third party payors, and could indirectly reduce revenue to the
Company.
8
<PAGE>
Rates paid by private third party payors, including those that provide
Medicare supplemental insurance, are based on established health care provider
and hospital charges and are generally higher than Medicare payment rates. A
change in the patient mix of any of the Affiliated Practices that results in a
decrease in patients covered by private insurance could have a material adverse
effect on the Affiliated Practices and, as a result, on the Company.
GOVERNMENT REGULATION
The delivery of health care, including the relationships among health care
providers such as physicians and other clinicians, is subject to extensive
federal and state regulation. The Company believes that its operations are
conducted in material compliance with applicable laws; however, the Company has
not received or applied for a legal opinion from counsel or from any federal or
state judicial or regulatory authority to this effect, and many aspects of the
Company's business operations have not been the subject of state or federal
regulatory interpretation. There can be no assurance that a review of the
Company's operations by federal or state judicial or regulatory authorities will
not result in a determination that the Company or one of its Affiliated
Practices has violated one or more provisions of federal or state law. Any such
determination could have a material adverse effect on the Company.
The fraud and abuse provisions of the Social Security Act and anti-kickback
laws and regulations adopted by many states, including Florida, a state in which
two of the Initial Affiliated Practices are located, prohibit the solicitation,
payment, receipt or offering of any direct or indirect remuneration in return
for, or as an inducement to, certain referrals of patients, items or services.
Provisions of the Social Security Act also impose significant penalties for
false or improper billings. In addition, the Stark Self-Referral Law imposes
restrictions on physicians' referrals for designated health services
reimbursable by Medicare or Medicaid to entities with which the physicians have
financial relationships. Many states, including the states in which the Initial
Affiliated Practices are located, have adopted similar self-referral laws which
are not limited to Medicare or Medicaid reimbursed services. Accordingly, the
Company is prohibited from owning facilities for the provision of, or otherwise
providing, certain ancillary services for patients of its Affiliated Practices.
Violations of any of these laws may result in substantial civil or criminal
penalties, including large civil monetary penalties, and, in the case of
violations of federal laws, exclusion from participation in the Medicare and
Medicaid programs. Such exclusion and penalties, if applied to the Company or
its Affiliated Practices, would have a material adverse effect on the Company.
The laws of many states, including the states in which the Initial
Affiliated Practices are located, prohibit business corporations such as the
Company from practicing medicine or exercising control over the medical
judgments or decisions of physicians and from engaging in certain financial
arrangements, such as splitting fees with physicians. These laws and their
interpretations vary from state to state and are enforced by both the courts and
regulatory authorities, each with broad discretion. Violations of these laws
could result in censure or delicensing of affiliated physicians, civil or
criminal penalties, including large civil monetary penalties, or other
sanctions. In addition, a determination in any state that the Company is engaged
in the corporate practice of medicine or any unlawful fee-splitting arrangement
could render any service agreement between the Company and an Affiliated
Practice located in such state unenforceable or subject to modification, which
could have a material adverse effect on the Company.
Expansion of the operations of the Company to certain jurisdictions may
require modification of the Company's form of relationship with its Affiliated
Practices, which could have a material adverse effect on the Company.
Furthermore, the Company's ability to expand into, or to continue to operate
within certain jurisdictions may depend on the Company's ability to modify its
operational structure to conform to such jurisdictions' regulatory framework or
to obtain necessary approvals, licenses and permits. Any limitation on the
Company's ability to expand could have a material adverse effect on the Company.
See 'Business -- Government Regulation and Supervision.'
In addition to extensive existing government health care regulation, there
are numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of
9
<PAGE>
health care services. These initiatives include reductions in Medicare and
Medicaid payments, trends in adopting managed care for Medicare and Medicaid
patients and regulation of entities that provide managed care and additional
prohibitions on ownership by health care providers, directly or indirectly, of
facilities to which they refer patients. Aspects of certain of these health care
proposals, if adopted, could have a material adverse effect on the Company. See
'-- Risks Associated with Affiliation and Expansion Strategy,' '-- Risk of
Changes in Payment for Medical Services' and 'Business -- Government Regulation
and Supervision.'
DEPENDENCE ON INFORMATION SYSTEMS
The Company's success is largely dependent on its ability to implement new
information systems and to integrate these systems into the Initial Affiliated
Practices' existing, operational, financial and clinical information systems. In
addition to their integral role in helping the Affiliated Practices realize
operating efficiencies, such systems are critical to negotiating, pricing and
managing capitated managed care contracts. See '-- Risks Associated with Managed
Care Contracts.' The Company will need to continue to invest in, and administer,
sophisticated management information systems to support these activities. The
Company may experience unanticipated delays, complications and expenses in
implementing, integrating and operating such systems. Furthermore, such systems
may require modifications, improvements or replacements as the Company expands
or if new technologies become available. Such modifications, improvements or
replacements may require substantial expenditures and may require interruptions
in operations during periods of implementation. The failure to implement
successfully and maintain operational, financial and clinical information
systems would have a material adverse effect on the Company. See 'Business --
SCN Operations.'
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS
As an increasing percentage of patients enter into health care coverage
arrangements with managed care payors, the Company believes that its success
will be, in part, dependent upon the Company's ability to negotiate contracts on
behalf of its Affiliated Practices with HMOs, employer groups and other private
third party payors. The inability of the Company to enter into such arrangements
in the future on behalf of its Affiliated Practices could have a material
adverse effect on the Company.
In certain instances, the Company may seek to negotiate on behalf of
regional musculoskeletal care networks consisting of the Company's Affiliated
Practices and other physicians or group practices willing to permit the Company
to negotiate on their behalf with respect to a particular third party payor. The
Company anticipates that, in the future, the payor contracts that may be entered
into on behalf of its Affiliated Practices and any related network physicians
will include contracts based on capitated fee arrangements. Under some of these
types of contracts, a health care provider agrees either to accept a
predetermined dollar amount per member per month in exchange for undertaking to
provide all covered services to patients or to provide treatment on an episode
of care basis. Such health care providers bear the risk, generally subject to
certain loss limits, that the aggregate costs of providing medical services will
exceed the premiums received. Some agreements may also contain 'shared risk'
provisions under which affiliated physicians may earn additional compensation
based on utilization control of institutional, ancillary and other services by
patients, and the Affiliated Practices may be required to bear a portion of any
loss in connection with such 'shared risk' provisions. To the extent that
patients or enrollees covered by such contracts require more frequent or, in
certain instances, more extensive care than anticipated, there could be a
material adverse effect on an Affiliated Practice and, therefore, on the
Company. In the worst case, revenue negotiated under risk-sharing or capitated
contracts would be insufficient to cover the costs of the care provided. Any
such reduction or elimination of earnings to the Affiliated Practices under such
fee arrangements could have a material adverse effect on the Company.
TOC has a non-contractual capitated arrangement covering approximately
75,000 lives and a capitated contract covering approximately 55,000 lives, and
POA has a capitated contract covering approximately 20,000 lives. These
arrangements existed at the time of the Initial Affiliation Transactions. No
other Initial Affiliated Practice has a capitated arrangement.
10
<PAGE>
The National Association of Insurance Commissioners (the 'NAIC') in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
Affiliated Practices will be precluded from entering into capitated contracts
directly with employers, individuals and benefit plans unless they qualify to do
business as HMOs or insurance companies. Currently, the Company does not intend,
on its own behalf, or on behalf of the Initial Affiliated Practices, to enter
into capitated payment or other risk-sharing arrangements other than with HMOs
or insurance companies. In addition, in December 1996, the NAIC issued a white
paper entitled 'Regulation of Health Risk Bearing Entities,' which sets forth
issues to be considered by state insurance regulators when considering new
regulations, and encourages that a uniform body of regulation be adopted by the
states. The Company believes that additional regulation at the state level will
be forthcoming in response to the NAIC initiatives. Other states have enacted
statutes or adopted regulations affecting risk assumption in the health care
industry, including statutes and regulations that subject any physician or
physician network engaged in risk-based contracting to applicable insurance laws
and regulations, which may include, among other things, laws and regulations
providing for minimum capital requirements and other safety and soundness
requirements. The Company and Affiliated Practices may not satisfy such
insurance laws or regulations. Full compliance with such laws and regulations
could result in substantial costs to the Company and the Affiliated Practices.
The inability to enter into capitated arrangements or the cost of complying with
certain applicable laws that would permit expansion of the Company's risk-based
contracting activities would have a material adverse effect on the Company.
Generally, there is no certainty that the Company and its Affiliated
Practices will be able to establish or maintain satisfactory relationships with
managed care and other third party payors, many of which already have existing
provider structures in place and may not be able or willing to change their
provider networks. In addition, any significant loss of revenue by the
Affiliated Practices as a result of the termination of third party payor
contracts or otherwise would have a material adverse effect on the Company.
NEED FOR ADDITIONAL FUNDS
The Company's acquisition and expansion strategy will require substantial
capital, and the Company anticipates that it will, in the future, seek to raise
additional funds through debt financing or the issuance of equity or debt
securities. There can be no assurance that sufficient funds will be available on
terms acceptable to the Company, if at all. If equity securities are issued,
either to raise funds or in connection with future affiliations, dilution to the
Company's stockholders may result, and if additional funds are raised through
the incurrence of debt, the Company may become subject to restrictions on its
operation and finances. Such restrictions may have an adverse effect on, among
other things, the Company's ability to pursue its acquisition strategy. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.'
COMPETITION
Competition for affiliation with additional musculoskeletal practices is
intense and may limit the availability of suitable practices with which the
Company may be able to affiliate. Several companies with established operating
histories and greater resources than the Company, including physician practice
management companies and some hospitals, clinics and health maintenance
organizations ('HMOs'), are pursuing activities similar to those of the Company.
There can be no assurance that the Company will be able to compete effectively
with such competitors, that additional competitors will not enter the market or
that such competition will not make it more difficult and costly to acquire the
assets of, and provide management services to, musculoskeletal medical practices
on terms beneficial to the Company. The Company also believes that changes in
governmental and private reimbursement policies, among other factors, have
resulted in increased competition among providers of medical services to
consumers. There can be no assurance that the Company's Affiliated Practices
will be able to compete effectively in the markets they serve. See 'Business --
Competition.'
11
<PAGE>
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent upon the ability and experience of its executive
officers and key personnel for the management of the Company and the
implementation of its business strategy. The Company currently has employment
contracts with its nine executive officers. Because of the difficulty in finding
adequate replacements for such personnel, the loss of the services of any such
personnel or the Company's inability in the future to attract and retain
management and other key personnel could have a material adverse effect on the
Company. The Company does not maintain significant key man insurance for any of
its executive officers. See 'Management -- Employment Agreements.'
POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. While the Initial Affiliated Practices
maintain malpractice insurance, there can be no assurance that any claim
asserted against any of the Initial Affiliated Practices or any other Affiliated
Practice will be covered by, or will not exceed the coverage limits, of
applicable insurance. A successful malpractice claim against any of the
Affiliated Practices, even if covered by insurance, could have a material
adverse effect on such Affiliated Practice and, as a result, on the Company.
The Company does not engage in the practice of medicine; however, the
Company could be implicated in such claims, and there can be no assurance that
claims, suits or complaints relating to services delivered by Affiliated
Practices (including claims with regard to services rendered by the Initial
Affiliated Practices prior to the Initial Affiliation Transactions) will not be
asserted against the Company in the future. Although the Company has attempted
to address this risk by maintaining insurance, there can be no assurance that
any claim asserted against the Company for professional or other liability will
be covered by, or will not exceed the coverage limits of, such insurance. The
Company's medical professional liability insurance provides coverage of up to $1
million per incident, with maximum coverage of $3 million per year. The
Company's general liability insurance provides coverage of up to $5 million per
incident, with maximum coverage of $5 million per year.
The availability and cost of professional liability insurance have been
affected by various factors, many of which are beyond the control of the
Company. There can be no assurance that the Company will be able to maintain
insurance in the future at a cost that is acceptable to the Company, or at all.
Any claim made against the Company not fully covered by insurance could have a
material adverse effect on the Company.
RISKS RELATED TO PURCHASE OF RECEIVABLES
The Initial Service Agreements provide that the Company will acquire each
Initial Affiliated Practice's accounts receivable each month. The purchase price
for such accounts receivable equals the gross amounts of the accounts receivable
recorded each month, less adjustments for contractual allowances, allowances for
doubtful accounts and other potentially uncollectible amounts based on the
practice's historical collection rate, as determined by the Company. To the
extent that the Company's actual collections are less than the amounts paid for
the receivables, or if payment of receivables is not made on a timely basis, the
Company could be materially adversely affected. See 'Business -- Contractual
Agreements with Affiliated Practices.' The Company also bears the collection
risk with respect to outstanding receivables acquired in the Initial Affiliation
Transactions.
MANAGEMENT DISCRETION IN ALLOCATION OF NET PROCEEDS
Although the Company intends to utilize the proceeds of the offering as set
forth under 'Use of Proceeds,' the Company has not determined how the proceeds
will be allocated among the specific uses described, other than with respect to
the repayment of all outstanding indebtedness of the Company under a bank credit
facility. Therefore, investors will be dependent on the judgment of management
with respect to the allocation of the proceeds of this offering not used to
repay such indebtedness. See 'Use of Proceeds.'
12
<PAGE>
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or continue after this offering. The initial public
offering price will be determined by negotiations among the Company and Credit
Suisse First Boston Corporation, Equitable Securities Corporation and Lehman
Brothers Inc. and may not be indicative of the market price for the Common Stock
after this offering. See 'Underwriting' for factors to be considered in
determining the initial public offering price. From time to time after this
offering, there may be significant volatility in the market price of the Common
Stock. Quarterly operating results of the Company, deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the health care industry or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Concern about the potential effects of
health care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock following this offering. Any such fluctuations that
occur following completion of this offering may adversely affect the market
price of the Common Stock.
QUARTERLY RESULTS FLUCTUATION
The Company's quarterly operating results may fluctuate significantly as
the result of the timing of affiliations and as a result of timing of
musculoskeletal procedures. Such fluctuation could adversely affect the price of
the Company's Common Stock. See '-- No Prior Market; Possible Volatility of
Stock Price.'
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following this offering. After giving effect to the shares of Common
Stock offered hereby, the Company will have outstanding 14,044,955 shares of
Common Stock. Of these shares, 3,350,000 shares (3,800,000 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock sold
in this offering will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the 'Securities Act'), except for any shares
purchased by 'affiliates,' as that term is defined under the Securities Act, of
the Company. The remaining 10,694,955 shares are 'restricted securities' within
the meaning of Rule 144 promulgated under the Securities Act. Of these
restricted shares, 1,265,000 shares will be eligible for sale pursuant to Rule
144 in December 1997 and the balance of the restricted shares will be eligible
for sale at various times from January 1998 through November 1998. The
Securities and Exchange Commission (the 'Commission') has proposed reducing the
initial Rule 144 holding period to one year. There can be no assurance as to
whether or when such rule changes will be enacted. If enacted, such modification
will accelerate by one year the initial date upon which all currently
outstanding Common Stock becomes eligible for resale under Rule 144.
The Company, its officers and directors and certain other stockholders of
the Company have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to any additional shares of Common Stock or securities
convertible or exchangeable or exercisable for any shares of Common Stock,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this Prospectus (the 'lock-up period'),
except (i) subsequent sales of Common Stock offered in this offering, (ii)
issuances of unregistered Common Stock by the Company in connection with
affiliation with practices, physicians and ancillary providers (although persons
receiving such shares would be subject to such restrictions for the remainder of
the lock-up period) or (iii) issuances of Common Stock by the Company pursuant
to the exercise of employee stock options outstanding on the date of this
Prospectus.
13
<PAGE>
The holders of all shares of Common Stock outstanding on the date of this
Prospectus have certain rights to have their shares, and an additional 550,000
shares issuable upon exercise of outstanding options, registered under the
Securities Act, although the holders of at least 2,437,534 of these shares have
agreed to refrain from selling their shares during the lock-up period. In
addition, the Company intends to register approximately 2,000,000 shares of
Common Stock reserved for issuance under the Company's 1996 Equity Compensation
Plan as soon as practicable after expiration of the lock-up period. The Company
also intends to register an additional 553,500 shares of Common Stock reserved
for issuance under the Company's 1996 Incentive and Non-Qualified Stock Option
Plan as soon as practicable thereafter. See 'Management' and 'Underwriting.'
CONTROL BY EXISTING STOCKHOLDERS
Following the completion of this offering, the officers and directors of
the Company and the physician owners of the Initial Affiliated Practices will
beneficially own approximately 66% of the outstanding shares of Common Stock of
the Company. Although, following this offering, no arrangements or understanding
among such persons with respect to the voting of the shares of Common Stock
beneficially owned by such persons will remain in effect, such persons may
nevertheless effectively be able to control the affairs of the Company. Each of
the Initial Affiliated Practices is represented on the Company's Board of
Directors and physician owners of the Initial Affiliated Practices constitute a
majority of the Board of Directors. See 'Principal and Selling Stockholders.'
POTENTIAL ANTI-TAKEOVER EFFECTS OF CHARTER AND BYLAWS PROVISIONS; POSSIBLE
ISSUANCES OF PREFERRED STOCK
Certain provisions of Delaware law, the Company's Amended and Restated
Certificate of Incorporation ('Certificate of Incorporation') and the Company's
Amended and Restated Bylaws ('Bylaws') could delay or impede the removal of
incumbent directors and could make it more difficult for a third party to
acquire, or could discourage a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. In
addition, shares of preferred stock may be issued by the Board of Directors
without stockholder approval on such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine. The
rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The Company has no current plans to issue any shares of
preferred stock. See 'Description of Capital Stock.'
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $7.68 per share (assuming an initial
public offering price of $10.00 per share and after giving effect to estimated
underwriting discounts and commissions). See 'Dilution.' In the event the
Company issues additional Common Stock in the future, including shares that may
be issued in connection with future affiliations, purchasers of Common Stock in
this offering may experience further dilution in the net tangible book value per
share of the Common Stock of the Company.
NO DIVIDENDS
The Company has never paid or declared any cash dividends and does not
anticipate paying any cash dividends in the foreseeable future. The Company's
credit facility with a bank prohibits the payment of any dividends without
written approval from the lender. See 'Dividend Policy.'
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,000,000 shares of Common
Stock in this offering, after deducting the underwriting discounts and
commissions and estimated expenses, are estimated to be approximately
$26,790,000 ($30,975,000 if the Underwriters' over-allotment option is exercised
in full) assuming an initial public offering price of $10.00 per share, the
midpoint of the range indicated on the cover page of this Prospectus. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders. The Company expects to use a portion of the net proceeds
to repay all outstanding indebtedness under the Company's loan agreement with
NationsBank of Tennessee, N.A. (the 'Credit Facility'). Pursuant to the terms of
the Credit Facility, the Company may borrow up to $5.0 million for working
capital and other corporate purposes (the 'Working Capital Facility') and up to
$15.0 million to finance the acquisition of assets (the 'Aquisition Facility'),
subject to a lower amount based on an 'established borrowing base,' as defined
in the Credit Facility. As of January 17, 1997, approximately $5.6 million was
outstanding under the Credit Facility, of which $3.9 million was borrowed under
the Working Capital Facility and $1.7 million was borrowed under the Acquisition
Facility. Of the amounts borrowed under the Credit Facility, approximately $1.7
million was utilized to finance the cash portion of the consideration paid by
the Company to finance the acquisition of the assets of the predecessor of ROA,
approximately $800,000 was used to fund loans by the Company to certain
physician owners of the Initial Affiliated Practices to cover anticipated cash
flow needs, and other borrowings have been used for working capital and other
corporate purposes.
The Working Capital Facility matures on October 31, 1997 and the
Acquisition Facility matures on October 31, 1998. The Company can elect to
borrow on either facility at a floating rate based on the prime rate plus an
applicable margin or at a fixed rate based on LIBOR plus an applicable margin.
At January 17, 1997, the effective interest rate for the Acquisition and the
Working Capital Facilities was 7.48% and 7.23% per annum, respectively. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.'
The balance of the net proceeds will be used to finance the acquisition of
assets of additional Affiliated Practices, for working capital, including the
acquisition of receivables from the Initial Affiliated Practices, and other
general corporate purposes. Although the Company has engaged in discussions with
practices with which it might affiliate, except as described under 'Business --
Initial Affiliated Practices,' the Company has no definitive agreements
regarding any affiliations with additional practices. Pending such uses, the net
proceeds will be invested in United States government securities and in
short-term, interest-bearing investment grade securities.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in its business. The
Credit Facility prohibits the payment of any dividends without written approval
from the lender.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 on a pro forma basis (i) to reflect the Initial Affiliation
Transactions and (ii) as adjusted to reflect the sale by the Company of
3,000,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $10.00 per share) and the application of the estimated net
proceeds therefrom. See 'Use of Proceeds.' This table should be read in
conjunction with the historical financial statements of the Company and the
Predecessor Practices, the Unaudited Pro Forma Financial Statements and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
---------- -----------
(UNAUDITED)
<S> <C> <C>
Acquisition revolving line of credit and current portion of capital
lease obligations.................................................... $1,868,023 $ 190,273
---------- -----------
---------- -----------
Capital lease obligations, less current portion........................ $ 967,989 $ 967,989
Stockholders' equity:
Preferred Stock, $.001 par value: 2,000,000 shares authorized; no
shares issued or outstanding...................................... -- --
Common Stock, $.001 par value: 50,000,000 shares authorized;
11,044,955 shares issued and outstanding pro forma; and 14,044,955
shares issued and outstanding pro forma as adjusted............... 11,045 14,045
Additional paid-in capital........................................... 8,298,156 35,085,156
Accumulated deficit.................................................. (2,285,314) (2,285,314)
---------- -----------
Total stockholders' equity............................................. 6,023,887 32,813,887
---------- -----------
Total capitalization................................................... $6,991,876 $33,781,876
---------- -----------
---------- -----------
</TABLE>
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at September 30, 1996,
after giving effect to the Initial Affiliation Transactions as if they had
occurred on that date, was $5,836,046 or $0.53 per share. 'Pro forma net
tangible book value per share' represents the amount of pro forma total tangible
assets of the Company less pro forma total liabilities divided by the number of
shares of Common Stock outstanding. After giving effect to the sale by the
Company of the 3,000,000 shares of Common Stock offered hereby (assuming an
initial public offering price of $10.00 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company) and the application of the net proceeds therefrom as
discussed under 'Use of Proceeds,' the pro forma as adjusted net tangible book
value of the Company as of September 30, 1996 would have been approximately
$32,626,046, or $2.32 per share. This represents an immediate increase in pro
forma net tangible book value of approximately $1.79 per share to existing
stockholders and an immediate dilution of approximately $7.68 per share to new
investors purchasing Common Stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................................... $10.00
Pro forma net tangible book value per share as of September 30, 1996............... 0.53
Increase per share attributable to new investors................................... 1.79
----
Pro forma as adjusted net tangible book value per share after this offering.......... 2.32
------
Dilution per share to new investors.................................................. $ 7.68(1)
------
------
</TABLE>
- ------------------
(1) Does not include the effect of the issuance of 1,908,748 shares of Common
Stock issuable upon exercise of outstanding options with a weighted average
exercise price of $4.89 per share.
The following table sets forth as of September 30, 1996 (i) the number of
shares of Common Stock outstanding and total and average per share amounts of
par value of outstanding Common Stock and additional paid-in capital immediately
after giving effect to the Initial Affiliation Transactions and (ii) the number
of shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share for new investors (assuming an initial
public offering price of $10.00 per share), before deducting underwriting
discounts and commissions and estimated offering expenses payable by the Company
(no effect is given to the sale of shares of Common Stock by the Selling
Stockholders):
<TABLE>
SHARES TOTAL
-------------------- ----------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... 11,044,955 79% $ 8,309,201(1) 22% $ 0.75(1)
New investors....................................... 3,000,000 21 30,000,000 78 10.00
---------- --- ----------- ---
Total.......................................... 14,044,955 100% $38,309,201 100% $ 2.73
---------- --- ----------- ---
---------- --- ----------- ---
</TABLE>
- ------------------
(1) Represents the par value of outstanding Common Stock and additional paid-in
capital immediately after giving effect to the Initial Affiliation
Transactions. See the Unaudited Pro Forma Financial Statements and Notes
thereto of Specialty Care Network, Inc. included elsewhere in this
Prospectus.
17
<PAGE>
SELECTED UNAUDITED FINANCIAL DATA
The following table sets forth certain unaudited pro forma financial data
for the Company giving effect to the Initial Affiliation Transactions, which
were accounted for using historical cost in accordance with SAB 48, and the
Initial Service Agreements. Accordingly, the Company will record the net assets
acquired at the Predecessor Practices' historical cost basis. The pro forma
statement of income data for the year ended December 31, 1995 and the nine
months ended September 30, 1996 assume that the Company was incorporated, the
Initial Affiliation Transactions had occurred and the Initial Service Agreements
were entered into on January 1, 1995. The pro forma balance sheet data assume
that the Initial Affiliation Transactions occurred on September 30, 1996.
Prior to the Initial Affiliation Transactions, each of the Predecessor
Practices operated independently and none was under common control or
management. Accordingly, the unaudited pro forma financial data may not be
indicative of the results that actually would have occurred if these
transactions had been effected on the dates indicated or the results that may be
obtained in the future. This data is qualified in its entirety by, and should be
read in conjunction with, the Unaudited Pro Forma Financial Statements and Notes
thereto, the financial statements for the Company and each of the Predecessor
Practices and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA (1)
<TABLE>
<S> <C> <C>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
STATEMENT OF INCOME DATA
- ------------------------
Revenue(2) .................................................. $31,493,723 $25,132,937
----------- -----------
Operating expenses:
Salaries and benefits ..................................... 14,214,984 10,599,417
Supplies, general and administrative expenses ............. 10,930,793 9,579,454
Depreciation and amortization ............................. 713,481 602,396
Costs to evaluate and acquire physician practices ......... 94,903 71,177
----------- -----------
Income from continuing operations ........................... 5,539,562 4,280,493
Interest expense and other, net ............................. (74,306) (22,648)
----------- -----------
Income from continuing operations before income tax ......... 5,465,256 4,257,845
Income tax expense .......................................... (2,076,797) (1,617,981)
----------- -----------
Net income .................................................. $ 3,388,459 $ 2,639,864
----------- -----------
----------- -----------
Total weighted average number of common shares outstanding(3) 12,491,897 12,491,897
----------- -----------
----------- -----------
Income per share amount(4) .................................. $ 0.27 $ 0.21
----------- -----------
----------- -----------
SEPTEMBER 30, 1996
------------------
BALANCE SHEET DATA
- ------------------
Total assets.................................................................. $14,744,983
Total debt.................................................................... 2,836,012
</TABLE>
- ------------------
(1) Excluded from the selected financial data above are the discontinued
operations of Vero Orthopaedics, P.A. for the year ended December 31, 1995.
(2) Revenue consists of service fees equal to (i) a percentage of pre-tax
earnings of the Predecessor Practices before physician compensation and most
fringe benefits and excluding certain expenses of the Predecessor Practices
and (ii) reimbursement for operating expenses of the Predecessor Practices
to be paid by the Company. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview.'
(3) The computation of income per share is based upon 12,491,897 weighted
average common shares outstanding and common stock equivalents. See Note 15
to the Unaudited Pro Forma Financial Statements included elsewhere in this
Prospectus for further discussion of the weighted average number of common
shares.
(4) See Note 2 to the financial statements of the Company for a description of
the computation of income (loss) per share amount.
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA -- PREDECESSOR PRACTICES
The historical financial data presented for each of the Predecessor
Practices for the years ended December 31, 1993, 1994 and 1995 are derived from
each of the Predecessor Practice's respective audited financial statements, and
the historical financial data for the nine months ended September 30, 1995 and
1996 and as of September 30, 1996 are derived from each of the Predecessor
Practice's respective unaudited financial statements.
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
- ------------------------
Net practice revenue................... $ 11,902,216 $ 13,325,350 $ 17,549,907 $ 12,431,874 $14,255,838
Income from operations before income
taxes................................ 377,445 128,803 1,460,162 774,082 374,437
Pro forma income tax expense(1)........ 152,158 62,029 555,804 293,405 139,307
Pro forma net income(1)................ 225,287 66,774 904,358 480,677 235,130
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets........................... $ 3,672,138 $ 3,701,073 $ 5,312,577 $ 5,334,817
Total debt............................. 700,000 550,000 570,000 155,699
</TABLE>
- ------------------
(1) Pro forma net income represents the effects of taxing the entity under
Subchapter C of the Internal Revenue Code.
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net practice revenue................... $ 11,552,476 $ 13,561,339 $ 13,298,164 $ 9,842,814 $11,152,357
Income (loss) from operations before
income taxes......................... (617,719) 95,371 (334,642) (25,271) 24,876
Income tax benefit (expense)........... 194,660 (35,385) 118,242 6,608 (8,707)
Net income (loss)...................... (423,059) 59,986 (216,400) (18,663) 16,169
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets........................... $ 3,807,273 $ 3,654,883 $ 3,584,722 $ 4,451,636
Total debt............................. 1,636,102 1,552,502 1,412,663 1,286,040
</TABLE>
19
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net practice revenue...................... $ 8,040,293 $ 9,455,216 $ 10,420,265 $ 7,470,881 $10,053,710
Income (loss) from operations
before income taxes..................... 261,123 351,361 103,809 (167,690) 903,425
Pro forma income tax benefit
(expense)(1)............................ (104,645) (143,143) (53,908) 54,393 (357,018)
Pro forma net income (loss)(1)............ 156,478 208,218 49,901 (113,297) 546,407
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets.............................. $ 2,527,530 $ 3,244,254 $ 5,481,617 $ 6,078,007
Total debt................................ -- -- 2,276,880 1,944,880
</TABLE>
- ------------------
(1) Pro forma net income (loss) represents the effects of taxing the entity
under Subchapter C of the Internal Revenue Code.
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net practice revenue..................................... $ 1,542,250 $ 8,207,951 $ 5,855,525 $ 6,208,360
Loss from operations before income taxes................. (286,717) (349,179) (314,296) (272,068)
Pro forma net loss(2).................................... (286,717) (349,179) (314,296) (272,068)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets............................................. $ 1,150,472 $ 1,685,062 $ 1,676,622
Total debt............................................... -- -- --
</TABLE>
- ------------------
(1) The selected financial data above includes GCOA from the period October 17,
1994 (date of inception) through September 30, 1996.
(2) Pro forma net loss represents the effects of taxing the entity under
Subchapter C of the Internal Revenue Code; however, no income tax benefit
has been provided herein due to the absence of net operating loss carryback
availability at the entity.
20
<PAGE>
VERO ORTHOPAEDICS, P.A.(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
- ----------------------------
Net practice revenue........................ $ 2,545,263 $ 3,204,224 $ 4,208,470 $ 3,179,034 $ 2,953,351
Income (loss) from continuing operations
before income taxes....................... (141,766) (202,494) (541,650) 49,160 306,354
Income tax benefit (expense)................ 49,618 69,646 (64,300) (5,021) (132,025)
Net income (loss) from
continuing operations..................... (92,148) (132,848) (605,950) 44,139 174,329
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets................................ $ 761,837 $ 719,150 $ 788,176 $ 846,453
Total debt.................................. 421,495 575,021 367,877 124,555
</TABLE>
- ------------------
(1) Excluded from the selected financial data above for Vero Orthopaedics, P.A.
are the discontinued operations for the years ended December 31, 1994 and
1995.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. See 'Prospectus Summary.' Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, but not limited to, those discussed in 'Risk
Factors.'
GENERAL
SCN was incorporated in 1995, but did not conduct any significant
operations until November 1996, following its affiliation with the Initial
Affiliated Practices. At the time of the Initial Affiliation Transactions, the
predecessors of the Initial Affiliated Practices and GCOA were established
businesses engaged in the provision of musculoskeletal care as separate
independent entities. The Initial Affiliated Practices currently conduct
business as separate entities obtaining services from the Company pursuant to
the Initial Service Agreements.
The following discussion of the unaudited pro forma results of operations
and financial position of the Company and of the combined results of operations
of the Predecessor Practices should be read in conjunction with the Unaudited
Pro Forma Financial Statements and Notes thereto and the financial statements
for the Company and each of the Predecessor Practices included elsewhere in this
Prospectus.
ACCOUNTING TREATMENT
The acquisition of the assets and assumption of certain liabilities of the
Predecessor Practices were accounted for by the Company at the transferors'
historical cost basis. The Common Stock being exchanged for those assets is
recorded by SCN at the Predecessor Practices' historical cost. In accordance
with SAB 48, the physician owners of the Predecessor Practices were deemed to
function as promoters in the Initial Affiliation Transactions. Cash
consideration given in these acquisitions is treated for accounting purposes as
a dividend from SCN to the physician owners who received cash.
Future acquisitions will be accounted for by either the pooling of
interests or purchase accounting methods. To the extent future acquisitions are
accounted for by the purchase method of accounting, the Company may have to
recognize substantial amounts of goodwill.
OVERVIEW
In connection with the Initial Affiliation Transactions, the Company
acquired certain assets and liabilities of the Predecessor Practices and entered
into the Initial Service Agreements with the Initial Affiliated Practices.
Pursuant to the terms of the Initial Service Agreements, the Company, among
other things, provides facilities and management, administrative and development
services, and employs most non-medical personnel, in return for management
service fees. Such fees are payable monthly and consist of the following: (i)
service fees based on a percentage (the 'Service Fee Percentage') ranging from
20%-33% of the Adjusted Pre-Tax Income of the Initial Affiliated Practices
(defined generally as revenue of the Initial Affiliated Practices related to
professional services less amounts equal to certain clinic expenses of the
Initial Affiliated Practices ('Clinic Expenses,' as defined more fully in the
Initial Service Agreements), not including physician owner compensation or most
benefits to physician owners) and (ii) amounts equal to Clinic Expenses. For the
first three years following affiliation, however, the portion of the service
fees described under clause (i) is specified to be the greater of the amount
payable as described under clause (i) above or a fixed dollar amount (the 'Base
Service Fee'), which was generally calculated by applying the respective Service
Fee Percentage of Adjusted Pre-Tax Income of the Predecessor Practices for the
twelve months prior to affiliation. The annual Base Service Fees for the Initial
Affiliated Practices is approximately $9.5 million in the aggregate. See
'Business -- Contractual Agreements with Affiliated Practices.' In addition,
with respect to its management of certain facilities and ancillary services
associated with
22
<PAGE>
certain of the Initial Affiliated Practices, the Company receives fees ranging
from 2%-8% of net revenue related to such facilities and services.
The expenses incurred by the Company in fulfilling its obligations under
the Initial Service Agreements include the salaries, wages and benefits of
personnel (other than physician owners and certain technical medical personnel),
supplies, expenses involved in administering the clinical practices of the
Initial Affiliated Practices and general and administrative expenses, as well as
depreciation and amortization of assets acquired from the Predecessor Practices.
The Company will seek to reduce these operating costs and expenses, as a
percentage of net revenue, through purchase discounts, economies of scale and
standardization of best practices. In addition to the operating costs and
expenses discussed above, the Company has and will continue to incur personnel
and administrative expenses in connection with its corporate office, which
provides management, administrative and development services to the Initial
Affiliated Practices.
Significant factors that influence revenue of the Initial Affiliated
Practices include the number of physicians, specialty and subspecialty mix,
payor mix and associated ancillary services. The Company plans to assist the
Initial Affiliated Practices by providing management, capital and other
resources required to develop new services, to recruit additional physicians to
its Initial Affiliated Practices and to secure managed care contracts.
The Company accounts for its stock-based compensation arrangements using
the intrinsic value method under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ('APB No. 25'). In
1995, Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation ('FASB No. 123'), was issued, whereby companies may
elect to account for stock-based compensation using a fair value based method or
continue measuring compensation expense using the intrinsic value method
prescribed in APB No. 25. Currently, the Financial Accounting Standards Board
has added to its agenda a project regarding certain APB No. 25 issues including
such things as incorporating the FASB No. 123 grant date definition into APB No.
25, readdressing the criteria under broad-based plans qualifying for
noncompensatory accounting and defining what constitutes employees. Accordingly,
pending resolution of these issues, the Company's accounting for stock-based
compensation arrangements could be revised.
RESULTS OF OPERATIONS
HISTORICAL
The Company had not entered into any service agreements, and consequently
generated no revenue, prior to September 30, 1996. The Company incurred a loss
for the period from the date of its incorporation through September 30, 1996 of
approximately $2.3 million reflecting management salaries and the travel, legal
and accounting costs associated with the Initial Affiliation Transactions.
PRO FORMA
Revenue. The pro forma revenue of the Company consists almost exclusively
of amounts to be earned under the Initial Service Agreements. The revenue
included in the pro forma financial statements is that which would have been
earned based on the operating results of the Predecessor Practices for the year
ended December 31, 1995 and for the nine months ended September 30, 1996,
assuming the Initial Affiliation Transactions had occurred, and the Initial
Service Agreements had been entered into, on January 1, 1995. The pro forma
revenue of $31.5 million and $25.1 million for the year ended December 31, 1995
and for the nine months ended September 30, 1996, respectively, are based on the
amounts that would have been payable pursuant to the Initial Service Agreements,
which include management fees and the reimbursable expenses of the Initial
Affiliated Practices. The pro forma revenue includes revenue that would have
been derived from the management agreement between TOC and the Company at TOC's
MRI center and revenue that would have been derived from the service agreement
between the Company and POA relating to POA's ambulatory surgery center.
23
<PAGE>
Operating Expenses. The total pro forma operating expenses for the year
ended December 31, 1995 and for the nine months ended September 30, 1996 reflect
the operating expenses of the Predecessor Practices which would have been
payable by SCN under the Initial Service Agreements and SCN corporate costs.
Income Taxes. Pro forma income taxes assume that the Company had operated
as a tax-paying entity, subject to an effective combined tax rate for state and
federal income taxes of 38%.
LIQUIDITY AND CAPITAL RESOURCES
SCN has financed its operations to date from the proceeds of private
placements of convertible debt and equity and bank borrowings. During 1996, the
Company received net proceeds from private placements of convertible
subordinated debt and equity in an aggregate amount of approximately $2.5
million. SCN utilized bank borrowings of approximately $1.7 million to effect
the Initial Affiliation Transactions.
The Company has a $20 million Credit Facility, including a $15.0 million
Acquisition Facility and a $5.0 million Working Capital Facility to be used for
acquisitions and general corporate purposes. However, the Company's aggregate
borrowings cannot exceed an established borrowing base, which is a multiple of
the Company's trailing twelve months cash flow, subject to certain adjustments,
less existing indebtedness. The minimum rates at which the Company can borrow
are the prime rate or LIBOR plus 1.75% on the Acquisition Facility and the prime
rate or LIBOR plus 1.50% on the Working Capital Facility. At January 17, 1997,
the Company had approximately $5.6 million outstanding under the Credit
Facility, consisting of $1.7 million in Acquisition Facility debt and $3.9
million in Working Capital Facility debt. At January 17, 1997, the Company's
borrowing base under the Credit Facility was $7.0 million, and the Company's
effective rate of interest for the Acquisition and Working Capital Facilities
was 7.48% and 7.23% per annum, respectively. The Credit Facility is secured by
substantially all of the assets of the Company and contains several affirmative
and negative covenants, including covenants limiting the Company's ability to
incur additional indebtedness and limiting the Company's ability to, and
restricting the terms upon which the Company can, affiliate with physician
practices in the future. The per annum commitment fee on the unused portion of
the Credit Facility is 0.25% on the Acquisition Facility and 0.20% on the
Working Capital Facility.
The Company plans to repay all outstanding indebtedness under the Credit
Facility with proceeds from this offering.
In connection with the Initial Affiliation Transactions, the Company has
committed to enter into loan agreements with certain physician owners of the
Predecessor Practices for loans in an aggregate amount of up to approximately
$4.3 million. These loans are available until November 12, 1998, and the amount
that each physician may borrow is limited. Pursuant to loan agreements, as of
January 17, 1997, the Company had loaned approximately $1 million (approximately
$800,000 of which was funded through the Credit Facility) to certain physician
owners of the Initial Affiliated Practices to cover anticipated cash flow needs
of these physician owners. The loans bear interest at a floating rate based on
prime plus 1.25% and mature at the earlier of the date on which any shares of
Common Stock held by the physicians (i) are sold pursuant to a registration
statement filed with the Commission or (ii) may otherwise be sold pursuant to
Rule 144. The loans are secured by a portion of the Common Stock owned by the
physicians.
Pursuant to separate agreements with two of the physician owners at ROA,
the Company has agreed to support the establishment of a sports medicine center
and a knee center. The Company has agreed to negotiate in good faith with one
physician owner to develop a plan for the sports medicine center by November
1997. The specifications relating to the development of the centers, including
the extent of capital commitments by the Company, have not been determined. The
development of the centers would be subject to regulatory approvals under
current law.
In connection with the Initial Affiliation Transactions, the Company
purchased, subject to adjustment, the accounts receivable of the Predecessor
Practices. In addition, pursuant to the Initial
24
<PAGE>
Service Agreements, the Company will purchase, subject to adjustment, the
accounts receivable of the Initial Affiliated Practices monthly in arrears and
anticipates that it will have a similar obligation under service agreements
entered into in the future. The Company expects to use working capital to fund
its obligation to purchase, subject to adjustment, the accounts receivable on an
ongoing basis. No adjustments will be made to reflect financing costs related to
the carrying of such receivables by the Company. The Company expects to use its
working capital to fund the receivables.
In connection with the Initial Affiliation Transactions, the Company will
record aggregate federal and state deferred tax liabilities of approximately
$3.9 million. These liabilities generally will become payable ratably over a
four year period commencing on the date of the consummation of the Initial
Affiliation Transactions.
The Company anticipates that capital expenditures during 1997 will relate
primarily to affiliations with additional practices, if any, and to the
expansion and replacement of medical and office equipment for the Initial
Affiliated Practices. It is anticipated that funding for these purposes will be
derived from the proceeds of this offering, funds borrowed under the Credit
Facility and cash flow from operations. Management believes that such sources
will be sufficient to fund the Company's capital needs for a period of in excess
of twelve months following completion of this offering. In the future, the
Company will seek to raise additional funds through borrowings or the issuance
of debt or equity securities. There can be no assurance that sufficient funds
will be available on terms acceptable to the Company, if at all.
25
<PAGE>
BUSINESS
GENERAL
Specialty Care Network is a physician practice management company focusing
exclusively on musculoskeletal disease-state management. Since November 12,
1996, the Company has provided management services under long-term agreements
with five practices, encompassing 49 physicians in five states. In addition, the
Company has entered into definitive agreements to affiliate with three single
physician practices in two of its existing markets. The Company also manages one
outpatient surgery center and one outpatient MRI center owned by two of its
Initial Affiliated Practices.
The Initial Affiliated Practices offer a broad spectrum of musculoskeletal
care, which is the treatment of conditions relating to bones, joints, muscles
and related connective tissues. The Company's affiliated physicians are trained
in a variety of musculoskeletal disciplines, including general orthopaedics,
joint replacement surgery, sports medicine, spinal care, hand and upper
extremity care, foot and ankle care, pediatric orthopaedics, physiatry, trauma
and adult neurology. In order to build networks of providers that offer access
to a full range of musculoskeletal care, the Company intends to affiliate and
otherwise contract with physicians trained in other musculoskeletal
subspecialties, including occupational medicine, neurosurgery, plastic surgery,
rehabilitation therapy and rheumatology.
SCN's goal is to build the leading musculoskeletal physician practice
management company in the United States. The Company's strategy consists of
three components: (i) affiliating with leading musculoskeletal practices in
targeted markets throughout the United States; (ii) assisting each Affiliated
Practice in managing and expanding its business by providing comprehensive
operational support, including proprietary clinical and financial information
systems; and (iii) developing integrated regional musculoskeletal networks
around its Affiliated Practices. As a first step in implementing this strategy,
the Company has entered into long-term service agreements with the Initial
Affiliated Practices, a select group of practices in Philadelphia, Pennsylvania;
Princeton, New Jersey; Tallahassee, Florida; Bainbridge, Georgia; Baltimore,
Maryland; and Vero Beach, Florida. These Initial Affiliated Practices were
selected based on a variety of factors including, but not limited to, physician
credentials and reputation; competitive market position; specialty and
subspecialty mix of physicians; historical financial performance and growth
potential; and willingness to embrace SCN's corporate philosophy.
INDUSTRY BACKGROUND
PHYSICIAN PRACTICE MANAGEMENT INDUSTRY
The Health Care Financing Administration ('HCFA') estimated that national
health care spending in 1994 was approximately $940 billion, with approximately
$180 billion of such expenditures directly attributable to physician services
and an additional $600 billion under physician direction. Moreover, HCFA
projects that national health care spending will be nearly $1.5 trillion in
2000. The growth in health care expenditures has increased the demand by
government and third party payors to control health care costs. The resulting
emphasis on cost containment, the consolidation of the health care market in
general, the increased market share of managed care companies and the transfer
of risk from payors to providers have precipitated and accelerated significant
changes in the way physicians organize themselves.
The Company believes that, among other factors, these market pressures have
caused physicians to affiliate with physician practice management companies that
provide comprehensive operational and financial support. Although several
companies provide such services to physicians across a variety of medical
specialties, including musculoskeletal care, management believes that, upon
completion of this offering, SCN will be the only publicly-traded physician
practice management company focusing exclusively on musculoskeletal care.
26
<PAGE>
MUSCULOSKELETAL MARKET OVERVIEW
Expenditures for musculoskeletal care in the United States are significant,
with total direct costs associated with the delivery of musculoskeletal care
exceeding $60 billion in 1988, according to the AAOS. Of this amount,
approximately $7 billion represents fees paid for physician services.
Furthermore, according to the AAOS, the 65-and-over age group accounts for
approximately 25% of musculoskeletal cases. Given the aging of the U.S.
population, the Company believes that demographic trends favor the growth of the
need for musculoskeletal care.
The spectrum of musculoskeletal care ranges from acute procedures, such as
spinal or hip surgery after trauma, to the treatment of chronic conditions, such
as arthritis and back pain. Musculoskeletal care is provided by a variety of
medical and surgical specialists. Although the orthopaedic surgeon represents
the primary musculoskeletal provider, musculoskeletal care is also provided by
neurosurgeons, neurologists, plastic surgeons, physiatrists, rheumatologists,
occupational medicine physicians, podiatrists and primary care physicians, as
well as rehabilitative therapists. Moreover, there are a number of
subspecialties of orthopaedics, including adult reconstructive (joint
replacement) surgery, spinal care, sports medicine, foot and ankle care, hand
and upper extremity care, pediatrics, oncology and trauma care. The American
Medical Association estimates that in 1995, there were approximately 23,000
orthopaedic surgeons, as well as approximately 5,500 physiatrists, 3,500
rheumatologists, 3,000 occupational medicine physicians, 11,400 neurologists and
4,900 neurosurgeons.
The payor mix for musculoskeletal care is diverse, with managed care
enrollees representing an increasing percentage of patients. According to data
from a 1994 AAOS survey, the largest percentage of patients is private pay
(28%), followed by managed care, including fee-for-service and capitation (21%),
Medicare (21%) and workers compensation (18%). Almost 80% of orthopaedic
surgeons indicated they received patients from managed care sources. While
private pay patients remain the largest category, the AAOS survey indicated that
the percentage of total private pay patients has declined from 39% in 1988 to
28% in 1994. Over the same period, patients from managed care sources increased
from 12% to 21%. The distribution of patients from other sources remained
relatively constant over this period.
STRATEGY
SCN's goal is to become the leading physician practice management company
focusing on musculoskeletal disease-state management. The Company's strategy
consists of three components: (i) affiliating with leading musculoskeletal
practices in targeted markets throughout the United States; (ii) assisting each
Affiliated Practice in managing and expanding its business by providing
comprehensive operational support, including the development of proprietary
clinical and financial information systems; and (iii) developing integrated
regional musculoskeletal networks around its Affiliated Practices.
AFFILIATE WITH LEADING MUSCULOSKELETAL GROUPS
As a result of the Initial Affiliation Transactions, the Company has
affiliated with five practices encompassing 49 physicians in five states. The
Company intends to acquire the assets of, and provide management services to,
additional leading musculoskeletal physician groups in targeted markets. The
Company evaluates potential acquisition candidates based on a variety of
factors, including, but not limited to, physician credentials and reputation;
competitive market position; specialty and subspecialty mix of physicians;
historical financial performance and growth potential; and willingness to
embrace SCN's corporate philosophy. The Company believes that it is an
attractive affiliation partner because of the depth and experience of the
Company's management team (see the descriptions of the experience of the
Company's executive officers under '-- Provide Comprehensive Operational
Support' and 'Management -- Directors and Executive Officers'); the Company's
physician-driven practice governance structure; the fee structure under the
Company's service agreements; and the Company's issuance of Common Stock in
connection with its affiliation with physician practices,
27
<PAGE>
which permits physicians to become stockholders whose interests are aligned with
those of the Company.
PROVIDE COMPREHENSIVE OPERATIONAL SUPPORT
The Company intends to provide the Affiliated Practices comprehensive
operational services designed to enable physicians to devote their full time and
effort toward their clinical practices. The Company also will seek to increase
practice revenue through physician recruitment, contracting with ancillary
musculoskeletal-related providers, enhanced managed care contracting and
improvements in billing and collection. For a discussion of the Company's
current efforts in this regard see '-- Payor Contracting.' In addition, the
Company will seek to reduce operating costs and expenses, as a percentage of net
revenue, through purchase discounts, economies of scale and standardization of
best practices.
As a key element of assisting the Affiliated Practices, the Company intends
to leverage the information systems experience of its management and utilize the
Company's proprietary information systems. Kerry R. Hicks, Chief Executive
Officer of the Company, and David G. Hicks, Vice President of Management
Information Systems of the Company, have significant experience in designing and
implementing health care information systems. The Company has established
standards at the Initial Affiliated Practices for gathering clinical and
financial information such as personal patient data, physician and procedure
identifier codes, payor class and amounts charged and reimbursed. The Company
intends to develop a proprietary clinical outcomes database to enable the
Affiliated Practices to analyze clinical outcomes at the practitioner and
practice levels on a standardized basis. Information will be gathered in areas
such as incidents rates (the number of specified procedural, diagnostic and
medical events during a specified period with respect to a specified patient
population), utilization (frequency of patient care and activity relating to the
patient) and quality of care (monitoring and evaluation of patient outcomes).
This information should assist physicians in developing clinical protocols,
measuring outcomes, ensuring that standards of quality are met and determining
the most cost-effective course for treating patients. The Company intends to use
this data, together with data derived from its financial information systems, to
produce comprehensive financial and clinical reports to be used in connection
with the negotiation, structuring and pricing of managed care contracts. See '--
SCN Operations -- Management Information Systems.'
DEVELOP INTEGRATED REGIONAL MUSCULOSKELETAL NETWORKS
The Company intends in the longer term to leverage the reputation and
market share of the Affiliated Practices to develop integrated regional
musculoskeletal care networks. In order to offer patients and payors a
multi-disciplinary continuum of care and to increase patient access points in a
given market, the Company intends to develop these networks through contracts
with additional specialists in the musculoskeletal disciplines not represented
in the Affiliated Practices. The Company also intends, to the extent permitted
by applicable law, to contract with selected musculoskeletal providers and
facilities as needed in order to offer an umbrella of care, including MRI and
X-ray, outpatient occupational medicine, physical therapy and surgery centers.
The Company's objective in developing these networks is to obtain managed care
contracts for the networks and to enhance relationships with third party payors.
The Company believes patients are treated most effectively and efficiently
when various physician, institutional and ancillary providers are integrated
vertically into an organized musculoskeletal health care delivery system.
Efficiencies can be achieved by gathering, interpreting and sharing clinical
outcomes information, standardizing referral patterns and treatment protocols
within the network and coordinating patients' clinical treatment as they move
through the continuum of care toward recovery. These efficiencies result in an
increased ability to control and predict the cost of care for various patient
diagnoses. The Company believes that organized musculoskeletal physicians in a
network, with access to reliable clinical outcomes information, are able to
deliver a higher quality of care to patients. Nevertheless, the Company is
unable to predict whether and to what extent it will be able to establish
integrated musculoskeletal networks or negotiate capitated arrangements in the
future.
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<PAGE>
INITIAL AFFILIATED PRACTICES
The Company has affiliated, through the Initial Service Agreements, with
five practices. On November 12, 1996, the Company, through a series of
transactions including an asset purchase, a share exchange and three mergers,
acquired substantially all of the assets and certain liabilities of the
Predecessor Practices. In the Initial Affiliation Transactions, the Company
issued an aggregate of 7,659,115 shares of Common Stock and paid $1,537,872 in
cash to physicians in the Initial Affiliated Practices. See 'Certain
Transactions.' In addition, the Company has entered into definitive agreements
to affiliate with three single physician practices in Tallahassee, Florida;
Thomasville, Georgia; and Baltimore, Maryland. The Company has agreed to
acquire, through merger, substantially all of the assets and certain liabilities
of the practices for an aggregate consideration of 409,265 shares. Consummation
of the transactions is subject to certain conditions, including the Company's
completion of, and satisfaction with, its review of the practices.
The table below sets forth certain information regarding the Initial
Affiliated Practices, all of whose physicians are board certified or board
eligible:
<TABLE>
<CAPTION>
MUSCULOSKELETAL
AFFILIATED PRACTICES LOCATION(S) PHYSICIANS SUBSPECIALTIES ANCILLARY SERVICES
- --------------------------------- --------------------- ------------- --------------------- --------------------------
<S> <C> <C> <C> <C>
Reconstructive Orthopaedic Philadelphia, PA 10 3 None
Associates II, P.C.
Princeton Orthopaedic Princeton, NJ 12 7 Outpatient Surgery,
Associates II, P.A. Physical Therapy
TOC Specialists, P.L. Tallahassee, FL 14 7 MRI
Bainbridge, GA
Greater Chesapeake Baltimore, MD 8 5 None
Orthopaedic
Associates, LLC
Vero Orthopaedics II, P.A. Vero Beach, FL 5 5 None
Sebastian, FL
-----
Total 49
-----
-----
</TABLE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES II, P.C.
ROA, operating under the name The Rothman Institute, was founded in
Philadelphia, Pennsylvania in 1970 and currently has nine orthopaedic surgeons
and one anesthesiologist. ROA has its own research department and has compiled
an orthopaedic database for more than 25 years.
ROA physicians (and their specialties) are Todd J. Albert, M.D. (spine
surgery); Richard A. Balderston, M.D. (spine surgery); Arthur R. Bartolozzi,
M.D. (sports medicine); Robert E. Booth, Jr., M.D. (joint replacement surgery);
Michael G. Ciccotti, M.D. (sports medicine); William J. Hozack, M.D. (joint
replacement surgery); Philip M. Maurer, M.D. (anesthesiologist); Richard H.
Rothman, M.D., Ph.D. (joint replacement surgery); Peter F. Sharkey, M.D. (joint
replacement surgery); and Alexander R. Vaccaro, M.D. (spine surgery). All of
these physicians, other than Dr. Maurer, are physician owners of ROA.
Dr. Balderston serves as Clinical Professor, Vice Chairman of the
Department of Orthopaedics and Chief of Orthopaedic Surgery at Thomas Jefferson
University Hospital ('Jefferson'). Dr. Bartolozzi is a team physician for
several sports teams, including the Philadelphia Flyers hockey team and the
Philadelphia Eagles football team. Dr. Booth serves as Co-Chief of Orthopaedic
Surgery at Pennsylvania Hospital, and is Professor and Vice Chairman of
Orthopaedic Surgery at Jefferson. Dr. Rothman serves as the Chairman of the
Department of Orthopaedics at Jefferson and Co-Chairman of
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<PAGE>
the Department of Orthopaedics at Pennsylvania Hospital and is the
Editor-in-Chief of the Journal of Arthroplasty, a journal of joint replacement
surgery.
Drs. Booth and Bartolozzi have entered into an agreement with the Company
and ROA that contemplates that Drs. Booth and Bartolozzi will form and own an
independent practice. The agreement provides that this practice will enter into
a separate service agreement with the Company. See 'Business -- Contractual
Agreements with Affiliated Practices.'
PRINCETON ORTHOPAEDIC ASSOCIATES II, P.A. AND PRINCETON SPORTSMEDICINE
POA was founded in 1974 in Princeton, New Jersey and currently has 10
orthopaedic surgeons, one podiatric surgeon, one physiatrist and 16 physical
therapists. POA operates three facilities, each of which has an approximately
7,000 square foot physical therapy center. One of these facilities, operating
under the name SportsMedicine Princeton, provides multi-disciplinary diagnostic
and rehabilitative care for sports-related injuries. POA also operates its own
outpatient surgery center, for which SCN provides management services for a fee.
POA physicians (and their specialties) are Jeffrey S. Abrams, M.D.
(shoulder surgery); Jon W. Ark, M.D. (hand and foot surgery); Robert N. Dunn,
M.D. (spine surgery); Richard E. Fleming, Jr., M.D. (sports medicine); Steven R.
Gecha, M.D. (sports medicine); W. Thomas Gutowski, M.D. (sports medicine);
Michael N. Jolley, M.D. (joint replacement surgery); C. Alexander Moskwa, Jr.,
M.D. (sports medicine); Michael A. Palmer, M.D. (physiatry); Harvey E. Smires,
M.D. (joint replacement surgery); David M. Smith, M.D. (general orthopaedics);
and John S. Smith, DPM (podiatry). All of these physicians, other than Drs. Ark,
Palmer and John S. Smith, are physician owners of POA.
TOC SPECIALISTS, P.L.
TOC was founded in 1972 and currently has nine orthopaedic surgeons, two
non-surgical musculoskeletal specialists and three neurologists. In its main
facility in Tallahassee, Florida, TOC has an MRI center, for which SCN provides
management services for a fee. In addition, TOC physicians also practice at a
satellite facility in Bainbridge, Georgia operating under the name Southern
Orthopedic Specialists, Inc. TOC has a non-contractual capitated arrangement
with Capital Health Plans covering approximately 75,000 lives and a capitated
contract with Health Plan Southeast covering approximately 55,000 lives.
TOC physicians (and their specialties) are Gregg A. Alexander, M.D.
(musculoskeletal medicine, disorders of the spine); D. Christian Berg, M.D.
(hand and upper extremities); Richard E. Blackburn, M.D. (adult neurology);
Donald M. Dewey, M.D., C.P.O. (foot and ankle surgery, pediatric orthopaedics);
Mark E. Fahey, M.D. (general orthopaedic surgery); Thomas C. Haney, M.D. (knee
surgery, sports medicine); William D. Henderson, Jr., M.D. (knee surgery, sports
medicine); Steve E. Jordan, M.D. (general orthopaedic surgery, sports medicine);
J. Rick Lyon, M.D. (general orthopaedic surgery); Kris D. Stowers, M.D.
(musculoskeletal and sports medicine); Robert L. Thornberry, M.D. (hip and knee
surgery, sports medicine); Billy C. Weinstein, M.D. (adult neurology); Stanley
Whitney, M.D. (adult neurology); and Charles H. Wingo, M.D. (spine surgery). All
of these physicians, other than Dr. Whitney, are physician owners of TOC.
TOC physicians have served as team physicians for a number of local high
schools and colleges. Dr. Haney serves as the team physician for the Florida
State University football team. Dr. Henderson currently serves as the president
of the Herodicus Society, a national sports medicine society, and is one of the
sports medicine physicians for the U.S. National Soccer Team. Dr. Wingo
currently serves as Chairman of the Orthopaedic Section/Surgery at the
Tallahassee Memorial Regional Medical Center.
30
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
GCOA was founded in Baltimore, Maryland in 1994 and currently has eight
orthopaedic surgeons. The two main focus areas of GCOA are sports medicine and
foot and ankle services. The practice is located adjacent to Union Memorial
Hospital and is actively involved in the orthopaedic residency and fellowship
teaching programs at that institution. In addition, three of its physicians are
active in such programs at the Johns Hopkins University School of Medicine
('Johns Hopkins').
GCOA physicians (and their specialties) are Paul L. Asdourian, M.D. (spine
surgery); Frank R. Ebert, M.D. (joint replacement surgery); Leslie S. Matthews,
M.D. (sports medicine); Stuart D. Miller, M.D. (foot and ankle); Mark S.
Myerson, M.D. (foot and ankle); John B. O'Donnell, M.D. (sports medicine); Lew
C. Schon, M.D. (foot and ankle); and Martin A. Yahiro, M.D. (general
orthopaedics). All of these physicians, other than Dr. Yahiro, are physician
owners of GCOA.
Dr. Asdourian serves as Chief of Orthopaedic Spinal Surgery at Union
Memorial Hospital and is a clinical instructor in orthopaedic surgery at Johns
Hopkins. Dr. Ebert currently serves as Assistant Chief of Orthopaedic Surgery at
Union Memorial Hospital. Dr. Matthews currently serves as Chief of Orthopaedic
Surgery at Union Memorial Hospital and is Program Director for the Orthopaedic
Surgery Residency training program. Dr. Matthews also is an Assistant Professor
of orthopaedic surgery at Johns Hopkins. Dr. Myerson serves as the director of
Foot and Ankle Services at Union Memorial Hospital. Dr. O'Donnell is assistant
director of Union Memorial Hospital's Sports Medicine Fellowship Program and is
a clinical instructor in orthopaedic surgery at Johns Hopkins. Dr. Schon serves
as Associate Director of the Foot & Ankle Fellowship program at Union Memorial
Hospital. Dr. Yahiro joined the group in July 1995. He currently serves as an
orthopaedic surgeon advisor to the federal Food and Drug Administration.
VERO ORTHOPAEDICS II, P.A.
VO was founded in Vero Beach, Florida in 1976 and currently has four
orthopaedic surgeons and one physiatrist. The practice is located near Indian
River Memorial Hospital. VO operates one satellite office in Sebastian, Florida.
VO's physicians (and their specialties) are James L. Cain, M.D. (foot and
ankle); David W. Griffin, M.D. (knee surgery); George K. Nichols, M.D. (hip
surgery); Peter G. Wernicki, M.D. (sports medicine); and Charlene Wilson, M.D.
(physiatry). All of these physicians, other than Dr. Wilson, are physician
owners of VO.
Dr. James L. Cain, founder of Vero Orthopaedics, has served as Chairman of
the Department of Orthopaedics, Chief of the Medical Staff, and as a member of
the Board of Directors of Indian River Memorial Hospital. Dr. David W. Griffin
is Director of the Joint Implant Center of the Treasure Coast at Indian River
Memorial Hospital.
SCN OPERATIONS
Upon affiliation with SCN, physician practices enter into a long-term
service agreement with the Company. Under the terms of a service agreement, the
Company generally employs most of a practice's non-physician personnel, provides
facilities for the practices and provides services in the areas of practice
management, information systems and negotiation of payor contracts, all as more
specifically described below. The governance structure provided with respect to
the service agreements facilitates close cooperation between the Company and the
practices, while ensuring that the practices maintain clinical autonomy. See '--
Contractual Agreements with Affiliated Practices.'
MANAGEMENT SERVICES
Pursuant to the terms of the Service Agreements, the Company assists the
Initial Affiliated Practices in strategic planning, preparation of operating
budgets and capital project analysis. The Company intends to coordinate group
purchasing of supplies, inventory and insurance for the practices. In addition,
the Company will assist the Affiliated Practices in physician recruitment by
introducing
31
<PAGE>
physician candidates to the practices and advising the practices in structuring
employment arrangements.
The Company also provides or arranges for a variety of additional services
relating to the day-to-day non-medical operations of the practices, including
(i) management and monitoring each practice's billing levels, invoicing and
accounts receivable collection by payor type, (ii) accounting, payroll and legal
services and records and (iii) cash management and centralized disbursements.
These services are designed to reduce the amount of time physicians must
spend on administrative matters, thereby enabling the physicians to dedicate
more of their efforts toward the delivery of health care. The Company's
anticipated capital resources and assistance in preparation of budgets and
capital project analyses are intended to facilitate the establishment of
ancillary musculoskeletal facilities, such as outpatient occupational medicine,
physical therapy and surgery centers and MRI centers. Comprehensive
administrative support should facilitate more effective billings and collections
and, as the Company grows, economies of scale in effecting purchases. The
Company's proprietary accounts payable system should allow SCN to control
disbursements and identify economies in purchasing.
PRACTICE SERVICES
As a result of its affiliation with the Initial Affiliated Practices, SCN
employs most of the Initial Affiliated Practices' non-physician personnel. These
non-physician personnel, along with additional personnel at the Company's
headquarters, manage the day-to-day non-medical operations of each of the
Initial Affiliated Practices, including, among other things, by providing
secretarial, bookkeeping, scheduling and other routine services. Under the
Initial Service Agreements, the Company must provide facilities and equipment to
the Initial Affiliated Practices, and to this end, the Company entered into
lease agreements for the facilities and purchased the assets utilized by each of
the Initial Affiliated Practices.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that a key element in the implementation of its
business strategy is the development and utilization of its proprietary
management information systems. The Company is designing its information systems
to integrate and analyze financial and clinical data, improve operating
efficiency at the practice level and enhance the ability of the Company to
negotiate managed care contracts on behalf of its Affiliated Practices.
The Company has developed proprietary financial systems that have been
installed at the Company's headquarters and at each of the Initial Affiliated
Practices. These systems include an internally developed purchase order
application and electronic interfaces between payroll, general ledger, banking,
accounts payable and accounts receivable applications. These systems permit each
Initial Affiliated Practice to separately designate purchase requirements and
transfer purchase information on a daily basis. Such information allows the
Company to monitor purchases from order to receipt, to centrally control the
disbursement of funds and to identify economies in purchasing. In addition, the
Company's systems permit the Company to capture, analyze and report centrally
financial data from the various Initial Affiliated Practice locations and
provide analyses of financial data on a fully integrated basis. In addition, the
Company's management information systems personnel is designing a proprietary
clinical outcomes database. See '-- Strategy -- Provide Comprehensive
Operational Support.'
PAYOR CONTRACTING
An increasing portion of the net revenue of the Initial Affiliated
Practices is derived from managed care payors. Although rates paid by managed
care payors are generally lower than commercial rates, managed care payors can
provide access to large patient volumes.
The Company seeks to negotiate both fee-for-service and capitated contracts
on behalf of the Initial Affiliated Practices. Under capitated arrangements,
providers deliver health care services to
32
<PAGE>
managed care enrollees and would bear all or a portion of the risk that the cost
of such services may exceed capitated payments. Capitated contracts involve
various forms of risk sharing. Providers may accept risk only with respect to
the costs of physician services required by a patient (professional component)
or for all of the medical costs required by a patient including professional,
institutional and ancillary services (global capitation). Managed care
companies' arrangements with providers can be further segmented into episode of
care and per member per month capitation. Under specified episode of care
capitation, providers deliver care for covered enrollees with a specified
medical condition or who require a particular treatment on a fixed fee basis per
episode. Under per member per month capitation, the providers receive fixed
monthly fees per covered enrollee and assume the additional risk for the
incidence of medical conditions requiring procedures specified in the contract.
Currently, the Company performs analyses of the Initial Affiliated
Practices' markets to develop managed care contracting strategies and meets with
principal payors in each of these markets to enhance and establish relationships
between the Initial Affiliated Practices and such payors. In addition, the
Company is currently in the process of negotiating a capitated, episode of care
managed care contract on behalf of one of the Initial Affiliated Practices, fee
for service contracts for physician services for several of the Initial
Affiliated Practices and a fee for service contract for the surgery center at
POA. TOC has a non-contractual capitated arrangement covering approximately
75,000 lives and a capitated contract covering approximately 55,000 lives, and
POA has a capitated contract covering approximately 20,000 lives. These
arrangements existed at the time of the Initial Affiliation Transactions. No
other Initial Affiliated Practice has a capitated arrangement.
GOVERNANCE AND QUALITY ASSURANCE
The Company's current governance structure promotes physician participation
in the management of the Company. At least one physician from each Initial
Affiliated Practice serves on the Company's Board of Directors. In addition,
each Initial Affiliated Practice has a Joint Policy Board whose membership
includes an equal number of representatives from each of the Company and the
Initial Affiliated Practice. The Joint Policy Board will have responsibilities
that include developing long-term strategic objectives, developing practice
expansion and payor contracting guidelines, promoting practice efficiencies,
recommending significant capital expenditures and facilitating communication and
information exchange between the Company and each of the Initial Affiliated
Practices.
The Company intends to create an Outcomes Management and Standards Board
that will focus on the identification and communication of the best practices
and clinical protocols in the business and administrative areas. The Company
also intends to create a Medical Provider Board that will identify and
communicate the best practices and protocols in the medical area. Both of these
boards, which will consist solely of physicians from Affiliated Practices, will
receive managerial and information systems support from the Company.
CONTRACTUAL AGREEMENTS WITH AFFILIATED PRACTICES
The Company has entered into the Initial Service Agreements with each of
the Initial Affiliated Practices, and intends to enter into long-term service
agreements with each additional Affiliated Practice, to provide management,
administrative and development services. Under the Initial Service Agreements,
the Initial Affiliated Practices are solely responsible for all aspects of the
practice of medicine and the Company has the primary responsibility for the
business and administrative aspects of the Initial Affiliated Practices. The
Company employs most of the Initial Affiliated Practice's non-physician
personnel. Pursuant to the Initial Service Agreements, the Company provides or
arranges for various management, administrative and development services to the
Initial Affiliated Practices relating to the day-to-day non-medical operations
of the Initial Affiliated Practices.
The following summary of the Initial Service Agreements is intended to be a
general summary of the form of Initial Service Agreement. The Company expects to
enter into similar agreements with other Affiliated Practices in the future. The
actual terms of the individual Initial Service Agreements, and other service
agreements into which the Company may enter in the future, may vary in certain
33
<PAGE>
respects from the description below as a result of negotiations with the
individual practices and the requirements of local regulations. Each of the
Initial Service Agreements and certain related agreements are filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary is qualified in its entirety by reference to such exhibits.
For a discussion of circumstances under which a service agreement may be
rendered unenforceable, see 'Risk Factors -- Government Regulation.'
Pursuant to the Initial Service Agreements, the Company, among other
things, (i) acts as the exclusive manager and administrator of non-physician
services relating to the operation of the Initial Affiliated Practices, subject
to matters for which the Initial Affiliated Practices maintain responsibility or
which are referred to the Joint Policy Boards of the Initial Affiliated
Practices, (ii) bills patients, insurance companies and other third party payors
and collects, on behalf of the Initial Affiliated Practices, the fees for
professional medical and other services rendered, including goods and supplies
sold by the Initial Affiliated Practices, (iii) provides or arranges for, as
necessary, clerical, accounting, purchasing, payroll, legal, bookkeeping and
computer services and personnel, information management, preparation of certain
tax returns, printing, postage and duplication services and medical transcribing
services, (iv) supervises and maintains custody of substantially all files and
records (medical records of the Initial Affiliated Practices remain the property
of the Initial Affiliated Practices), (v) provides facilities for the Initial
Affiliated Practices, (vi) prepares, in consultation with the Joint Policy
Boards and the Initial Affiliated Practices, all annual and capital operating
budgets, (vii) orders and purchases inventory and supplies as reasonably
requested by the Initial Affiliated Practices, (viii) implements, in
consultation with the Joint Policy Boards and the Initial Affiliated Practices,
national and local public relations or advertising programs and (ix) provides
financial and business assistance in the negotiation, establishment, supervision
and maintenance of contracts and relationships with managed care and other
similar providers and payors. Most of the services described above are provided
by employees previously employed by the Predecessor Practices.
Under the Initial Service Agreements, the Initial Affiliated Practices
retain the responsibility for, among other things, (i) hiring and compensating
physician employees and other medical professionals, (ii) ensuring that
physicians have the required licenses, credentials, approvals and other
certifications needed to perform their duties and (iii) complying with certain
federal and state laws and regulations applicable to the practice of medicine.
In addition, the Initial Affiliated Practices maintain exclusive control of all
aspects of the practice of medicine and the delivery of medical services.
Under the Initial Service Agreements, the Company collects fees from the
Initial Affiliated Practices on a monthly basis. The fees consist of the
following: (i) service fees based on a percentage (the 'Service Fee Percentage')
ranging from 20%-33% of the Adjusted Pre-Tax Income of the Initial Affiliated
Practices (defined generally as revenue of the Initial Affiliated Practices
related to professional services less amounts equal to certain clinic expenses
of the Initial Affiliated Practices ('Clinic Expenses,' as defined more fully in
the Initial Service Agreements), not including physician owner compensation or
most benefits to physician owners) and (ii) amounts equal to Clinic Expenses.
For the first three years following the affiliation, however, the portion of the
service fees described under clause (i) above is specified to be the greater of
the amount payable as described under clause (i) above or a fixed dollar amount
(the 'Base Service Fee'), which was generally calculated by applying the
respective Service Fee Percentage of Adjusted Pre-Tax Income of the Predecessor
Practices for the twelve months prior to affiliation. In addition, with respect
to its management of certain facilities and ancillary services associated with
certain of the Initial Affiliated Practices, the Company receives fees ranging
from 2%-8% of net revenue related to such facilities and services.
Pursuant to the Initial Service Agreements, each Initial Affiliated
Practice agrees to sell and assign to the Company, and the Company agrees to
buy, all of the Initial Affiliated Practice's accounts receivable each month
during the existence of the Initial Service Agreement. The purchase price for
such accounts receivable will equal the face amounts of the accounts receivable
recorded each month less adjustments for contractual allowances, allowances for
doubtful accounts and other potentially uncollectible amounts based on the
practice's historical collection rate, as determined by the Company.
34
<PAGE>
However, the Company and the Initial Affiliated Practices have discussed
making periodic adjustments so that amounts paid by the Company for the accounts
receivable will be adjusted upwards or downwards based on the Company's actual
collection experience. While the Company believes, based on its discussions with
the Initial Affiliated Practices, that this arrangement is acceptable to them,
the Company cannot assure that this arrangement will be effected.
The Initial Service Agreements have initial terms of forty years, with
automatic extensions (unless specified notice is given) of additional five-year
terms. The Initial Service Agreement may be terminated by either party if the
other party (i) files a petition in bankruptcy or other similar events occur or
(ii) defaults on the performance of a material duty or obligation, which default
continues for a specified term after notice. In addition, the Company may
terminate the agreement if the Affiliated Practice's Medicare or Medicaid number
is terminated or suspended as a result of some act or omission of the Affiliated
Practice or the physicians, and the Affiliated Practice may terminate the
agreement if the Company misapplies funds or assets or violates certain laws.
Upon termination of an Initial Service Agreement by the Company for one of
the reasons set forth above, the Company has the option to require the Initial
Affiliated Practice to purchase and assume the assets and liabilities related to
the Initial Affiliated Practice at the fair market value thereof. In addition,
upon termination of an Initial Service Agreement by the Company during the first
five years of the term, the physician owners of the Initial Affiliated Practice
are required to pay the Company or return to the Company an amount of cash or
stock of the Company equal to one-third of the total consideration received by
such physicians in connection with the Company's affiliation with the practice.
Under the Initial Service Agreements, each physician owner must give the
Company twelve months notice of an intent to retire from the Initial Affiliated
Practice. If a physician gives such notice during the first five years of the
agreement, the physician must also locate a replacement physician or physicians
acceptable to the Joint Policy Board and pay the Company any loss of service fee
payable to the Company for the first five years of the term. The agreement also
provides that no more than 20% of the physician owners at the Initial Affiliated
Practice may retire within a one-year period.
During the term of the Initial Service Agreements, the Initial Affiliated
Practices and the physician owners of the Initial Affiliated Practices agree not
to compete with the Company in providing services similar to those provided by
the Company under the Initial Service Agreements, and also agrees not to compete
with an Initial Affiliated Practice, within a specified geographic area. In
addition, the Initial Service Agreement requires the Initial Affiliated Practice
to enter into non-competition agreements with all physicians in the Initial
Affiliated Practice, of which agreements the Company is a third party
beneficiary. After the fifth year of the term of the Initial Service Agreement,
physician owners of the Initial Affiliated Practices may be released from the
non-competition provisions upon payment of certain amounts to the Company.
Non-competition restrictions apply to physician employees during the term of
their employment and for two years thereafter. The Initial Service Agreements
generally require the Initial Affiliated Practices to pursue enforcement of the
non-competition agreement with physicians or assign to the Company the right to
pursue enforcement.
The Company has entered into an agreement with ROA and Drs. Booth and
Bartolozzi pursuant to which there will be a division of ROA and Drs. Booth and
Bartolozzi will establish an independent practice ('BB One'). The agreement
provides that the Company will enter into a service agreement with BB One, and
amend the service agreement with ROA so that the aggregate Base Service Fee for
ROA and BB One will be equal to ROA's current Base Service Fee. In addition,
unless BB One exercises the right described below, in the event that the Base
Service Fee of either (but not both) of the practices is more than the service
fee (the 'Percentage-Based Service Fee') that would result from the application
of the Service Fee Percentage to the practice's Adjusted Pre-Tax Income (a 'Base
Fee Deficit'), the other practice will offset against the deficit the amount, if
any, by which its Percentage-Based Service Fee exceeds its Base Service Fee.
Thereafter, if any deficit remains, (i) the Company will forgive one-third of
the remaining Base Fee Deficit, up to $120,000, (ii) the practice that did not
have the Base Fee Deficit will pay to the Company one-third of the remaining
Base Fee Deficit, up to
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<PAGE>
$120,000 and (iii) the practice with the Base Fee Deficit will pay to the
Company all additional remaining Base Fee Deficit. If both practices have a Base
Fee Deficit, (i) BB One will pay to SCN one-third of ROA's Base Fee Deficit, up
to $120,000, (ii) the Company will forgive one-third of ROA's Base Fee Deficit,
up to $120,000, (iii) ROA will pay the remainder of the Base Fee Deficit and
(iv) BB One will pay to the Company the entire amount of its Base Fee Deficit.
The agreement provides that BB One has the right, prior to July 15, 1997,
to increase its Service Fee Percentage by a stipulated amount. In the event that
the right is exercised, BB One's Base Service Fee will be increased by a
stipulated amount, and Dr. Booth will receive options from the Company to
purchase shares of Common Stock, based on a specified multiple of the increase
in the Base Service Fee (which multiple will increase if the right is exercised
following the date of this Prospectus), the product of which will be divided by
$10.00 (if the right is exercised prior to the date of this Prospectus) or the
greater of $10.00 or the closing bid price of Company Common Stock on the Nasdaq
National Market on the date the right is exercised (if the right is exercised
after the date of this Prospectus). If the right is exercised, the Company will
have no obligation to forgive any Base Fee Deficit of either ROA or BB One.
The agreement also provides that in the event Dr. Bartolozzi does not join
with Dr. Booth in forming BB One, then ROA and the Company will enter into
arrangements with Dr. Booth on terms proportionately consistent with the
economic principles underlying the above described arrangement. In the event Dr.
Bartolozzi remains with ROA or leaves BB One, BB One's Base Service Fee and
Service Fee Percentage and the amount of the increase in the Base Service Fee in
the event the right is exercised will be modified.
The parties have agreed that in the event additional issues arise in the
process of completing definitive agreements, or amendments to existing
agreements, and such issues are not resolved, then such issues will be submitted
to binding arbitration.
In addition, the Company has entered into an agreement with Dr. Bartolozzi
pursuant to which the Company has agreed to support the development of a sports
medicine center. If the Company and Dr. Bartolozzi have not agreed to a plan for
the development of the center by November 1997, Dr. Bartolozzi may terminate the
service agreement as it pertains to him, with three months written notice to the
Company. Upon such a termination, Dr. Bartolozzi must return to the Company an
amount equal to (i) the after-tax amount of the consideration received by Dr.
Bartolozzi in the merger transaction between ROA and the Company less (ii) the
after-tax amount of Dr. Bartolozzi's pro rata portion of service fees paid to
SCN during the term of the service agreement. In the event of such termination,
the Base Service Fee to be paid by BB One (or ROA if Dr. Bartolozzi elects to
remain with ROA), to SCN will be proportionally reduced by the pro rata portion
of the consideration paid to Dr. Bartolozzi at the closing of the merger between
SCN and ROA.
The Initial Affiliated Practices are responsible for obtaining professional
liability and worker's compensation insurance for the physicians and other
medical employees of the Initial Affiliated Practices, as well as general
liability umbrella coverage. The Company is responsible for obtaining
professional liability and worker's compensation insurance for employees of the
Company and general liability and property insurance for the Initial Affiliated
Practices.
The Initial Service Agreements contain indemnification provisions, pursuant
to which the Company indemnifies the Initial Affiliated Practices for damages
resulting from negligent acts or omissions by the Company or its agents,
employees or shareholders. In addition, the Initial Affiliated Practices
indemnify the Company for any damages resulting from any negligent act or
omissions by any affiliated physicians, agents or employees of the Initial
Affiliated Practice, other than damages resulting from claims arising from the
performance or nonperformance of medical services. See 'Risk Factors --
Potential Liability and Insurance; Legal Proceedings.'
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GOVERNMENT REGULATION AND SUPERVISION
The delivery of health care services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and the individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services. Federal law and regulations are based primarily upon
the Medicare program and the Medicaid program, each of which is financed, at
least in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment.
The Company believes its operations are in material compliance with
applicable laws; however, the Company has not received or applied for a legal
opinion from counsel or from any federal or state judicial or regulatory
authority to this effect, and many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation. The
laws applicable to the Company are subject to evolving interpretations, and
therefore, there can be no assurance that a review of the Company or the
Affiliated Practices by a court or law enforcement or regulatory authority will
not result in a determination that could have a material adverse effect on the
Company or the Affiliated Practices. Furthermore, there can be no assurance that
the laws applicable to the Company will not be amended in a manner that could
have a material adverse effect on the Company.
FEDERAL LAW
The federal health care laws apply in any case in which an Affiliated
Practice is providing an item or service that is reimbursable under Medicare or
Medicaid or in which the Company is claiming reimbursement from Medicare or
Medicaid on behalf of physicians with whom the Company has a service agreement.
The principal federal laws include those that prohibit the filing of false or
improper claims with the Medicare or Medicaid programs, those that prohibit
unlawful inducements for the referral of business reimbursable under Medicare or
Medicaid and those that prohibit the provision of certain services by a provider
to a patient if the patient was referred by a physician with which the provider
has certain types of financial relationships.
False and Other Improper Claims. The federal government is authorized to
impose criminal, civil and administrative penalties on any health care provider
that files a false claim for reimbursement from Medicare or Medicaid. Criminal
penalties are also available in the case of claims filed with private insurers
if the government can show that the claims constitute mail fraud or wire fraud.
While the criminal statutes are generally reserved for instances evincing an
obviously fraudulent intent, the criminal and administrative penalty statutes
are being applied by the government in an increasingly broad range of
circumstances. The government has taken the position, for example, that a
pattern of claiming reimbursement for unnecessary services violates these
statutes if the claimant should have known that the services were unnecessary.
The government has also taken the position that claiming reimbursement for
services that are substandard is a violation of these statutes if the claimant
should have known that the care was substandard.
The Company believes that its billing activities on behalf of the Initial
Affiliated Practices are in material compliance with such laws, but there can be
no assurance that the Company's activities will not be challenged or scrutinized
by governmental authorities. A determination that the Company had violated such
laws could have a material adverse impact on the Company.
Anti-Kickback Law. A federal law commonly known as the 'Anti-kickback
Amendments' prohibits the offer, solicitation, payment or receipt of anything of
value (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce the referral of Medicare or Medicaid patients, or the
ordering of items or services reimbursable under those programs. The law also
prohibits remuneration that is intended to induce the recommendation of, or the
arranging for, the provision of items or services reimbursable under Medicare
and Medicaid. The law has been broadly interpreted by a number of courts to
prohibit remuneration that is offered or paid for otherwise legitimate purposes
if the circumstances show that one purpose of the arrangement is to induce
referrals. Even bona fide investment interests in a health care provider may be
questioned under the Anti-kickback Amendments
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if the government concludes that the opportunity to invest was offered as an
inducement for referrals. The penalties for violations of this law include
criminal sanctions and exclusion from the federal health care program.
In part to address concerns regarding the implementation of the
Anti-kickback Amendments, the federal government in 1991 published regulations
that provide exceptions or 'safe harbors,' for certain transactions that will
not be deemed to violate the Anti-kickback Amendments. Among the safe harbors
included in the regulations were provisions relating to the sale of physician
practices, management and personal services agreements and employee
relationships. Subsequently, regulations were published offering safe harbor
protection to additional activities, including referrals within group practices
consisting of active investors. Proposed amendments clarifying the existing safe
harbor regulations were published in 1994. If any of the proposed regulations
are ultimately adopted, they would result in substantive changes to existing
regulations. The failure of an activity to qualify under a safe harbor
provision, while potentially leading to greater regulatory scrutiny, does not
render the activity illegal.
There are several aspects of the Company's relationships with physicians to
which the anti-kickback law may be relevant. In some instances, for example, the
government may construe some of the marketing and managed care contracting
activities of the Company as arranging for the referral of patients to the
physicians with whom the Company has a Service Agreement.
Although neither the investments in the Company by physicians nor the
Initial Service Agreements between the Company and the Initial Affiliated
Practices qualify for protection under the safe harbor regulations, the Company
does not believe that these activities fall within the type of activities the
Anti-kickback Amendments were intended to prohibit. A determination that the
Company had violated the Anti-kickback Amendments would have a material adverse
effect on the Company.
The Stark Self-Referral Law. The Stark Self-Referral Law (the 'Stark Law')
prohibits a physician from referring a patient to a health care provider for
certain designated health services reimbursable by Medicare or Medicaid if the
physician has a financial relationship with that provider, including an
investment interest, a loan or debt relationship or a compensation relationship.
In addition to the conduct directly prohibited by the law, the statute also
prohibits schemes that are designed to obtain referrals indirectly that cannot
be made directly. The penalties for violating the law include (i) a refund of
any Medicare or Medicaid payments for services that resulted from an unlawful
referral, (ii) civil fines and (iii) exclusion from the Medicare and Medicaid
programs.
The Company does not currently provide any designated health service under
the Stark Law. However, because the Company will provide management services
related to those designated health services provided by physicians affiliated
with the Initial Affiliated Practices, there can be no assurance that the
Company will not be deemed the provider for those services for purposes of the
Stark Law and, accordingly, the recipient of referrals from physicians
affiliated with the Affiliated Practices. In that event, such referrals will be
permissible only if (i) the financial arrangements under the service agreements
with the Affiliated Practices meet certain exceptions in the Stark Law and (ii)
the ownership of stock in the Company by the referring physicians meets certain
investment exceptions under the Stark Law. The Company believes that the
financial arrangements under the Initial Service Agreements qualify for
applicable exceptions under the Stark Law; however, there can be no assurance
that a review by courts or regulatory authorities would not result in a contrary
determination. In addition, the Company will not meet the Stark Law exception
related to investment interest until the Company's stockholders' equity exceeds
$75 million.
STATE LAW
State Anti-Kickback Laws. Many states have laws that prohibit payment of
kickbacks in return for the referral of patients. Some of these laws apply only
to services reimbursable under state Medicaid programs. However, a number of
these laws apply to all health care services in the state, regardless of the
source of payment for the service. Based on court and administrative
interpretation of federal anti-kickback laws, the Company believes that these
laws prohibit payments to referral sources
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where a purpose for payment is for the referral. However, the laws in most
states regarding kickbacks have been subjected to limited judicial and
regulatory interpretation and therefore, no assurances can be given that the
Company's activities will be found to be in compliance. Noncompliance with such
laws could have an adverse effect upon the Company and subject it and physicians
affiliated with the Affiliated Practices to penalties and sanctions.
State Self-Referral Laws. A number of states have enacted self-referral
laws that are similar in purpose to the Stark Law but which impose different
restrictions. Some states, for example, only prohibit referrals when the
physician's financial relationship with a health care provider is based upon an
investment interest. Other state laws apply only to a limited number of
designated health services. Some states do not prohibit referrals, but require
only that a patient be informed of the financial relationship before the
referral is made. The Company believes that its operations are in material
compliance with the self-referral law of the states in which the Initial
Affiliated Practices are located.
Fee-Splitting Laws. Many states prohibit a physician from splitting with a
referral source the fees generated from physician services. Other states have a
broader prohibition against any splitting of a physician's fees, regardless of
whether the other party is a referral source. In most states, it is not
considered to be fee-splitting when the payment made by the physician is
reasonable reimbursement for services rendered on the physician's behalf.
The Company will be reimbursed by physicians on whose behalf the Company
provides management services. The compensation provisions of the Initial Service
Agreements have been designed to comply with applicable state laws relating to
fee-splitting. There can be no certainty, however, that, if challenged, the
Company and its Affiliated Practices will be found to be in compliance with each
state's fee-splitting laws. A determination in any state that the Company is
engaged in any unlawful fee-splitting arrangement could render any service
agreement between the Company and an Affiliated Practice located in such state
unenforceable or subject to modification in a manner adverse to the Company.
Corporate Practice of Medicine. Most states prohibit corporations from
engaging in the practice of medicine. Many of these state doctrines prohibit a
business corporation from employing a physician. States differ, however, with
respect to the extent to which a licensed physician can affiliate with corporate
entities for the delivery of medical services. Some states interpret the
'practice of medicine' broadly to include activities of corporations such as the
Company that have an indirect impact on the practice of medicine, even where the
physician rendering the medical services is not an employee of the corporation
and the corporation exercises no discretion with respect to the diagnosis or
treatment of a particular patient.
The Company intends that, pursuant to its service agreements, it will not
exercise any responsibility on behalf of affiliated physicians that could be
construed as affecting the practice of medicine. Accordingly, the Company
believes that its operations do not violate applicable state laws relating to
the corporate practice of medicine. Such laws and legal doctrines have been
subjected to only limited judicial and regulatory interpretation and there can
be no assurance that, if challenged, the Company would be considered to be in
compliance with all such laws and doctrines. A determination in any state that
the Company is engaged in the corporate practice of medicine could render any
service agreement between the Company and an Affiliated Practice located in such
state unenforceable or subject to modification in a manner adverse to the
Company.
Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers. While these laws do not generally apply to
companies that provide management services to networks of physicians, there can
be no assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that its proposed operations are in compliance with these laws in the
states in which it currently does business, but there can be no assurance that
future interpretations of insurance and health care network laws by regulatory
authorities in these states or in the states into which the Company may expand
will not require
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licensure or a restructuring of some or all of the Company's operations. See
'Risk Factors -- Government Regulation.'
The National Association of Insurance Commissioners ('NAIC') in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
Affiliated Practices will be precluded from entering into capitated contracts
directly with employers, individuals and benefit plans unless they qualify to do
business as HMOs or insurance companies. Currently, the Company does not intend,
on its own behalf, or on behalf of the Initial Affiliated Practices, to enter
into capitated payment or other risk-sharing arrangements other than with HMOs
or insurance companies. In addition, in December 1996, the NAIC issued a white
paper entitled 'Regulation of Health Risk Bearing Entities,' which sets forth
issues to be considered by state insurance regulators when considering new
regulations and encourages that a uniform body of regulation be adopted by the
states. The Company believes that additional regulation at the state level will
be forthcoming in response to the NAIC initiatives. Other states have enacted
statutes or adopted regulations affecting risk assumption in the health care
industry, including statutes and regulations that subject any physician or
physician network engaged in risk-based contracting to applicable insurance laws
and regulations, which may include, among other things, laws and regulations
providing for minimum capital requirements and other safety and soundness
requirements.
COMPETITION
The Company competes with many other entities to affiliate with
musculoskeletal practices. Several companies that have established operating
histories and greater resources than the Company are pursuing the acquisition of
the assets of general and specialty practices and the management of such
practices. Physician practice management companies and some hospitals, clinics
and HMOs engage in activities similar to the activities of the Company. There
can be no assurance that the Company will be able to compete effectively with
such competitors, that additional competitors will not enter the market, or that
such competition will not make it more difficult to affiliate with, and to enter
into agreements to provide management services to, practices on terms beneficial
to the Company.
Affiliated Practices will compete with local musculoskeletal care service
providers as well as some managed care organizations. The Company believes that
changes in governmental and private reimbursement policies and other factors
have resulted in increased competition for consumers of medical services. The
Company believes that the cost, accessibility and quality of services provided
are the principal factors that affect competition. There can be no assurance
that the Affiliated Practices will be able to compete effectively in the markets
that they serve. The inability of the Affiliated Practices to compete
effectively would materially adversely affect the Company.
Further, the Affiliated Practices compete with other providers for managed
musculoskeletal care contracts. The Company believes that trends toward managed
care have resulted in increased competition for such contracts. Other practices
and management service organizations may have more experience than the Initial
Affiliated Practices and the Company in obtaining such contracts. There can be
no assurance that the Company and the Affiliated Practices will be able to
successfully acquire sufficient managed care contracts to compete effectively in
the markets they serve. The inability of the Affiliated Practices to compete
effectively for such contracts could materially adversely affect the Company.
EMPLOYEES
As of January 17, 1997, the Company has approximately 317 employees, of
whom 22 are located at the Company's headquarters and 295 are located at the
Initial Affiliated Practices. The Company believes that its relationship with
its employees is good.
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LEGAL PROCEEDINGS
On January 8, 1997, Michael A. Feiertag, M.D. filed a lawsuit against the
Company in the Circuit Court of the 19th Judicial Circuit in and for Indian
River County, Florida. Dr. Feiertag's complaint alleges that Vero Orthopaedics
breached his employment agreement by failing to offer him a 'full partnership'
in accordance with the agreement. Dr. Feiertag claims that he is entitled to
damages consisting of amounts he allegedly should have received in connection
with the Company's merger with Vero Orthopaedics had he been a partner prior to
the merger. Dr. Feiertag also claims that he has not been paid certain vacation
and bonus pay. Dr. Feiertag is seeking damages in excess of $500,000. The
Company has not yet answered the complaint, and discovery in the case has not
yet commenced. Accordingly, the Company is not yet able to assess its potential
exposure in this case.
There can be no assurance that additional claims will not be asserted
against the Company in the future. The Company may become subject to certain
pending claims as the result of successor liability in connection with the
assumption of certain liabilities of the Initial Affiliated Practices;
nevertheless, the Company believes that the ultimate resolution of such
additional claims will not have a material adverse effect on the Company. See
'Risk Factors -- Potential Liability and Insurance; Legal Proceedings.'
PROPERTIES
The Company has a five-year lease for its headquarters in Lakewood,
Colorado, which provides for annual lease payments of approximately $80,000. In
addition, in connection with the Initial Affiliation Transactions, the Company
entered into leases for the facilities utilized by the Initial Affiliated
Practices for annual lease payments of approximately $2.3 million. For
additional information, see 'Certain Transactions.'
CORPORATE LIABILITY AND INSURANCE
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. However, the Company does not influence or
control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. As a result of the relationship between the
Company and the Affiliated Practices, the Company may become subject to some
medical malpractice actions under various theories, including successor
liability. There can be no assurance that claims, suits or complaints relating
to services and products provided by Affiliated Practices will not be asserted
against the Company in the future. The Company maintains insurance coverage that
it believes will be adequate both as to risks and amounts. The Company believes
that such insurance will extend to professional liability claims that may be
asserted against employees of the Company that work on site at Affiliated
Practice locations. In addition, pursuant to the Service Agreements, the Initial
Affiliated Practices are required (and the other Affiliated Practices will be
required) to maintain comprehensive professional liability insurance. The
availability and cost of such insurance has been affected by various factors,
many of which are beyond the control of the Company and Affiliated Practices.
The cost of such insurance to the Company and Affiliated Practices may have a
material adverse effect on the Company. In addition, successful malpractice or
other claims asserted against Affiliated Practices or the Company that exceed
applicable policy limits would have a material adverse effect on the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors, executive officers and key personnel of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard H. Rothman, M.D., Ph.D....................... 60 Chairman of the Board of Directors
Kerry R. Hicks....................................... 37 President, Chief Executive Officer and Director
Patrick M. Jaeckle................................... 38 Executive Vice President of Finance/Development and
Director
William C. Behrens................................... 45 Executive Vice President of Practice Management and
Director
Robert E. Booth, Jr., M.D............................ 54 Director
James L. Cain, M.D................................... 57 Director
Peter H. Cheesbrough................................. 44 Director
Richard E. Fleming, Jr., M.D......................... 50 Director
Thomas C. Haney, M.D................................. 54 Director
Leslie S. Matthews, M.D.............................. 45 Director
D. Paul Davis........................................ 38 Vice President of Finance/Controller
Peter A. Fatianow.................................... 33 Vice President of Development
David G. Hicks....................................... 38 Vice President of Management Information Systems
Timothy D. O'Hare.................................... 43 Vice President, Payor Operations
Fran W. Hempstead.................................... 43 Manager, Practice Operations
M. John Neal......................................... 29 Manager, Finance and Development
Michael M. Nuzzo..................................... 26 Manager, Payor Operations
</TABLE>
RICHARD H. ROTHMAN, M.D., PH.D. has been Chairman of the Board of Directors
of the Company since December 1996. Since 1970, Dr. Rothman has been Chairman of
The Rothman Institute at Pennsylvania Hospital and since 1986, has been Chairman
of the Department of Orthopaedic Surgery at Thomas Jefferson University. Dr.
Rothman is Editor-in-Chief of The Journal of Arthroplasty, a journal of joint
replacement surgery. Dr. Rothman received a B.A. degree from the University of
Pennsylvania, an M.D. degree from the University of Pennsylvania School of
Medicine and a Ph.D. degree from Jefferson Medical College.
KERRY R. HICKS has served as President and Chief Executive Officer and as a
director of the Company since its inception. From 1985 to March 1996, Mr. Hicks
served as Senior Vice President of LBA Health Care Management ('LBA'), a
developer of health care and management information services. LBA provided
management consulting services (including over 150 orthopaedic projects) to over
400 medical centers to support the purchasing, planning, marketing and delivery
of health care. Mr. Hicks was principally responsible for developing LBA's
orthopaedic product line and its information systems. LBA's orthopaedic product
line established quality and cost benchmarks and developed clinical protocols
and patient care algorithms intended to enhance both the quality and
effectiveness of the delivery of orthopaedic care. From 1993 to March 1996, Mr.
Hicks consulted with more than 350 hospitals and more than 100 musculoskeletal
clients.
PATRICK M. JAECKLE has served as Executive Vice President of
Finance/Development and as a director of the Company since its inception. From
February 1994 to March 1996, Dr. Jaeckle served as director of health care
corporate finance at Morgan Keegan & Company, Inc., a regional investment
banking firm. Prior to February 1994, Dr. Jaeckle was a member of the health
care investment banking groups at both Credit Suisse First Boston Corporation
(from June 1992 to February 1994) and Smith Barney, Inc. (from May 1991 to June
1992). Dr. Jaeckle holds an M.B.A. degree from Columbia
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Business School, a D.D.S. degree from Baylor College of Dentistry and a B.A.
degree from The University of Texas at Austin.
WILLIAM C. BEHRENS has been the Company's Executive Vice President of
Practice Management Service since he joined the Company in June 1996 and as a
director of the Company since June 1996. From June 1992 to July 1996, he served
as Chief Executive Officer and President of The Hughston Sports Medicine
Foundation, a non-profit foundation focused on furthering orthopaedic clinical
studies. From 1984 to June 1992, Mr. Behrens served as Executive Administrator
for Knoxville Orthopaedic Center in Knoxville, Tennessee. In these positions,
Mr. Behrens participated in the development of medical office buildings,
out-patient surgery centers and services as well as diagnostic centers. Mr.
Behrens received his B.S. degree from Alderson-Broaddus College and a Masters
degree in Public Health & Administration from the University of South Carolina.
ROBERT E. BOOTH, JR., M.D. has served as a director of the Company since
December 1996. Since 1977, Dr. Booth has been an orthopaedic surgeon at The
Rothman Institute at Pennsylvania Hospital and since 1990, he has been Co-Chief
of Orthopaedic Surgery at Pennsylvania Hospital. Dr. Booth received a B.A.
degree from Princeton University and an M.D. degree from the University of
Pennsylvania.
JAMES L. CAIN, M.D. has served as a director of the Company since December
1996. Since 1976, Dr. Cain has been an orthopaedic surgeon at, and the physician
manager of, Vero Orthopaedics in Vero Beach, Florida. Dr. Cain received a B.A.
degree from Emory University and an M.D. degree from the Tulane University
School of Medicine.
PETER H. CHEESBROUGH has served as a director of the Company since December
1996. Since June 1993, Mr. Cheesbrough has been the Senior Vice
President-Finance and Chief Finance Officer of Echo Bay Mines Ltd., a company
engaged in precious metals mining. From April 1988 to June 1993, he was Echo Bay
Mines' Vice President and Controller. Mr. Cheesbrough is a Fellow of the
Institute of Chartered Accountants of England and Wales and also a chartered
accountant in Canada.
RICHARD E. FLEMING, JR., M.D. has served as a director of the Company since
December 1996. Since 1979, Dr. Fleming has been an orthopaedic surgeon at
Princeton Orthopaedic Associates, P.A. Dr. Fleming received a B.A. degree from
Princeton University and an M.D. degree from Columbia University College of
Physicians and Surgeons.
THOMAS C. HANEY, M.D. has served as a director of the Company since
December 1996. Since 1973, Dr. Haney has been an orthopaedic surgeon at
Tallahassee Orthopedic Clinic, Inc. Dr. Haney received a B.A. degree from
Florida State University and an M.D. degree from Emory University School of
Medicine.
LESLIE S. MATTHEWS, M.D. has served as a director of the Company since
December 1996. Since October 1994, Dr. Matthews has been an orthopaedic surgeon
at Greater Chesapeake Orthopaedic Associates, LLC and since 1990, has been the
Chief of Orthopaedic Surgery at Union Memorial Hospital. From July 1982 to
October 1994, Dr. Matthews was in private practice. Dr. Matthews received a B.A.
degree from Johns Hopkins University and an M.D. degree from the Baylor College
of Medicine.
D. PAUL DAVIS has served as Vice President of Finance/Controller of the
Company since March 1996. From January 1993 to March 1996, Mr. Davis served as
Vice President of Finance for Surgical Partners of America, Inc. From April 1987
to January 1993, he served as Chief Financial Officer for Anesthesia Service
Medical Group, Inc. Mr. Davis received a B.S. degree in Accounting from the
University of Utah. He is a certified public accountant.
PETER A. FATIANOW has been Vice President of Development of the Company
since March 1996. From July 1994 to February 1996, Mr. Fatianow worked at Morgan
Keegan & Company, Inc., most recently as an Associate Vice President in health
care corporate finance. From July 1992 to July 1994, Mr. Fatianow was a member
of the health care investment banking group at Credit Suisse First Boston
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Corporation in New York. Mr. Fatianow received a B.S. degree in Business
Management with an emphasis in Finance from Brigham Young University.
DAVID G. HICKS has served as Vice President of Management Information
Systems of the Company since March 1996. From November 1994 to March 1996, Mr.
Hicks worked as Manager of Information Technology for the Association of
Operating Room Nurses, responsible for information technology maintenance and
development. From February 1993 to November 1994, he served as Manager of
Information Systems Administration for Coors Brewing Company, and from January
1982 to February 1993, Mr. Hicks served as Manager of Internal Systems for
Martin Marietta Data Systems. Mr. Hicks received a B.S. degree in Management
Information Systems from Colorado State University.
TIMOTHY D. O'HARE joined the Company as Vice President, Payor Operations in
August 1996. From May 1994 to July 1996, Mr. O'Hare served as Executive Director
of Kaiser Foundation HealthPlan of North Carolina, where his responsibilities
included the negotiation of capitated and incentive contracts with hospitals,
physician hospital organizations and physician group practices. From April 1987
to May 1994, Mr. O'Hare served as Vice President/Executive Director of CIGNA
Health Care of North Carolina. From March 1986 to April 1987, Mr. O'Hare served
as Vice President of Operations for a Preferred Health Network. Mr. O'Hare
received a B.S. degree from Virginia Polytechnic Institute and State University
and a Masters degree in Health Administration from Virginia Commonwealth
University.
FRAN W. HEMPSTEAD has served as Manager of Practice Operations since
joining the Company in July 1996. Ms. Hempstead has over 16 years experience in
the operations aspects of an orthopaedic practice. From September 1988 to April
1996, Ms. Hempstead was employed in various capacities by The Hughston Clinic
P.C., an orthopaedic practice in Columbus, Georgia including as Chief Operating
Officer from June 1994 to April 1996 and as the Director of Operations from June
1992 to May 1994. She is currently on the Board of the Orthopaedic Practice
Assembly of the Medical Group Management Association ('MGMA'). Ms. Hempstead
received a B.A. degree in Business Administration from the University of
Georgia.
M. JOHN NEAL has served as Manager of Finance and Development of the
Company since March 1996. From July 1994 to March 1996, Mr. Neal worked as an
investment banking associate with Morgan Keegan & Company, Inc. Previously, Mr.
Neal served two years as a financial analyst for Service Merchandise, Inc. Mr.
Neal received a B.S. in Finance and an M.B.A. in Economics and Finance from the
University of Tennessee at Knoxville.
MICHAEL M. NUZZO has been Manager of Payor Operations of the Company since
July 1996. From June 1992 to July 1996, Mr. Nuzzo worked as an associate with
Medimetrix Group, Inc., a health care consulting company. Prior to joining
Medimetrix, Mr. Nuzzo received a B.A. degree from Kenyon College.
Drs. Cain, Fleming, Haney, Matthews and Rothman were elected to the Board
of Directors pursuant to the terms of a Stockholders Agreement among the holders
of the Company's outstanding Common Stock. Dr. Booth was elected to the Board of
Directors pursuant to an agreement between the Company and Dr. Booth. The
provisions of the agreements relating to election of these persons to the Board
of Directors will not be in effect following completion of this offering.
Kerry R. Hicks and David G. Hicks are brothers.
DIRECTOR COMPENSATION AND COMMITTEES
The directors do not currently receive compensation for their service on
the Board of Directors or any committee thereof but are reimbursed for their
out-of-pocket expenses for serving on the board of directors. However, under the
Company's 1996 Equity Compensation Plan, non-employee directors are eligible to
receive option grants, and, in December 1996, each non-employee director other
than Mr. Cheesbrough was granted an option to purchase 10,000 shares of Common
Stock at an exercise price of $6 per share and Mr. Cheesbrough was granted an
option to purchase 20,000 shares of Common
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Stock at an exercise price of $6 per share. The options vest in three
substantially equal increments on the first, second and third anniversary of the
date of grant. See 'Stock Plans.'
The Board of Directors intends to establish a Compensation Committee and an
Audit Committee, each of which will be comprised of two independent directors.
It is anticipated that the Compensation Committee and the Audit Committee will
be comprised of Mr. Cheesbrough and a second independent director to be elected
by the Board of Directors. The Board of Directors plans to elect the second
independent director within 90 days after listing the Common Stock on the Nasdaq
National Market. The Compensation Committee will determine compensation for
executive officers of the Company and administer the Company's stock option
plans. The Audit Committee will recommend the appointment of the Company's
independent public accountants and will review the scope and results of audits
and internal accounting controls.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since its inception, the Company has not had a Compensation Committee of
the Board of Directors. The compensation of the Company's executive officers has
been determined by Kerry R. Hicks and Patrick M. Jaeckle, the Company's
President and Executive Vice President of Finance/Development, respectively,
through December 1996. Options were granted in December 1996 and cash annual
incentive awards were approved in December 1996 by the Board of Directors. The
Board of Directors intends to establish, within 90 days following the completion
of this offering, a Compensation Committee that will determine compensation for
the Company's executive officers and administer the Company's stock option
plans.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information concerning the compensation paid by the Company to the Chief
Executive Officer of the Company during the fiscal year ending December 31, 1995
and the Chief Executive Officer and the four other most highly paid executive
officers (collectively, the 'Named Executive Officers') during 1996. No
executive officer of the Company earned any salary or bonus for services
rendered during the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION -------------
-------------------- STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (1)
- --------------------------- ---- --------- --------- -------------
<S> <C> <C> <C> <C>
Kerry R. Hicks
President and Chief Executive Officer.............................. 1996 $ 138,876 $ 140,625 75,000
1995 $ -- $ -- --
Patrick M. Jaeckle
Executive Vice President of Finance/Development.................... 1996 $ 147,210 $ 140,625 75,000
William C. Behrens
Executive Vice President of Practice Management.................... 1996 $ 83,516 $ 85,938 545,825
Peter A. Fatianow
Vice President of Development...................................... 1996 $ 89,339 $ 67,500 30,000
D. Paul Davis
Vice President of Finance.......................................... 1996 $ 89,338 $ 67,500 30,000
</TABLE>
- ------------------
(1) The exercise price per share is equal to the fair market value of the Common
Stock on the date of grant, as determined by the Company's Board of
Directors.
45
<PAGE>
Option Grants. The following table sets forth certain information
regarding stock options granted during 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- --------------------------------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR PER SHARE(1) DATE 5% 10%
- ---- ------------ ------------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kerry R. Hicks..................... 75,000 6.0% $6.00 12/4/2006 $283,003 $717,184
Patrick M. Jaeckle................. 75,000 6.0% $6.00 12/4/2006 $283,003 $717,184
William C. Behrens................. 500,000 40.1% $1.00 3/22/2006 $314,448 $796,871
45,825 3.7% $6.00 12/4/2006 $172,915 $438,200
D. Paul Davis...................... 30,000 2.4% $6.00 12/4/2006 $113,201 $286,874
Peter A. Fatianow.................. 30,000 2.4% $6.00 12/4/2006 $113,201 $286,874
</TABLE>
- ------------------
(1) The exercise price per share is equal to the fair market value of the Common
Stock on the date of grant, as determined by the Company's Board of
Directors.
(2) Based on the exercise price per share on the date of grant.
The following table sets forth certain information regarding stock options
held as of December 31, 1996 by the Named Executive Officers. None of the Named
Executive Officers exercised stock options during 1996.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END (#) AT FISCAL YEAR-END($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kerry R. Hicks............................................ 0 75,000 0 $ 300,000
Patrick M. Jaeckle........................................ 0 75,000 0 300,000
William C. Behrens........................................ 0 545,825 0 4,683,300
D. Paul Davis............................................. 0 30,000 0 120,000
Peter A. Fatianow......................................... 0 30,000 0 120,000
</TABLE>
- ------------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. These values have been calculated on the basis of an assumed initial
public offering price of $10.00 per share (which is the assumed per share
price to the public in this offering), minus the applicable per share
exercise price.
1996 EQUITY COMPENSATION PLAN
The Company's 1996 Equity Compensation Plan (the 'Plan') provides for
grants of stock options ('Options') to selected employees, officers, directors,
consultants and advisers of the Company. By encouraging stock ownership, the
Company seeks to attract, retain and motivate such persons and to encourage them
to devote their best efforts to the business and financial success of the
Company.
The Plan authorizes up to 2,000,000 shares of the Company's Common Stock
(subject to adjustment in certain circumstances) for issuance pursuant to the
terms of the Plan. If Options expire or are terminated for any reason without
being exercised, the shares of Common Stock subject to such Options again will
be available for grant.
46
<PAGE>
The Plan may be administered by the Board of Directors (the 'Board') or by
a committee of the Board (references to the 'Committee' refers to the committee,
if one is appointed, and otherwise to the Board). Grants under the Plan may
consist of (i) options intended to qualify as incentive stock options ('ISOs')
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended (the 'Code') or (ii) 'non-qualified stock options' that are not intended
so to qualify ('NQSOs'). Options may be granted to any employee (including
officers and directors) of the Company, members of the Board who are not
employees, and consultants and advisers who perform services to the Company or
any of its subsidiaries ('Key Advisers'). 'Key Advisers' include personnel of
medical practices that have entered into and remain subject to management
agreements with the Company or any of its subsidiaries. During any calendar
year, no grantee may receive Options for more than 500,000 shares of the
Company's Common Stock.
The option price of any ISO granted under the Plan will not be less than
the fair market value of the underlying shares of Common Stock on the date of
grant. The option price of a NQSO will be determined by the Committee, in its
sole discretion, and may be greater than, equal to or less than the fair market
value of the underlying shares of Common Stock on the date of grant. The
Committee will determine the term of each Option, provided that the exercise
period may not exceed ten years from the date of grant. The option price of an
ISO granted to a person who owns more than 10% of the total combined voting
power of all classes of stock of the Company must be at least equal to 110% of
the fair market value of Common Stock on the date of grant, and the ISO's term
may not exceed five years. A grantee may pay the option price (i) in cash, (ii)
by delivering shares of Common Stock already owned by the grantee and having a
fair market value on the date of exercise equal to the option price, or (iii) by
such other method as the Committee may approve. The Committee may impose on
Options such vesting and other conditions as the Committee deems appropriate.
Options may be exercised while the grantee is an employee, Key Adviser or member
of the Board or within a specified period after termination of the grantee's
employment or services.
In the event of a change of control (as defined in the Plan), all
outstanding Options will become fully exercisable, unless the Committee
determines otherwise. Except as provided below, unless the Committee determines
otherwise, in the event of a merger where the Company is not the surviving
corporation, all outstanding Options will be assumed by or replaced with
comparable options by the surviving corporation. The Committee may require that
grantees surrender their outstanding Options in the event of a change of control
and receive a payment in cash or Common Stock equal to the amount by which the
fair market value of the shares of Common Stock subject to the Options exceeds
the exercise price of the Options.
All options issued under the Plan will be granted subject to any applicable
federal, state and local withholding requirements; the Company can deduct from
wages paid to the grantee any such taxes required to be withheld with respect to
the options. If the Company so permits, a grantee may choose to satisfy the
Company's income tax withholding obligation with respect to an option by having
shares withheld up to an amount that does not exceed the grantee's maximum
marginal tax rate for federal, local and state taxes.
The Board may amend or terminate the Plan at any time; provided that, if
the Common Stock becomes publicly traded, the Board may not make any amendment
that requires stockholder approval pursuant to Section 162(m) of the Code
without stockholder approval. As of January 17, 1997, options to purchase
1,355,248 shares of Common Stock were outstanding under the Plan. The Plan will
terminate on October 14, 2006, unless terminated earlier by the Board or
extended by the Board with approval of the stockholders.
1996 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
The Specialty Care Network, Inc. 1996 Incentive and Non-Qualified Stock
Option Plan (the 'Incentive Plan') provides incentives to attract and retain
directors, officers, advisors, consultants and key employees. As of January 17,
1997, options to purchase 553,500 shares of Common Stock were
47
<PAGE>
outstanding under the Incentive Plan. The Incentive Plan was terminated by the
Board of Directors in January 1997.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Kerry R. Hicks and
Patrick M. Jaeckle dated as of April 1, 1996 and an employment agreement with
William Behrens dated as of March 11, 1996. Each agreement has an initial term
of five years and is renewable automatically for one year periods unless
terminated by one of the parties. The agreements provide for an annual salary
rate to each officer of $187,500 for 1996, $215,000 for 1997 and $250,000 for
1998, with cost of living increases for the years following the third year. In
addition, the agreements provide for annual incentive compensation to each
officer equal to up to 100% of his base salary based on performance targets
established by the Board of Directors, and on December 4, 1996, the Board of
Directors approved annual incentive compensation awards to Messrs. Hicks,
Jaeckle and Behrens of $140,625, $140,625 and $85,938, respectively. In the
event that the officer is terminated without cause and there has been no change
of control of the Company, the Company will pay such officer his base salary for
the remaining term of the agreement and any earned but unpaid salary and
incentive compensation. In the event the officer is terminated with cause,
regardless of whether there has been a change of control of the Company, the
Company will pay such officer his base salary for 60 days following such
termination. If the officer is terminated without cause upon a change of control
of the Company, he is entitled to receive a lump sum payment upon such
termination equal to 300% of his base salary plus 300% of his annual incentive
compensation for the prior year. Each agreement contains certain confidentiality
and non-competition covenants.
The Company has an employment agreement with Peter A. Fatianow dated as of
March 1, 1996 and an agreement with D. Paul Davis dated as of February 22, 1996.
Each agreement has an initial term of five years and is renewable automatically
for one year periods unless terminated by one of the parties. The agreements
provide for an annual salary rate to each officer of $108,000 for 1996, $125,000
for 1997 and $144,000 for 1998, with cost of living increases for the years
following the third year. In addition, the agreements provide for annual
incentive compensation to each officer equal to up to 75% of his base salary
based on performance targets established by the Board of Directors and on
December 4, 1996, the Board of Directors approved annual incentive compensation
awards to each of Messrs. Fatianow and Davis in the amount of $67,500. In the
event that the officer is terminated without cause and there has been no change
of control of the Company, the Company will pay such officer his base salary for
the remaining term of the agreement and any earned but unpaid salary and
incentive compensation. In the event the officer is terminated with cause,
regardless of whether there has been a change of control of the Company, the
Company will pay such officer his base salary for 60 days following such
termination. If the officer is terminated without cause upon a change of control
of the Company, he is entitled to receive a lump sum payment upon such
termination equal to 300% of his base salary plus 300% of his annual incentive
compensation for the prior year. Each agreement contains certain confidentiality
and non-competition covenants.
48
<PAGE>
CERTAIN TRANSACTIONS
Following the Company's incorporation in December 1995, the following
individuals purchased shares of Common Stock, at a price of $.001 per share:
Kerry R. Hicks purchased 500,000 shares; Patrick M. Jaeckle purchased 500,000
shares; D. Paul Davis purchased 50,000 shares; Peter A. Fatianow purchased
50,000 shares.
In addition, since January 15, 1996, various executive officers, directors
and principal stockholders have participated in the Company's debt and equity
financings. These financings have included the following.
From January 1, 1996 through July 1, 1996, the Company sold 5% convertible
debentures in the aggregate principal amount of $1,870,000. On November 12,
1996, the convertible debentures, along with the accrued interest thereon, were
converted into 1,920,272 shares of Common Stock at a rate of one share of Common
Stock for each $1.00 of indebtedness. The securities were issued to certain
executive officers of the Company as follows: Kerry R. Hicks and Patrick M.
Jaeckle each converted $200,000 of convertible debentures and $5,418 in accrued
interest into 205,418 shares of Common Stock, William C. Behrens converted
$75,000 of convertible debentures and $1,645 in accrued interest into 76,645
shares of Common Stock, Peter A. Fatianow converted $35,000 in convertible
debentures and $1,236 of accrued interest into 36,236 shares of Common Stock and
D. Paul Davis converted $35,000 of convertible debentures and $899 in accrued
interest into 35,899 shares of Common Stock. In addition, securities were issued
to certain non-employee directors of the Company as follows: Richard H. Rothman,
M.D., Ph.D. and Richard Balderston, M.D. each converted $233,333 of convertible
debentures and $7,085 in accrued interest into 240,418 shares of Common Stock
and Richard E. Booth, Jr., M.D. converted $83,333 of convertible debentures and
$3,483 in accrued interest into 86,816 shares of Common Stock.
On October 1, 1996, the Company sold to GCOA 5% convertible debentures in
the aggregate principal amount of $300,000. On November 12, 1996, the
convertible debentures, along with the accrued interest thereon of $1,707, was
converted into 100,569 shares of Common Stock at a rate of one share of Common
Stock for each $3.00 in indebtedness. Leslie S. Matthews, M.D., a director of
the Company, is a physician owner of GCOA.
On November 4, 1996, the Company sold to TOC 100,000 shares of Common Stock
for an aggregate purchase price of $300,000. Thomas C. Haney, M.D., a director
of the Company, is a physician owner of TOC.
On November 12, 1996, pursuant to the Initial Affiliation Transactions, the
Company entered into agreements with each of the Predecessor Practices pursuant
to which the Company merged with or acquired stock or certain assets of the
Predecessor Practices. The Company also assumed certain liabilities of the
Predecessor Practices, including obligations under acquired contracts (including
facilities leases and vendor or supplier contracts). In connection with the
Initial Affiliation Transactions, the Company issued shares of Common Stock to
the physician owners of the Initial Affiliated Practices. The specific issuances
of Company securities in each of the Initial Affiliation Transactions is
described below.
The Company entered into an Asset Exchange Agreement with GCOA and the
individual physicians who are owners of GCOA, including Leslie S. Matthews,
M.D., a director of the Company. Pursuant to the terms of the agreement, the
Company purchased certain assets of GCOA and assumed certain liabilities
relating to those assets. In exchange for the purchased assets, the Company
issued 1,568,922 shares of its Common Stock, valued at $6 per share, including
280,721 shares to Dr. Matthews. The Company also entered into an Initial Service
Agreement with GCOA and its physician owners. The Company leases the facilities
utilized by GCOA from an entity of which Dr. Matthews is a partial owner, for an
aggregate annual lease payment of approximately $300,000.
The Company entered into a Stock Exchange Agreement with the individual
physicians who are members of POA, including Richard E. Fleming, Jr., M.D., a
director of the Company. Pursuant to the terms of the agreement, the Company
purchased all of the outstanding shares of the predecessor of
49
<PAGE>
POA, in exchange for 1,196,793 shares of Common Stock, valued at $6 per share,
including 163,548 shares issued to Dr. Fleming. The Company also entered into an
Initial Service Agreement with POA and its physician owners. The Company leases
the facilities utilized by POA from an entity of which Dr. Fleming is a partial
owner, for an aggregate annual lease payment of approximately $1.4 million.
The Company entered into a Merger Agreement with a predecessor of ROA whose
physicians included Richard H. Rothman, M.D., Ph.D., the Chairman of the Board
of Directors of the Company and Robert E. Booth, Jr., M.D., a director of the
Company, pursuant to which the predecessor of ROA merged with and into Company,
with the Company surviving the merger. Pursuant to the terms of the agreement,
the outstanding shares of Common Stock of the predecessor of ROA were converted
into 3,169,378 shares of Common Stock valued at $6 per share and $1,388,000 in
cash was paid to two former shareholders of the predecessor of ROA. In addition,
$149,872 was paid by the Company in satisfaction of outstanding indebtedness of
the predecessor of ROA. The Company issued 462,484 shares of Common Stock and
approximately $694,000 in cash to Dr. Rothman, and 462,484 shares of Common
Stock and approximately $694,000 in cash to Dr. Booth. The Company also entered
into an Initial Service Agreement with ROA and its physician owners. The Company
leases the facilities utilized by ROA from an entity of which Drs. Rothman and
Booth are partial owners, for an aggregate annual lease payment of approximately
$160,000.
The Company entered into a Merger Agreement with a predecessor of TOC,
pursuant to which the predecessor of TOC merged with and into Company, with the
Company surviving the Merger. Pursuant to the terms of the agreement, each
outstanding share of Common Stock of the predecessor of TOC was converted into
1,032.02 shares of Common Stock, with the result that the Company issued an
aggregate of 1,072,414 shares, valued at $6 per share, to the former
shareholders of the predecessor of TOC, including 103,202 shares to Thomas C.
Haney, M.D., a director of the Company. The Company also entered into an Initial
Service Agreement with TOC and its physician owners. The Company leases the
facilities utilized by TOC from an entity of which Dr. Haney is a partial owner,
for an aggregate annual lease payment of approximately $500,000.
The Company entered into a Merger Agreement with a predecessor of VO,
pursuant to which the predecessor of VO merged with and into Company, with the
Company surviving the merger. Pursuant to the terms of the agreement, each
outstanding share of Common Stock of the predecessor of VO was converted into
6,516.07 shares of Common Stock, with the result that the Company issued an
aggregate of 651,607 shares, valued at $6 per share, to the former shareholders
of the predecessor of VO. In addition, pursuant to the terms of the agreement,
one shareholder of the predecessor of VO was granted an option to purchase
80,000 shares of Common Stock at an exercise price of $6 per share. In
connection with the transaction, James L. Cain, M.D., a director of the Company,
received 103,410 shares of Common Stock. The Company also entered into an
Initial Service Agreement with VO and its physician owners. The Company leases
the facilities utilized by VO from an entity of which Dr. Cain is a partial
owner, for an aggregate annual lease payment of approximately $8,000.
For a description of the terms of the Initial Service Agreements, see
'Business -- Contractual Agreements with Affiliated Practices.'
For a description of registration rights that apply to Shares of Common
Stock held by certain directors, officers and 5% stockholders, see 'Shares
Eligible for Future Sale.'
In connection with the Initial Affiliation Transactions, the Company has
committed to enter into loan agreements with certain physician owners of the
Predecessor Practices for loans in an aggregate amount of up to approximately
$4.3 million. These loans are available until November 12, 1998 and the amount
that each physician may borrow is limited. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Speciality Care
Network, Inc. -- Liquidity and Capital Resources.'
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of January 17, 1997, as
adjusted to reflect the sale of the shares offered pursuant to this Prospectus,
by (i) each Selling Stockholder, (ii) each person known to the Company to own
beneficially more than 5% of the Company's Common Stock (including their
address), (iii) each Named Executive Officer of the Company, (iv) each director
of the Company and (v) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED SUBSEQUENT
TO OFFERING(1) SHARES TO OFFERING(1)
------------------- BEING --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Richard H. Rothman, M.D., Ph.D. (2)...................... 496,902 4.5% 496,902 3.5%
Kerry R. Hicks (3)(4).................................... 645,418 5.8 645,418 4.6
Patrick M. Jaeckle (3)(5)................................ 605,418 5.5 605,418 4.3
William C. Behrens (3)(6)................................ 76,645 * 76,645 *
Robert E. Booth, Jr., M.D................................ 549,300 5.0 549,300 3.9
James L. Cain, M.D....................................... 132,721 1.2 132,721 *
Peter H. Cheesbrough..................................... 0 * 0 *
Richard E. Fleming, Jr., M.D. (7)........................ 158,454 1.4 158,454 1.1
Thomas C. Haney, M.D..................................... 110,549 1.0 110,549 *
Leslie S. Matthews, M.D.................................. 295,088 2.7 295,088 2.1
D. Paul Davis............................................ 85,899 * 85,899 *
Peter A. Fatianow (8).................................... 71,236 * 71,236 *
David G. Hicks (9)....................................... 102,281 * 102,281 *
Richard Balderston, M.D. (10)............................ 818,524 7.4 818,524 5.8
Jeffrey S. Abrams, M.D. (11)(12)......................... 165,579 1.5 20,518 145,061 1.0
Todd J. Albert, M.D. (13)(14)............................ 330,063 3.0 51,000 279,063 2.0
Gregg A. Alexander, M.D. (15)............................ 28,174 * 1,000 27,174 *
D. Christian Berg, M.D. (15)............................. 110,548 1.0 15,500 95,048 *
Richard E. Blackburn, M.D. (15).......................... 59,689 * 4,700 54,989 *
Michael G. Ciccotti, M.D. (13)........................... 153,028 1.4 22,964 130,064 *
Donald M. Dewey, M.D. (15)............................... 110,548 1.0 10,300 100,248 *
Mark E. Fahey, M.D. (15)................................. 110,548 1.0 6,500 104,048 *
Steven R. Gecha, M.D. (11)(16)........................... 165,588 1.5 20,518 145,070 1.0
W. Thomas Gutowski, M.D. (11)(17)........................ 153,359 1.4 20,518 132,841 *
William D. Henderson, M.D. (15).......................... 57,691 * 7,600 50,091 *
William J. Hozack, M.D. (13)............................. 340,062 3.1 51,000 289,062 2.1
Michael N. Jolley, M.D. (11)............................. 165,588 1.5 20,518 145,070 1.0
Steve E. Jordan, M.D. (15)............................... 110,548 1.0 10,300 100,248 *
Peter F. Sharkey, M.D. (13).............................. 153,028 1.4 22,964 130,064 *
Harvey E. Smires, M.D. (11).............................. 165,588 1.5 12,000 153,588 1.1
Kris D. Stowers, M.D. (15)............................... 32,351 * 1,100 31,251 *
Alexander R. Vaccaro, M.D. (13).......................... 340,062 3.1 51,000 289,062 2.1
All directors and executive officers as a group (17
persons) (18).......................................... 3,391,274 30.7 3,391,274 24.1
</TABLE>
- ------------------
* Less than one percent.
51
<PAGE>
(1) Applicable percentage of ownership is based on 11,044,955 shares of Common
Stock outstanding as of January 17, 1997 and 14,044,955 shares of Common
Stock outstanding upon consummation of this offering. Beneficial ownership
is determined in accordance with the rules of the Commission and includes
voting or investment power with respect to securities. Shares of Common
Stock issuable upon the exercise of stock options currently exercisable or
convertible, or exercisable or convertible within 60 days of January 17,
1997 are deemed outstanding and to be beneficially owned by the person
holding such option for purposes of computing such person's percentage
ownership, but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. Except for shares held jointly
with a person's spouse or subject to applicable community property laws, or
as indicated in the footnotes to this table, each stockholder identified in
the table possesses sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by such stockholder.
(2) Does not include 200,000 shares of Common Stock held in the Richard H.
Rothman 1996 'SCN' Annuity Trust dated November 26, 1996 and 3,000 shares
of Common Stock held by each of the U/I/T of Richard H. Rothman dated
September 5, 1995 f/b/o Daniel Sheerr Kapp and the U/I/T of Richard H.
Rothman dated September 5, 1995 f/b/o Samuel Rothman Kapp, with respect to
which Dr. Rothman disclaims beneficial ownership. Dr. Rothman's business
address is 800 Spruce Street, Philadelphia, Pennsylvania 19107.
(3) Messrs. Hicks, Jaeckle and Behren's business address is 44 Union Boulevard,
Suite 600, Lakewood, Colorado 80228.
(4) Includes 60,000 shares of Common Stock held in the Linda Wratten Trust,
20,000 shares of Common Stock in each of the Frank Nemick III Trust, the
William Nemick Trust and the Jeanette Baysinger Trust and 10,000 shares of
Common Stock in each of the Frank Nemick, Jr. Trust and the Julie Nemick
Trust. Does not include 60,000 shares of Common Stock held by The Hicks
Family Irrevocable Trust, for which shares Mr. Hicks disclaims beneficial
ownership.
(5) Does not include 100,000 shares of Common Stock held by The Patrick M.
Jaeckle Family Irrevocable Children's Trust, for which shares Mr. Jaeckle
disclaims beneficial ownership.
(6) On March 22, 1997 options to purchase 166,666 shares of Common Stock will
vest.
(7) Includes 20,382 shares and 5,095 shares of Common Stock held by the Fleming
Charitable Remainder Unitrust and the Fleming Family Foundation,
respectively. Does not include 2,547 shares of Common Stock held by each of
the Irrevocable Trust FBO M. Fleming and the Irrevocable Trust FBO A.
Fleming, respectively, for which Dr. Fleming disclaims beneficial
ownership.
(8) Does not include 15,000 shares of Common Stock held by the Fatianow Family
Irrevocable Children's Trust, for which shares Mr. Fatianow disclaims
beneficial ownership.
(9) Does not include 10,000 shares of Common Stock held by The David G. Hicks
Irrevocable Children's Trust, for which shares Mr. Hicks disclaims
beneficial ownership.
(10) Dr. Balderston's business address is 800 Spruce Street, Philadelphia,
Pennsylvania 19107.
(11) Drs. Abrams, Gecha, Gutowski, Jolley, Moskwa and Smires are each physician
owners of POA, one of the Initial Affiliated Practices.
(12) Represents shares of Common Stock held by the Abrams Family Holding
Company, L.L.C.
(13) Drs. Albert, Ciccotti, Hozack, Sharkey and Vaccaro are physician owners of
the predecessor of ROA, one of the Initial Affiliated Practices.
(14) Excludes 3,333 shares of Common Stock held by each of Jonathan Albert,
Trustee of Agreement of Trust of Todd J. Albert for Stuart J. McCormick
dated December 23, 1996, Jonathan Albert, Trustee of Agreement of Trust of
Todd J. Albert for Elliot T. Albert dated December 23, 1996 and Jonathan
Albert, Trustee of Agreement of Trust of Todd J. Albert for Emily K. Albert
dated December 23, 1996, with respect to which Dr. Albert disclaims
beneficial ownership.
(15) Drs. Alexander, Berg, Blackburn, Dewey, Fahey, Henderson, Jordan and
Stowers are each physician owners of TOC, one of the Initial Affiliated
Practices.
(16) Represents shares of Common Stock held by the Gecha Family Holding Company,
L.L.C.
(17) Does not include 4,076 shares of Common Stock held by each of the Andrew
Gutowski 1995 Irrevocable Trust, Christina Gutowski 1995 Irrevocable Trust
and Alexandra Gutowski 1995 Irrevocable Trust, for which Dr. Gutowski
disclaims beneficial ownership.
(18) On March 22, 1997 options to purchase 183,332 shares of Common Stock will
vest.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share (the 'Preferred Stock'). As of January 17,
1997, there were 11,044,955 shares of Common Stock outstanding. No shares of
Preferred Stock are currently outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on each
matter to be decided by the stockholders and do not have cumulative voting
rights. Accordingly, the holders of a majority of Common Stock entitled to vote
in any election of directors may elect all of the directors standing for
election. The holders of Common Stock have no preemptive, redemption or
conversion rights. The holders of the Common Stock will be entitled to receive
ratably such dividends, if any, as the Board of Directors may declare from time
to time out of funds legally available for such purpose. In the event of
liquidation, dissolution or winding up of the affairs of the Company, after
payment or provision for payment of all of the Company's debts and obligations
and any preferential distributions to holders of Preferred Stock, if any, the
holders of the Common Stock will be entitled to share ratably in the Company's
remaining assets. All outstanding shares of Common Stock are, and the Common
Stock offered hereby will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
stockholders, to provide for the issuance of shares of Preferred Stock as a
class without series or in one or more series, to establish the number of shares
in each class or series and to fix the designation, powers, preferences and
rights of each such class or series and the qualifications, limitations or
restrictions thereof. Because the Board of Directors has the power to establish
the preferences and rights of each class or series of Preferred Stock, the Board
of Directors may afford the holders of any class or series of Preferred Stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Stock. The issuance of Preferred Stock could have the effect
of delaying or preventing a change in control of the Company. As of the date of
this Prospectus, the Company has not authorized the issuance of any Preferred
Stock and there are no plans, agreements or understandings for the issuance of
any shares of Preferred Stock.
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the 'GCL'). Section 203 prohibits a
publicly held Delaware corporation from engaging in a 'business combination'
with an 'interested stockholder' for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A 'business
combination' includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an 'interested stockholder' is a person who, together with affiliates and
associates, owns, or within three years prior to the proposed business
combination has owned, 15% or more of the corporation's voting stock.
The Company's Certificate of Incorporation provides that liability of
directors of the Company is eliminated to the fullest extent permitted under
Section 102(b)(7) of the GCL. As a result, no director of the Company will be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for any willful or negligent payment of an unlawful
dividend, stock purchase or redemption; or (iv) for any transaction from which
the director derived an improper personal benefit. The Company's Bylaws
generally provide that the Company shall indemnify its directors, employees and
other agents to the fullest extent provided by Delaware law.
53
<PAGE>
In addition, the Company's Certificate of Incorporation requires the vote
of 66 2/3% of the outstanding voting securities to effect certain actions,
including a sale of substantially all of the assets of the Company, certain
mergers and consolidations, and dissolution and liquidation of the Company
unless such actions have been approved by a majority of the directors. The
'supermajority' voting rights could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from seeking to
acquire, control of the Company.
The Bylaws of the Company provide that stockholders must follow an advance
notification procedure for certain stockholder nominations of candidates for the
Board of Directors and for certain other stockholder business to be conducted at
an annual meeting. These provisions could, under certain circumstances, operate
to delay, defer or prevent a change in control of the Company.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Co., New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following this offering. After giving effect to the shares of Common
Stock offered hereby, the Company will have outstanding 14,044,955 shares of
Common Stock. Of these shares, the 3,350,000 shares (3,800,000 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock sold
in this offering will be freely tradeable without restriction under the
Securities Act, except for any shares purchased by 'affiliates,' as that term is
defined under the Securities Act, of the Company. The remaining 10,694,955
shares are 'restricted securities' within the meaning of Rule 144 promulgated
under the Securities Act. Of these restricted shares, 1,265,000 shares will be
eligible for the sale pursuant to Rule 144 in December 1997 and the balance of
the restricted shares will be eligible for sale at various times from January
1998 through November 1998. The Securities and Exchange Commission (the
'Commission') has proposed reducing the initial Rule 144 holding period to one
year. There can be no assurance as to whether or when such rule changes will be
enacted. If enacted, such modification will accelerate by one year the initial
date upon which all currently outstanding Common Stock becomes eligible for
resale under Rule 144.
The Company, its officers and directors and certain other stockholders of
the Company have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to any additional shares of Common Stock or securities
convertible or exchangeable or exercisable for any shares of Common Stock
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this Prospectus (the 'lock-up period'),
except (i) subsequent sales of Common Stock offered in this offering, (ii)
issuances of unregistered Common Stock by the Company in connection with
affiliation with practices, physicians and ancillary providers (although persons
receiving such shares would be subject to such restrictions for the remainder of
the lock-up period) or (iii) issuances of Common Stock by the Company pursuant
to the exercise of employee stock options outstanding on the date of this
Prospectus.
The holders of all shares of Common Stock outstanding on the date of this
Prospectus have certain rights to have their shares, and an additional 550,000
shares issuable upon exercise of outstanding options, registered under the
Securities Act, although the holders of at least 2,437,534 of these shares have
agreed to refrain from selling their shares during the lock-up period. In
addition, the Company intends to register approximately 2,000,000 shares of
Common Stock reserved for issuance under the Company's 1996 Equity Compensation
Plan as soon as practicable after expiration of the lock-up period. The Company
intends to register an additional 553,500 shares of Common Stock reserved for
issuance under the Company's 1996 Incentive and Non-Qualified Stock Option Plan
as soon as practicable thereafter. See 'Management' and 'Underwriting.'
54
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the 'Underwriting Agreement'), the
Underwriters named below (the 'Underwriters'), for whom Credit Suisse First
Boston Corporation, Equitable Securities Corporation and Lehman Brothers Inc.
are acting as representatives (the 'Representatives') have severally but not
jointly agreed to purchase from the Company and the Selling Stockholders the
following respective numbers of shares of Common Stock:
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Credit Suisse First Boston Corporation.......................
Equitable Securities Corporation.............................
Lehman Brothers Inc..........................................
---------
Total........................................................ 3,350,000
---------
---------
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below), if any are purchased. The Underwriting Agreement provides
that, in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of the non-defaulting Underwriter may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring on the
close of business on the 30th day after the date of this Prospectus, to purchase
up to 450,000 additional shares at the initial public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of the additional shares of Common
Stock as it was obligated to purchase pursuant to the Underwriting Agreement.
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the shares of Common Stock will be
determined by negotiation among the Company and the Representatives and will be
based on, among other things, the Company's financial and operating history and
condition, its prospects and the prospects for its industry in general, the
management of the Company and the market prices for the securities of companies
in businesses similar to that of the Company.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares offered hereby to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of $_____ per share, and the
Underwriters and such dealers may allow a discount of $______ per share on sales
to certain other dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
Representatives.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the Shares being offered
hereby.
The Company, its officers and directors and certain other stockholders of
the Company have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to any additional shares of Common Stock or securities
convertible into or exchangeable or exercisable for any shares of Common Stock
without the prior written consent of
55
<PAGE>
Credit Suisse First Boston Corporation for a period of 180 days from the date of
this Prospectus, except (i) subsequent sales of Common Stock offered in this
offering, (ii) issuances of unregistered Common Stock by the Company issued in
connection with affiliation with Acquired Practices or (iii) issuances of Common
Stock by the Company pursuant to the exercise of employee stock options
outstanding on the date of this Prospectus.
At the request of the Company, the Underwriters are reserving up to 150,000
shares of Common Stock (approximately 4.5% of the shares to be offered) for sale
to employees, directors and friends of the Company. The number of shares
available for sale to the general public in this offering will be reduced to the
extent such persons purchase such reserved shares. Shares purchased by
employees, directors and friends of the Company will be at the public offering
price as set forth on the cover page of this Prospectus. Any reserved shares not
so purchased will be offered by the Underwriters to the general public in this
offering.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters may be required
to make in respect thereof.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol 'SCNI.'
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as agent
and (iii) such purchaser has reviewed the text above under 'Resale
Restrictions.'
RIGHT OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulations under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against the issuer or such
persons outside of Canada.
56
<PAGE>
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any such
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blank
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain
health care regulatory matters will be passed upon for the Company by Baker,
Donelson, Bearman & Caldwell, Memphis, Tennessee. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.
EXPERTS
The financial statements of Specialty Care Network, Inc., Greater
Chesapeake Orthopaedic Associates, LLC, Princeton Orthopaedic Associates, P.A.,
Reconstructive Orthopaedic Associates, Inc., Tallahassee Orthopedic Clinic, Inc.
and Vero Orthopaedics, P.A., appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, to the
extent indicated in their reports thereon also appearing elsewhere herein and in
the Registration Statement. Such financial statements have been included herein
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act (the 'Registration Statement') with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement, including the exhibits and schedules thereto. For
further information with respect to the Company and the shares of Common Stock,
reference is made to the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's
Regional Offices at Seven World Trade Center, Suite 1300, New York, New York
10048, and Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies may be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the registration statement and certain
other filings made with the Commission through its Electronic Data Gathering
Analysis and Retrieval ('EDGAR') system are publicly available through the
Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF SPECIALTY CARE NETWORK, INC.:
Basis of Presentation......................................................... F-2
Unaudited Pro Forma Balance Sheet at September 30, 1996....................... F-3
Unaudited Pro Forma Statements of Income for the year ended
December 31, 1995 and for the nine months ended September 30, 1996......... F-4 - F-5
Notes to Unaudited Pro Forma Financial Statements............................. F-6
SPECIALTY CARE NETWORK, INC.:
Report of Independent Auditors................................................ F-13
Balance Sheet................................................................. F-14
Statement of Operations....................................................... F-15
Statement of Stockholders' Deficiency......................................... F-16
Statement of Cash Flows....................................................... F-17
Notes to Financial Statements................................................. F-18
RECONSTRUCTIVE ORTHOPAEDICS ASSOCIATES, INC.:
Report of Independent Auditors................................................ F-25
Balance Sheets................................................................ F-26
Statements of Income.......................................................... F-27
Statements of Stockholders' Equity............................................ F-28
Statements of Cash Flows...................................................... F-29
Notes to Financial Statements................................................. F-30
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.:
Report of Independent Auditors................................................ F-34
Balance Sheets................................................................ F-35
Statements of Operations...................................................... F-36
Statements of Stockholders' Equity............................................ F-37
Statements of Cash Flows...................................................... F-38
Notes to Financial Statements................................................. F-39
TALLAHASSEE ORTHOPEDIC CLINIC, INC.:
Report of Independent Auditors................................................ F-44
Balance Sheets................................................................ F-45
Statements of Income.......................................................... F-46
Statements of Stockholders' Equity............................................ F-47
Statements of Cash Flows...................................................... F-48
Notes to Financial Statements................................................. F-49
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC:
Report of Independent Auditors................................................ F-54
Balance Sheets................................................................ F-55
Statements of Operations...................................................... F-56
Statements of Members' Equity................................................. F-57
Statements of Cash Flows...................................................... F-58
Notes to Financial Statements................................................. F-59
VERO ORTHOPAEDICS, P.A.:
Report of Independent Auditors................................................ F-64
Balance Sheets................................................................ F-65
Statements of Operations...................................................... F-66
Statements of Stockholders' Equity............................................ F-67
Statements of Cash Flows...................................................... F-68
Notes to Financial Statements................................................. F-69
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OF SPECIALTY CARE NETWORK, INC.
BASIS OF PRESENTATION
The following unaudited pro forma financial statements give effect to the
acquisition by Specialty Care Network, Inc. (the 'Company'), a Delaware
corporation, of substantially all of the net assets of the Predecessor
Practices, in exchange for shares of the Company's Common Stock, cash and the
assumption of certain liabilities, and the effects of the provisions of the
Initial Service Agreements between the Company and each of the Initial
Affiliated Practices.
Reconstructive Orthopaedic Associates, Inc.
Princeton Orthopaedic Associates, P.A.
Tallahassee Orthopedic Clinic, Inc.
Greater Chesapeake Orthopaedic Associates, LLC
Vero Orthopaedics, P.A.
The unaudited pro forma financial statements have been prepared by the
Company based upon the historical financial statements of Specialty Care
Network, Inc. and the Predecessor Practices included elsewhere in this
prospectus, and certain preliminary estimates and assumptions deemed appropriate
by management of the Company. These pro forma financial statements may not be
indicative of actual results as if the transaction had occurred on the dates
indicated or which may be realized in the future. Neither expected benefits nor
cost reductions anticipated by the Company following consummation of the Initial
Affiliation Transactions and the execution of the Initial Service Agreements
have been reflected in such pro forma financial statements; however, additional
estimated future corporate overhead and direct costs of the Company have been
reflected in the pro forma financial statements. The pro forma balance sheet as
of September 30, 1996 gives effect to the Initial Affiliation Transactions as if
such transactions had occurred, and the Initial Service Agreements were
executed, on September 30, 1996. The pro forma statements of income for the nine
months ended September 30, 1996 and the year ended December 31, 1995 assume the
Initial Affiliation Transactions were completed on January 1, 1995 and exclude
the discontinued operations of Vero Orthopaedics, P.A. for the year ended
December 31, 1995.
The pro forma financial statements should be read in conjunction with the
historical financial statements of the Company and the individual Predecessor
Practices, including the related notes thereto, and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' that appear elsewhere
in this prospectus.
F-2
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SPECIALTY PRO FORMA
CARE PRO FORMA ADJUSTMENT
NETWORK, INC. ADJUSTMENTS LEGEND PRO FORMA
------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash................................................. $ 132,105 $ 600,000 (3) $ 732,105
Accounts receivable, net............................. -- 10,119,180 (2) 10,119,180
Inventories.......................................... -- 80,324 (2) 80,324
Due from related parties............................. -- 605,538 (2) 605,538
Prepaid expenses..................................... 20,130 99,529 (2) 119,659
----------- ----------- -----------
Total current assets................................... 152,235 11,504,571 11,656,806
Furniture, fixtures and equipment, net................. 251,560 2,320,187 (2) 2,571,747
Intangible assets...................................... 25,457 139,800 (1) 187,841
22,584 (2)
Prepaid offering costs................................. 250,142 -- 250,142
Other assets........................................... 51,733 26,714 (2) 78,447
----------- ----------- -----------
Total assets........................................... $ 731,127 $14,013,856 $14,744,983
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 92,332 $ 376,483 (2) $ 468,815
Accrued compensation and benefits.................... 496,939 257,622 (2) 754,561
Revolving line of credit............................. -- 1,677,750 (1) 1,677,750
Current portion of capital lease obligations......... -- 190,273 (2) 190,273
Convertible debentures............................... 1,870,000 (1,870,000) (3) --
Deferred tax liability............................... -- 251,635 (2) 1,637,094
1,385,459 (4)
Other accrued expenses............................... 555,905 (39,254) (3) 764,651
248,000 (5)
----------- ----------- -----------
Total current liabilities.............................. 3,015,176 2,477,968 5,493,144
Deferred tax liability................................. 124,776 (2) 2,259,963
-- 2,135,187 (4)
Capital lease obligations, less current portion........ -- 967,989 (2) 967,989
----------- ----------- -----------
Total liabilities...................................... 3,015,176 5,705,920 8,721,096
Stockholders' equity (deficit)
Common stock......................................... 1,265 9,780 (3) 11,045
Additional paid-in capital (owners' equity).......... -- (1,537,950) (1) 8,298,156
(9,780) (3)
11,105,278 (2)
1,870,000 (3)
39,254 (3)
600,000 (3)
(3,520,646) (4)
(248,000) (5)
Accumulated deficit.................................. (2,285,314) -- (2,285,314)
----------- ----------- -----------
Total stockholders' equity (deficit)................... (2,284,049) 8,307,936 6,023,887
----------- ----------- -----------
Total liabilities and stockholders' equity (deficit)... $ 731,127 $14,013,856 $14,744,983
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-3
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SPECIALTY PRO FORMA
CARE PRO FORMA ADJUSTMENT
NETWORK, INC. ADJUSTMENTS LEGEND PRO FORMA
------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue................................................. $ -- $31,493,723 (8) $31,493,723
Operating expenses:
Salaries and benefits................................. -- 11,366,021 (6) 14,214,984
2,848,963 (9)
Supplies, general and administrative expenses......... -- 9,968,982 (6) 10,930,793
961,811 (10)
Depreciation and amortization......................... -- 554,434 (6) 713,481
159,047 (11)
Costs to evaluate and acquire physician practices..... -- 94,903 (12) 94,903
----------- ----------- -----------
Income from continuing operations....................... -- 5,539,562 5,539,562
Interest expense and other, net......................... -- (74,306) (6) (74,306)
----------- ----------- -----------
Income from continuing operations before
income tax............................................ -- 5,465,256 5,465,256
Income tax expense...................................... -- (2,076,797) (14) (2,076,797)
----------- ----------- -----------
Net income.............................................. $ -- $ 3,388,459 $ 3,388,459
----------- ----------- -----------
----------- ----------- -----------
Net income per share.................................... $ 0.27
Weighted average common shares outstanding and common
stock equivalents..................................... 12,491,897
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-4
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
PRO FORMA STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SPECIALTY PRO FORMA
CARE PRO FORMA ADJUSTMENT
NETWORK, INC. ADJUSTMENTS LEGEND PRO FORMA
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue....................................................... $ -- $25,132,937 (8) $25,132,937
Operating expenses:
Salaries and benefits....................................... 1,223,923 8,556,147 (7) 10,599,417
819,347 (9)
Supplies, general and administrative expenses............... 480,905 8,858,096 (7) 9,579,454
240,453 (10)
Depreciation and amortization............................... 37,482 483,111 (7) 602,396
81,803 (11)
Costs to evaluate and acquire physician practices........... 509,656 (438,479) (12) 71,177
----------- ----------- -----------
Income (loss) from operations................................. (2,251,966) 6,532,459 4,280,493
Interest expense and other, net............................... (33,348) (28,554) (7) (22,648)
39,254 (13)
----------- ----------- -----------
Income (loss) from operations before income tax............... (2,285,314) 6,543,159 4,257,845
Income tax expense............................................ -- (1,617,981) (14) (1,617,981)
----------- ----------- -----------
Net income (loss)............................................. $(2,285,314) $ 4,925,178 $ 2,639,864
----------- ----------- -----------
----------- ----------- -----------
Net income per share.......................................... $ 0.21
Weighted average common shares outstanding and common stock
equivalents................................................. 12,491,897
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-5
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
1. Reflects the distributions to certain owners of Reconstructive Orthopaedic
Associates, Inc. of $1,537,950 in connection with the Initial Affiliation
Transactions and the application of SAB 48. These payments are accounted for
as dividends to such owners of Reconstructive Orthopaedic Associates, Inc.
The cash necessary to effectuate these dividend payments was primarily
provided by a bank pursuant to a new $20 million Revolving Loan and Security
Agreement established between the Company and the bank on November 1, 1996.
Accordingly, this accounting treatment results in (i) a $1,537,950 reduction
in additional paid-in capital, (ii) an increase in the revolving line of
credit of $1,677,750, and (iii) an increase of intangible assets for deferred
debt issuance costs of $139,800. The pro forma financial statements do not
reflect an adjustment for interest expense on the revolving line of credit
because management expects that the outstanding principal will be fully
repaid with the proceeds from the initial public offering of the Company's
common stock and, accordingly, there is no continuing effect for a period of
at least twelve months after the Initial Affiliation Transactions.
2. Historical assets and liabilities to be included in the pro forma balance
sheet pursuant to the terms and conditions of the underlying acquisition
agreements executed with the Predecessor Practices are summarized on the
following page. In addition, the pro forma balance sheet reflects certain
excluded assets and liabilities that are comprised of the following
significant items: assets and liabilities on an ambulatory surgery center and
an MRI facility that were not acquired as part of the Initial Affiliation
Transactions; substantially all cash and cash equivalents, accrued physician
compensation and benefits that were retained by the owners of Predecessor
Practices and GCOA under the Initial Affiliation Transactions; and all
short-term notes and lines of credit related to the Predecessor Practices
that were paid prior to the Initial Affiliation Transactions.
F-6
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
RECONSTRUCTIVE PRINCETON TALLAHASSEE
ORTHOPAEDIC ORTHOPAEDIC ORTHOPEDIC
ASSOCIATES, ASSOCIATES, CLINIC,
INC. P.A. INC.
-------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 831,472 $ 632,059 $ 647,863
Accounts receivable, net.................................... 3,905,093 2,338,764 2,611,574
Inventories................................................. 19,100 -- 68,224
Due from related parties.................................... -- 465,924 815,341
Prepaid expenses............................................ -- 80,006 180,677
---------- ---------- ----------
Total current assets.......................................... 4,755,665 3,516,753 4,323,679
Furniture, fixtures and equipment, net........................ 563,048 934,883 1,744,788
Intangible assets............................................. -- -- --
Other assets.................................................. 16,104 -- 9,540
---------- ---------- ----------
Total assets.................................................. $5,334,817 $4,451,636 $6,078,007
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings....................................... $ -- $ -- $ 400,000
Current portion of long-term notes payable.................. 66,000 70,000 409,708
Current portion of capital lease obligations................ -- 107,489 49,976
Accounts payable............................................ 119,338 439,629 113,613
Accrued compensation and
benefits.................................................. 160,949 1,588,076 211,551
Accrued profit sharing
contribution.............................................. 285,750 300,000 427,072
Income taxes payable........................................ -- -- --
Deferred tax liability...................................... -- 251,635 --
Due to related parties...................................... 168,356 165,377 201,173
Other accrued expenses...................................... -- -- 7,304
---------- ---------- ----------
Total current liabilities..................................... 800,393 2,922,206 1,820,397
Deferred tax liability........................................ -- -- --
Notes payable, less current portion........................... 89,699 339,428 896,077
Capital lease obligations, less current portion............... -- 769,123 189,119
---------- ---------- ----------
Total liabilities............................................. 890,092 4,030,757 2,905,593
Total owners' equity.......................................... 4,444,725 420,879 3,172,414
---------- ---------- ----------
Total liabilities and owners' equity.......................... $5,334,817 $4,451,636 $6,078,007
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
GREATER EXCLUDED
CHESAPEAKE VERO ASSETS
ORTHOPAEDIC ORTHOPAEDICS, AND PRO FORMA
ASSOCIATES, LLC P.A. LIABILITES ADJUSTMENT
--------------- ------------- ---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 448,196 $135,228 $(2,694,818) $ --
Accounts receivable, net.................................... 1,136,958 564,425 (437,634) 10,119,180
Inventories................................................. -- -- (7,000) 80,324
Due from related parties.................................... -- 40,692 (716,419) 605,538
Prepaid expenses............................................ 49,892 32,367 (243,413) 99,529
---------- -------- ----------- -----------
Total current assets.......................................... 1,635,046 772,712 (4,099,284) 10,904,571
Furniture, fixtures and equipment, net........................ 18,992 72,671 (1,014,195) 2,320,187
Intangible assets............................................. 22,584 -- -- 22,584
Other assets.................................................. -- 1,070 -- 26,714
---------- -------- ----------- -----------
Total assets.................................................. $1,676,622 $846,453 $(5,113,479) $13,274,056
---------- -------- ----------- -----------
---------- -------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings....................................... $ -- $ -- $ (400,000) $ --
Current portion of long-term notes payable.................. -- 82,000 (627,708) --
Current portion of capital lease obligations................ -- 32,808 -- 190,273
Accounts payable............................................ 30,287 13,245 (339,629) 376,483
Accrued compensation and
benefits.................................................. 1,431,935 40,676 (3,175,565) 257,622
Accrued profit sharing
contribution.............................................. -- -- (1,012,822) --
Income taxes payable........................................ -- 107,994 (107,994) --
Deferred tax liability...................................... -- -- -- 251,635
Due to related parties...................................... 122,932 -- (657,838) --
Other accrued expenses...................................... -- -- (7,304) --
---------- -------- ----------- -----------
Total current liabilities..................................... 1,585,154 276,723 (6,328,860) 1,076,013
Deferred tax liability........................................ -- 124,776 -- 124,776
Notes payable, less current portion........................... -- -- (1,325,204) --
Capital lease obligations, less current portion............... -- 9,747 -- 967,989
---------- -------- ----------- -----------
Total liabilities............................................. 1,585,154 411,246 (7,654,064) 2,168,778
Total owners' equity.......................................... 91,468 435,207 2,540,585 11,105,278
---------- -------- ----------- -----------
Total liabilities and owners' equity.......................... $1,676,622 $846,453 $(5,113,479) $13,274,056
---------- -------- ----------- -----------
---------- -------- ----------- -----------
</TABLE>
F-7
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
3. Pursuant to equity transactions executed as part of, or contemporaneously
with, the Initial Affiliation Transactions, 11,044,955 shares of the
Company's $0.001 par value Common Stock became outstanding immediately
thereafter, inclusive of the conversion of all of the outstanding convertible
debentures into Common Stock. Accordingly, the pro forma financial statements
reflect (i) a reclassification of $9,780 from additional paid-in capital to
Common Stock, (ii) a $1,870,000 reclassification from convertible debentures
to additional paid-in capital, (iii) a $39,254 reclassification from accrued
expenses to additional paid-in capital, and (iv) increases of $600,000 in
cash and additional paid-in capital for the issuance of Common Stock to one
of the Predecessor Practices subsequent to September 30, 1996 and the
issuance/conversion of an incremental $300,000 in convertible debentures to
another one of the Predecessor Practices, also in the period subsequent to
September 30, 1996.
4. Reflects the resulting deferred income taxes in accordance with Statement of
Accounting Standards No. 109, Accounting for Income Taxes, for the Internal
Revenue Code Section 481 net federal and state deferred tax liabilities to be
assumed by the Company based on the underlying cash basis net assets of the
Predecessor Practices. This pro forma adjustment results in (i) a $1,385,459
increase in the short-term deferred tax liability, (ii) a $2,135,187 increase
in the long-term deferred tax liability, and (iii) a corresponding $3,520,646
reduction in additional paid-in capital. A full valuation allowance remains
on the net deferred tax asset of the Company because, notwithstanding the pro
forma statements of income included herein, there can be no objective
measurement of the Company's ability to generate sufficient future taxable
income of the appropriate nature and character to provide reasonable
assurance that the net deferred tax asset will be recoverable in a timely
fashion. Subsequent to November 12, 1996, to the extent that the operations
of the Predecessor Practices have been assumed by the Company, those
operations will be reflected in the income tax return of the Company. Taxable
income or loss of the separate Initial Affiliated Practices will be included
in their individual income tax returns.
5. Reflects the incremental costs necessary to effectuate the acquisition of the
Predecessor Practices, resulting in an increase of $248,000 in accrued
expenses and a corresponding reduction in additional paid-in capital.
6. For purposes of deriving the pro forma financial statements of the Company
based on the terms and conditions of the underlying long-term service
agreements with the Initial Affiliated Practices, the following adjustments
have been made to the Predecessor Practices' combined historical financial
information for the year ended December 31, 1995 for pro forma purposes.
F-8
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
RECONSTRUCTIVE PRINCETON GREATER
ORTHOPAEDIC ORTHOPAEDIC TALLAHASSEE CHESAPEAKE
ASSOCIATES, ASSOCIATES, ORTHOPEDIC ORTHOPAEDIC
INC. P.A. CLINIC, INC. ASSOCIATES, LLC
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Net practice revenue......................................... $17,549,907 $13,298,164 $10,420,265 $8,207,951
Operating expenses:
Physician compensation..................................... 9,288,516 4,968,251 3,473,978 6,432,601
Salaries and benefits...................................... 3,874,636 4,057,086 4,028,185 1,113,570
Supplies, general and administrative expenses.............. 2,792,588 4,235,715 2,471,876 1,003,915
Depreciation and amortization.............................. 133,450 258,497 224,054 12,338
----------- ----------- ----------- ----------
Total operating expenses..................................... 16,089,190 13,519,549 10,198,093 8,562,424
----------- ----------- ----------- ----------
Income (loss) from operations................................ 1,460,717 (221,385) 222,172 (354,473)
Interest expense, net........................................ (555) (113,257) (118,363) --
Other income (expense) net................................... 5,294
----------- ----------- ----------- ----------
Income (loss) from continuing operations before income
taxes...................................................... 1,460,162 (334,642) 103,809 (349,179)
Income tax benefit (expense)................................. -- 118,242 -- --
----------- ----------- ----------- ----------
Net income (loss) from continuing operations................. $ 1,460,162 $ (216,400) $ 103,809 $ (349,179)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
<CAPTION>
VERO
ORTHOPAEDICS, ADJUSTMENT PRO FORMA
P.A. ADJUSTMENTS LEGEND ADJUSTMENT
------------- ------------ ---------- ------------
Net practice revenue......................................... $4,208,470 $(53,684,757) (a) $ --
Operating expenses:
Physician compensation..................................... 2,865,311 (27,028,657) (b) --
Salaries and benefits...................................... 1,023,481 (2,730,937) (c) 11,366,021
Supplies, general and administrative expenses.............. 786,036 (1,321,148) (d) 9,968,982
Depreciation and amortization.............................. 61,361 (135,266) (e) 554,434
---------- ------------ ------------
Total operating expenses..................................... 4,736,189 (31,216,008) 21,889,437
---------- ------------ ------------
Income (loss) from operations................................ (527,719) (22,468,749) (21,889,437)
Interest expense, net........................................ (20,391) 166,506 (f) (86,060)
Other income (expense) net................................... 6,460 -- 11,754
---------- ------------ ------------
Income (loss) from continuing operations before income
taxes...................................................... (541,650) (22,302,243) (21,963,743)
Income tax benefit (expense)................................. (64,300) (53,942) (g) --
---------- ------------ ------------
Net income (loss) from continuing operations................. $ 605,950) $(22,356,185) $(21,963,743)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
<TABLE>
<S> <C>
(a) Reflects the following adjustments to net practice revenue:
(i) Elimination of net practice revenue from recurring business
segments....................................................... ($53,018,325)
(ii) Reduction for nonrecurring business segments...................... (666,432)
-----------
(53,684,757)
(b) Reflects the following adjustment to physician compensation:
(i) Elimination of all physician compensation......................... ($27,028,657)
(c) Reflects the following adjustments to salaries and benefits:
(i) Elimination of physician owner fringe benefit expenses............ ($2,697,549)
(ii) Incremental employee benefit plan costs........................... 61,413
(iii) Reduction for nonrecurring business segments...................... (94,801)
-----------
(2,730,937)
(d) Reflects the following adjustments to supplies, general and
administrative expenses:
(i) Reduction for nonrecurring business segments...................... $(208,150)
(ii) Elimination of nonclinical expenses assumed by shareholder
physicians..................................................... (1,112,998)
-----------
(1,321,148)
(e) Reflects the following adjustment to depreciation and amortization:
(i) Reduction for nonrecurring business segments...................... $(135,266)
(f) Reflects the following adjustments to interest expense related to:
(i) Elimination of debt assumed by shareholder physicians............. $ 81,076
(ii) Elimination of debt related to nonrecurring business segments..... 85,430
-----------
166,506
(g) Reflects the following adjustment to the provision for income taxes:
(i) Elimination of income tax benefit retained by Predecessor
Practices...................................................... $ (53,942)
</TABLE>
F-9
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
7. For purposes of deriving the pro forma financial statements of the Company
based on the terms and conditions of the underlying long-term service
agreements with the Initial Affiliated Practices, the following adjustments
have been made to the Predecessor Practices' combined unaudited historical
financial information for the nine months ended September 30, 1996 for pro
forma purposes.
<TABLE>
<CAPTION>
RECONSTRUCTIVE PRINCETON GREATER
ORTHOPAEDIC ORTHOPAEDIC TALLAHASSEE CHESAPEAKE VERO
ASSOCIATES, ASSOCIATES, ORTHOPEDIC ORTHOPAEDIC ORTHOPAEDICS,
INC. P.A. CLINIC, INC. ASSOCIATES, LLC P.A.
------------- ----------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Net practice revenue................................... $14,255,838 $11,152,357 $10,053,710 $6,208,360 $2,953,351
Operating expenses:
Physician compensation............................... 8,051,782 4,084,772 3,052,624 4,580,750 1,186,879
Salaries and benefits................................ 2,205,990 3,350,844 3,453,082 948,270 828,882
Supplies, general and administrative expenses........ 3,512,248 3,464,665 2,133,338 965,778 571,716
Depreciation and amortization........................ 98,972 137,054 394,337 12,205 43,382
----------- ----------- ----------- ---------- ----------
Total operating expenses............................... 13,868,992 11,037,335 9,033,381 6,507,003 2,630,859
----------- ----------- ----------- ---------- ----------
Income (loss) from operations.......................... 386,846 115,022 1,020,329 (298,643) 322,492
Interest expense, net.................................. (12,409) (90,146) (116,904) -- (21,460)
Other income, net...................................... -- -- -- 26,575 5,322
----------- ----------- ----------- ---------- ----------
Income (loss) from operations before income taxes...... 374,437 24,876 903,425 (272,068) 306,354
Income tax expense..................................... -- (8,707) -- -- (132,025)
----------- ----------- ----------- ---------- ----------
Net income (loss)...................................... $ 374,437 $ 16,169 $ 903,425 $(272,068) $ 174,329
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
<CAPTION>
ADJUSTMENT PRO FORMA
ADJUSTMENTS LEGEND ADJUSTMENT
------------- ---------- ------------
Net practice revenue................................... $(44,623,616) (a) $ --
Operating expenses:
Physician compensation............................... (20,956,807) (b) --
Salaries and benefits................................ (2,230,921) (c) 8,556,147
Supplies, general and administrative expenses........ (1,789,649) (d) 8,858,096
Depreciation and amortization........................ (202,839) (e) 483,111
------------ ------------
Total operating expenses............................... (25,180,216) 17,897,354
------------ ------------
Income (loss) from operations.......................... (19,443,400) (17,897,354)
Interest expense, net.................................. 180,468 (f) (60,451)
Other income, net...................................... -- 31,897
------------ ------------
Income (loss) from operations before income taxes...... (19,262,932) (17,925,908)
Income tax expense..................................... 140,732 (g) --
------------ ------------
Net income (loss)...................................... $(19,122,200) $(17,925,908)
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
(a) Reflects the following adjustments to net practice revenue:
(i) Elimination of net practice revenue from recurring business
segments....................................................... ($42,605,438)
(ii) Reduction for nonrecurring business segments...................... (2,018,178)
------------
(44,623,616)
(b) Reflects the following adjustment to physician compensation:
(i) Elimination of all physician compensation......................... ($20,956,807)
(c) Reflects the following adjustment to salaries and benefits:
(i) Elimination of physician owner fringe benefit expenses............ $(2,082,904)
(ii) Incremental employee benefit plan costs........................... (41,360)
(iii) Reduction for nonrecurring business segments...................... (106,657)
------------
(2,230,921)
(d) Reflects the following adjustments to supplies, general and
administrative expenses:
(i) Reduction for nonrecurring business segments...................... $ (610,287)
(ii) Elimination of Predecessor Practices' costs to effectuate the
Initial Affiliation Transactions............................... (174,612)
(iii) Elimination of nonclinical expenses assumed by shareholder
physicians..................................................... (1,004,750)
------------
(1,789,649)
(e) Reflects the following adjustment to depreciation and amortization:
(i) Reduction for nonrecurring business segments...................... $ (202,839)
(f) Reflects the following adjustments to interest expense related to:
(i) Elimination of debt assumed by shareholder physicians............. $ 86,917
(ii) Elimination of debt related to nonrecurring business segments..... 93,551
------------
180,468
(g) Reflects the following adjustment to the provision for income taxes:
(i) Elimination of income tax expense retained by Predecessor
Practices...................................................... $ 140,732
</TABLE>
F-10
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC.
NOTES TO PRO FORMA
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPT. 30,
1995 1996
------------- ---------------
<S> <C> <C>
8. Reflects the following adjustments to revenue:
(i) Recognition of service fee revenue based on long-term management
service agreements................................................... $ 9,516,759 $ 7,234,430
(ii) Reimbursement of clinic operating expenses ......................... 21,976,964 17,898,507
----------- -----------
31,493,723 25,132,937
</TABLE>
Pursuant to the terms of the Management Service Agreements, the above fees
consist of the following: (i) service fees based on a percentage ranging from
20%-33% of the Adjusted Pre-Tax Income of the Initial Affiliated Practices
(defined as revenue of the Initial Affiliated Practices related to professional
services less amounts equal to certain clinic expenses of the Initial Affiliated
Practices ('Clinic Expenses,' as defined more fully in the Management Service
Agreements), not including physician owner compensation or most benefits to
physician owners) and (ii) amounts equal to Clinic Expenses. For the first three
years following affiliation, however, the portion of the service fees described
under clause (i) is specified to be the greater of the amount payable as
described under clause (i) above or a fixed dollar amount (the 'Base Service
Fee'), which was generally calculated by applying the respective Service Fee
Percentage of Adjusted Pre-Tax Income of the Predecessor Practices for the
twelve months prior to affiliation. The aggregate annual Base Service Fee for
all of the Initial Affiliated Practices is approximately $9.5 million. For the
nine months ended September 30, 1996, as reflected on a pro forma basis, two of
the Initial Affiliated Practices are at or above the Base Service Fee by
approximately $70,000 in the aggregate. The remaining three Initial Affiliated
Practices are below the Base Service Fee by approximately $326,000 in the
aggregate. In addition, with respect to its management of certain facilities and
ancillary services associated with certain of the Initial Affiliated Practices,
the Company receives fees ranging from 2%-8% of net revenue.
<TABLE>
<S> <C> <C>
9. Reflects the following adjustments to salaries and benefits:
(i) Corporate office and officer compensation............................ $ 2,492,063 $ 799,128
(ii) Corporate office and officer fringe benefit expenses................ 356,900 20,219
----------- -----------
2,848,963 819,347
10. Reflects the following adjustment to supplies, general and administrative
expenses:
(i) Annualized historical corporate supplies, general and administrative
expenses............................................................. $ 961,811 $ 240,453
11. Reflects the following adjustment to depreciation and amortization:
(i) Annualized historical corporate overhead charges..................... $ 159,047 $ 81,803
12. Reflects the following adjustment to costs to evaluate and acquire
practices:
(i) Addition (elimination) of costs to evaluate and acquire physician
practices............................................................ $ 94,903 $ (438,479)
13. Reflects the following adjustment to interest expense related to:
(i) Elimination of convertible debentures................................ $ -- $ 39,254
14. Reflects the following adjustment to the provision for income taxes:
(i) Provide for an expected combined federal and state effective income
tax rate of 38%...................................................... $(2,076,797) $(1,617,981)
</TABLE>
F-11
<PAGE>
15. The computation of pro forma income per share is based upon 12,491,897
weighted average common shares outstanding and common stock
equivalents, calculated by using the treasury stock method and an
assumed initial public offering price of $10.00 per share and includes
(i) 7,659,115 shares distributed to the shareholders of the Predecessor
Practices, (ii) 1,517,905 weighted average common shares outstanding
during the period ended September 30, 1996 and the year ended December
31, 1995, (iii) 100,000 shares issued to TOC subsequent to September
30, 1996, (iv) 2,020,841 shares converted from debt and accrued
interest into common stock by debenture holders, (v) 1,040,249 common
stock equivalents attributable to stock options outstanding at December
4, 1996, and (vi) 153,787 common stock equivalents arising from cash
paid to certain owners of the predecessor of ROA in lieu of common
shares that otherwise would have been issued as part of the Initial
Affiliated Transactions.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Specialty Care Network, Inc.
We have audited the accompanying balance sheet of Specialty Care Network, Inc.
(the 'Company') as of September 30, 1996, and the related statements of
operations, stockholders' deficiency, and cash flows for the period from
December 22, 1995 (date of incorporation) through September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Specialty Care Network, Inc. at
September 30, 1996, and the results of its operations and its cash flows for the
period from December 22, 1995 (date of incorporation) through September 30, 1996
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP_________________
Ernst & Young LLP
Denver, Colorado
November 12, 1996,
except for Note 9, as
to which the date is
January 17, 1997
F-13
<PAGE>
SPECIALTY CARE NETWORK, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
Cash.............................................................................................. $ 132,105
Prepaid expenses.................................................................................. 20,130
-----------
Total current assets.............................................................................. 152,235
Property and equipment, net of accumulated depreciation........................................... 251,560
Intangible assets, net of accumulated amortization of $4,127...................................... 25,457
Prepaid offering costs............................................................................ 250,142
Other assets...................................................................................... 51,733
-----------
Total assets...................................................................................... $ 731,127
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable.................................................................................. $ 92,332
Accrued payroll, incentive compensation and related expenses...................................... 496,939
Accrued expenses.................................................................................. 555,905
Convertible debentures............................................................................ 1,870,000
-----------
Total current liabilities......................................................................... 3,015,176
Commitments
Stockholders' deficiency:
Preferred stock, $.001 par value, 2,000,000 shares authorized,
no shares issued or outstanding........................................................... --
Common stock, $.001 par value, 50,000,000 nontransferable shares authorized, 1,265,000 shares
issued and outstanding..................................................................... 1,265
Accumulated deficit.......................................................................... (2,285,314)
-----------
Total stockholders' deficiency.................................................................... (2,284,049)
-----------
Total liabilities and stockholders' deficiency.................................................... $ 731,127
-----------
-----------
</TABLE>
See accompanying notes.
F-14
<PAGE>
SPECIALTY CARE NETWORK, INC.
STATEMENT OF OPERATIONS
PERIOD FROM DECEMBER 22, 1995
(DATE OF INCORPORATION) THROUGH SEPTEMBER 30, 1996
<TABLE>
<S> <C>
Interest income.................................................................................. $ 5,906
Costs and expenses:
Salaries, wages and incentive compensation..................................................... 1,069,919
Fringe benefits and payroll taxes.............................................................. 154,004
Costs to evaluate and acquire physician practices.............................................. 509,656
Depreciation and amortization.................................................................. 37,482
Other general and administrative expenses...................................................... 480,905
Interest expense on convertible debentures..................................................... 39,254
-----------
2,291,220
-----------
Net loss......................................................................................... $(2,285,314)
-----------
-----------
Net loss per common share........................................................................ $ (0.18)
-----------
-----------
Weighted average common shares outstanding and common stock equivalents.......................... 12,491,897
-----------
-----------
</TABLE>
See accompanying notes.
F-15
<PAGE>
SPECIALTY CARE NETWORK, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
PERIOD FROM DECEMBER 22, 1995
(DATE OF INCORPORATION) THROUGH SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
$0.001 PAR VALUE $0.001 PAR VALUE
---------------------- ------------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 22, 1995............... -- $ -- -- $ -- $ -- $ --
Shares issued pursuant to a private
placement................................ -- -- 1,690,000 1,690 -- 1,690
Purchase and retirement of common stock in
connection with a severance agreement.... -- -- (425,000) (425) -- (425)
Net loss................................... -- -- -- -- (2,285,314) (2,285,314)
--------- ----------- ----------- ----------- ------------ ------------
Balance at September 30, 1996.............. -- $ -- 1,265,000 $ 1,265 $ (2,285,314) $ (2,284,049)
--------- ----------- ----------- ----------- ------------ ------------
--------- ----------- ----------- ----------- ------------ ------------
</TABLE>
See accompanying notes.
F-16
<PAGE>
SPECIALTY CARE NETWORK, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM DECEMBER 22, 1995
(DATE OF INCORPORATION) THROUGH SEPTEMBER 30, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss.......................................................................................... $(2,285,314)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................................... 37,482
Changes in operating assets and liabilities:
Prepaid expenses and other assets............................................................ (71,863)
Accounts payable............................................................................. 92,332
Accrued payroll, incentive compensation and related expenses................................. 496,939
Accrued expenses............................................................................. 555,905
-----------
Net cash used in operating activities (1,174,519)
INVESTING ACTIVITIES
Purchases of property and equipment............................................................... (284,915)
Increases in intangible assets.................................................................... (29,584)
-----------
Net cash used in investing activities............................................................. (314,499)
FINANCING ACTIVITIES
Proceeds from convertible debentures (Note 4)..................................................... 1,870,000
Capital contributions, net........................................................................ 1,265
Prepaid offering costs............................................................................ (250,142)
-----------
Net cash provided by financing activities......................................................... 1,621,123
-----------
Net increase in cash.............................................................................. 132,105
Cash at beginning of period....................................................................... --
-----------
Cash at end of period............................................................................. $ 132,105
-----------
-----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid..................................................................................... $ --
-----------
-----------
Income taxes paid................................................................................. $ --
-----------
-----------
</TABLE>
See accompanying notes.
F-17
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. DESCRIPTION OF BUSINESS
Specialty Care Network, Inc. (the 'Company'), which was incorporated on
December 22, 1995, is a national physician practice management company focusing
exclusively on musculoskeletal disease-state management. Commencing on or about
November 12, 1996, the Company began providing comprehensive management services
under long-term management service agreements with five physician practices in
various states and managing an outpatient surgery center in Princeton, New
Jersey.
The accompanying financial statements reflect the Company's activity during
its start-up and organizational phase. See Note 8 for further discussion of the
Company's activities subsequent to September 30, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes. Although these estimates are based on management's knowledge of
current events and actions they may undertake in the future, actual results
could differ from those estimates.
Net Loss Per Common Share
Earnings (loss) per common share is based upon the weighted average of
common and common equivalent shares outstanding during the period. Primary and
fully diluted earnings per share are the same. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletins and staff policy, common and
common equivalent shares issued during the 12-month period prior to an initial
public offering at prices below the public offering price are presumed to have
been issued in contemplation of the public offering, even if antidilutive, and
have been included in the calculation as if these common and common equivalent
shares were outstanding for all periods presented (using the treasury stock
method and the estimated initial public offering price for the Company's common
stock).
The Company has filed a Registration Statement on Form S-1 covering the
proposed sale of 3,350,000 shares of common stock in an initial public offering
(the 'Offering'). Management intends to use a portion of the proceeds from the
Offering to repay borrowings under the Company's Revolving Loan and Security
Agreement. If the shares to be issued to repay amounts outstanding under the
Company's Revolving Loan and Security Agreement were outstanding for the period
December 22, 1995 (date of incorporation) through September 30, 1996, the loss
per common share would not have changed from the amount reported.
F-18
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
The carrying amounts of financial instruments as reported in the
accompanying balance sheet approximate their fair value.
Prepaid Offering Costs
Prepaid offering costs of $250,142, which primarily relate to legal and
accounting services, will be used to reduce the expected proceeds from the
Company's initial public offering of its common stock. If the initial public
offering is unsuccessful, the costs will be charged to the statement of
operations in that future period.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the three to five year estimated useful lives of
the underlying assets. Costs of repairs and maintenance are expensed as
incurred.
Intangible Assets
Intangible assets, which are stated at cost, consist of organization costs
($29,854) that are being amortized over a three-year period.
Income Taxes
The Company provides for income taxes pursuant to the liability method as
prescribed in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. The liability method requires recognition of deferred income
taxes based on temporary differences between the financial reporting and income
tax bases of assets and liabilities, using currently enacted income tax rates
and regulations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards, expiring in 2011.......... $ 693,196
Deferred compensation....................................... 154,435
Vacation pay................................................ 8,669
---------
856,300
---------
Deferred tax liability:
Property and equipment...................................... (4,952)
---------
Valuation allowance........................................... (851,348)
---------
Net deferred tax asset........................................ $ --
---------
---------
A full valuation allowance has been recognized by the Company because
there can be no objective measurement of the Company's ability to generate
sufficient future taxable income of the appropriate nature and character to
provide reasonable assurance that the net deferred tax asset will be recoverable
in a timely fashion.
F-19
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements under
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ('APB No. 25'). In 1995, Financial Accounting
Standards Board Statement No. 123, Accounting for Stock-Based Compensation
('FASB No. 123'), was issued, whereby companies may elect to account for stock-
based compensation using a fair value based method or continue measuring
compensation expense using the intrinsic value method prescribed in APB No. 25.
FASB No. 123 requires that companies electing to continue to use the intrinsic
value method make pro forma disclosure of net income and net income per share as
if the fair value based method of accounting had been applied.
The fair value for these options was estimated at the date of grant using
an option pricing model with the following weighted-average assumptions for
1996: risk-free rate of 6%; no dividend yield; and an expected three year life
of the options. The estimated fair value for these options was calculated using
the minimum value method and may not be indicative of the future impact since
this model does not take into consideration volatility.
The pro forma effects of adopting FASB No. 123's fair value based method
for the period ended September 30, 1996 were not materially different than from
the corresponding APB No. 25 intrinsic value methodology because the weighted
average grant-date fair value of options granted during the period was
negligible. However, the effects of applying FASB No. 123 during 1996 are not
likely to be representative of the effects on pro forma net income for future
years because the vesting of options will cause additional incremental expense
to be recognized in future periods.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Computer equipment................................................. $160,327
Furniture and fixtures............................................. 116,197
Other.............................................................. 8,391
--------
284,915
Accumulated depreciation........................................... 33,355
--------
Net property and equipment......................................... $251,560
--------
--------
4. CONVERTIBLE DEBENTURES
The Company raised $1.87 million of short-term unsecured convertible debt
pursuant to two private placements during the period ended September 30, 1996.
The proceeds thereof have been utilized to fund the Company's start-up and
organizational phase until such time as certain physician practices were
acquired on or about November 12, 1996 (see Note 8).
Contemporaneous with the acquisitions of the founding physician practices,
the holders of the debentures converted the unpaid principal amount plus any
accrued interest thereon (calculated at 5.0%), into the Company's common stock
at the conversion ratio of $1.00 of debenture principal and
F-20
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. CONVERTIBLE DEBENTURES -- (CONTINUED)
accrued interest for one share of common stock. The following table summarizes
the September 30, 1996 financial position of the debenture holders:
<TABLE>
<CAPTION>
ACCRUED
PRINCIPAL INTEREST TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Stockholders of the Company............................................. $ 640,000 $14,406 $ 654,406
Founding physician practices and related stockholders................... 1,230,000 24,848 1,254,848
---------- ------- ----------
$1,870,000 $39,254 $1,909,254
---------- ------- ----------
---------- ------- ----------
</TABLE>
Subsequent to September 30, 1996, the Company issued an additional $300,000
of convertible debentures to one of the founding practices on substantially the
same terms as described above, except that the conversion ratio was $3.00 of
debenture principal and accrued interest for one share of common stock.
Concurrent with its acquisition by the Company, the founding practice executed
its right to convert the debentures and accrued interest thereon into the
Company's common stock.
5. COMMON STOCK
At September 30, 1996, 1,180,000 and 85,000 shares of outstanding
nontransferable common stock are held by current employees and former employees,
respectively. Pursuant to certain common stock subscription agreements and a
related Stockholders Agreement, executed by the Company and its employees, the
1,180,000 shares vest, based upon continued employment with the Company, as
follows:
December 31, 1996............................................. 393,333
December 31, 1997............................................. 393,333
December 31, 1998............................................. 393,334
---------
1,180,000
---------
---------
Certain events, including an initial public offering of the Company's
common stock, provide for the immediate and full vesting of the aforementioned
employee owned shares. However, prior to vesting, the holders retain voting
rights with respect to such shares. Of the 85,000 shares attributable to former
employees, 75,000 will fully vest solely upon the consummation of an initial
public offering and the remaining 10,000 shares are fully vested as of September
30, 1996.
Subsequent to September 30, 1996, the Company issued an additional 100,000
shares of nontransferable common stock to one of the founding practices (see
Note 8) at $3.00 per share.
6. STOCK OPTION PLANS
On March 22, 1996, the Company adopted the 1996 Incentive and Non-Qualified
Stock Option Plan (the 'Plan') pursuant to which nontransferable options to
purchase up to 5,000,000 shares of common stock of the Company may be granted to
eligible directors, officers, advisors, consultants and key employees in order
to provide incentive for such personnel to serve the Company and have a greater
interest in its overall success. The Plan will terminate no later than December
31, 2005, after which no additional stock options will be granted thereunder.
Pursuant to the Plan, the exercise price for incentive stock options shall not
be less than the fair market value of each share at the date of the grant. The
option period shall not exceed ten years. Options, which are generally
contingent on continued employment with the Company, may be exercised only in
accordance with a vesting schedule established by the Company's Board of
Directors. As of September 30, 1996, 4,446,500 shares of the Company's common
stock were available for future grants under the Plan. Only 3,500 of
F-21
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLANS -- (CONTINUED)
the options which are outstanding under the Plan at September 30, 1996 were
exercisable at such date, and no options were forfeited or expired during the
period then ended.
<TABLE>
<CAPTION>
SHARES
OPTION UNDER
PRICE OPTION
------ ------
<S> <C> <C>
Outstanding at September 30 1996, which generally vest ratably on March
22, 1997, 1998 and 1999 and expire on March 22, 2006................. $1.00 553,500
</TABLE>
On October 15, 1996, the Company's Board of Directors approved the 1996
Equity Compensation Plan (the 'Equity Plan'), which provides for the granting of
options to purchase up to two million shares of the Company's common stock. Both
incentive stock options and nonqualified stock options may be issued under the
provisions of the Equity Plan. Employees of the Company and any future
subsidiaries, members of the Board of Directors and certain key advisors are
eligible to participate in this plan, which shall terminate no later than
October 14, 2006. The granting and vesting of the options under the Equity Plan
are provided by the Company's Board of Directors. Subsequent to October 15,
1996, the Company's Board of Directors approved grants under the Equity Plan
exercisable for approximately 1,355,000 of common shares at an exercise price of
$6.00 per share (1,195,000) and $10.00 per share (160,000).
7. COMMITMENTS
The Company is obligated under operating lease agreements for an office and
certain equipment. Future minimum payments under noncancelable operating leases
with lease terms in excess of one year are summarized as follows for the years
ending September 30:
1997........................................................... $ 84,072
1998........................................................... 85,416
1999........................................................... 86,040
2000........................................................... 86,988
2001........................................................... 43,830
--------
$386,346
--------
--------
Rent expense for the period ended September 30, 1996 under all operating
leases was approximately $62,100.
The Company has entered into certain employment agreements that provide key
executives and employees with minimum base pay, annual incentive awards and
other fringe benefits. The Company expenses all costs related thereto in the
period that the service is rendered by the employee. In the event of death,
disability, termination with or without cause, voluntary employee termination,
change in ownership of the Company, etc., the Company may be partially or wholly
relieved of its financial obligations to such individuals. However, under
certain circumstances, a change in control of the Company may provide
significant and immediate enhanced compensation to the employees possessing
employment contracts. At September 30, 1996, the Company was contractually
obligated for the following base pay compensation amounts (summarized by fiscal
year ending September 30):
F-22
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS -- (CONTINUED)
1997.......................................................... $1,273,167
1998.......................................................... 1,458,604
1999.......................................................... 1,551,000
2000.......................................................... 1,551,000
2001.......................................................... 840,417
----------
$6,674,188
----------
----------
As required by one of its vendors, the Company established a $50,000
irrevocable letter of credit in favor of such vendor, which expires on February
3, 1997. The letter of credit will generally continue to exist beyond the
expiration date as long as the Company continues to maintain its relationship
with such vendor. The letter of credit is secured by a $50,000 savings account,
which is included in other long-term assets in the accompanying financial
statements.
8. PHYSICIAN PRACTICE ACQUISITIONS
As noted in the accompanying financial statements, the Company expended
approximately $510,000 during the period ended September 30, 1996 in order to
evaluate the acquisition of substantially all the assets, liabilities and
business of certain physician practices. Effective November 12, 1996, the
Company acquired substantially all of the assets, such as accounts receivable
and fixed assets, and certain liabilities of the five Predecessor Practices. The
physician owners, functioning as promoters, effectively contributed these assets
and liabilities in exchange for an aggregate of 7,659,115 shares of common stock
of the Company and $1,537,872 in cash. Upon closing, the Company, under signed
agreements, assumed all risks of ownership related to these assets. The
following table summarizes certain financial information (unaudited) related to
this transaction and the five individual founding physician practices:
<TABLE>
<CAPTION>
COMMON
STOCK
CONSIDERATION
TOTAL ASSETS PAID CASH
AT BY THE CONSIDERATION
SEPTEMBER 30 COMPANY PAID BY THE
1996 ------------- COMPANY
------------ (SHARES) -------------
<S> <C> <C> <C>
Reconstructive Orthopaedic Associates, Inc........................... $5,334,817 3,169,379 $1,537,872
Princeton Orthopaedic Associates, P.A................................ 4,451,636 1,196,793 --
Tallahassee Orthopedic Clinic, P.A................................... 6,078,007 1,072,414 --
Greater Chesapeake Orthopaedic Associates, LLC....................... 1,676,622 1,568,922 --
Vero Orthopaedics, P.A............................................... 846,453 651,607(1) --
</TABLE>
(1) Excludes stock options to purchase an additional 50,000 shares of the
Company's common stock at $6.00 per share.
On November 1, 1996, the Company entered into a $20 million Revolving Loan
and Security Agreement with a bank, which provided certain amounts necessary to
effectuate the aforementioned acquisition transactions. At November 12, 1996,
the outstanding amount thereunder was approximately $1.7 million, and such
amount is secured by a first collateral interest on substantially all of the
assets owned by the Company or thereafter acquired. Additionally,
contemporaneous with the acquisitions of the founding physician practices, the
Company extended lines of credit to the former stockholders of certain founding
practices aggregating approximately $4.3 million. Such lines of credit will
generally remain in existence through November 12, 1998. Advances thereunder,
which aggregated $800,000 subsequent to September 30, 1996, bear interest at the
prime lending rate plus 1.25% and will be collateralized by the Company's common
stock owned by the individual physician.
F-23
<PAGE>
SPECIALTY CARE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. PHYSICIAN PRACTICE ACQUISITIONS -- (CONTINUED)
Concurrent with the acquisitions, the affiliated physician groups
simultaneously entered into long-term service agreements with the Company.
Pursuant to the terms of the service agreements, the Company, among other
things, provides facilities and management, administrative and development
services, and employs most non-medical personnel, in return for service fees.
Such fees are payable monthly and consist of the following: (i) service fees
based on a percentage ranging from 20%-33% of the adjusted pre-tax income of the
Initial Affiliated Practices (defined as revenue of the Initial Affiliated
Practices related to professional services less amounts equal to certain clinic
expenses but not including physician owner compensation or most benefits to
physician owners) plus (ii) reimbursement of certain clinic expenses. For the
first three years following affiliation, however, the portion of the service
fees described under clause (i) is specified to be the greater of the amount
payable as described under clause (i) above or a fixed dollar amount (the 'Base
Service Fee'), which was generally calculated by applying the respective service
fee percentage of adjusted pre-tax income of the Initial Affiliated Practices
for the twelve months prior to affiliation. The aggregate annual Base Service
Fee for all of the Initial Affiliated Practices is approximately $9.5 million.
In addition, with respect to its management of certain facilities and ancillary
services associated with certain of the Initial Affiliated Practices, the
Company receives fees ranging from 2%-8% of net revenue.
The service agreements are for initial terms of forty years, with automatic
extensions (unless specified notice is given) of five years. The service
agreements may be terminated by either party if the other party (i) files a
petition in bankruptcy or other similar events occur, or (ii) defaults on the
performance of a material duty or obligation, which default continues for a
specified term after notice.
The Initial Affiliated Practices are responsible for obtaining professional
liability insurance for the employees of the Initial Affiliated Practice and the
Company is responsible for obtaining general liability and property insurance
for the Initial Affiliated Practices.
Upon termination of a service agreement by the Company, the physician
practice has the option to purchase and assume, and the Company has the option
to require the physician practice to purchase and assume, the related assets and
liabilities at the fair market value thereof, except in certain circumstances
where the physician practice or the Company, as applicable, is in breach of the
underlying agreement. Following the first five years of the term, the Company
will continue to have these rights under certain predefined circumstances.
9. SUBSEQUENT EVENTS
On January 8, 1997, the Company was sued by Michael A. Feiertag, M.D. (a
former physician at Vero Orthopaedics, P.A.) for alleged breach of his
employment agreement. Dr. Feiertag is seeking damages in excess of $500,000.
Discovery in the case has not yet commenced and, accordingly, the Company is not
yet able to assess its potential exposure, if any, in this case. However, the
Company believes that the ultimate resolution of the case will not have a
material adverse effect on the Company.
In December 1996, the Company entered into separate definitive agreements
to affiliate with three single physician practices in Florida, Georgia and
Maryland. The Company has agreed to acquire, through merger, substantially all
of the assets and certain liabilities of the practices for an aggregate
consideration of 409,265 common shares of the Company. These business
combinations will be afforded the purchase method of accounting treatment.
Consummation of the transactions is subject to certain conditions, including the
Company's completion of, and satisfaction with, its review of the practices.
On January 10, 1997, the Board of Directors voted to terminate the 1996
Incentive and Non-Qualified Stock Option Plan.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Reconstructive Orthopaedic Associates, Inc.
We have audited the accompanying balance sheets of Reconstructive Orthopaedic
Associates, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, l995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reconstructive Orthopaedic
Associates, Inc. as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP_________________
Ernst & Young LLP
Denver, Colorado
July 12, 1996
F-25
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
--------------------- ------------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 234,883 $ 246,203 $ 831,472
Accounts receivable, net.......................................... 2,623,768 4,288,456 3,905,093
Inventories....................................................... 25,200 19,100 19,100
Due from related parties.......................................... 57,716 -- --
Prepaid expenses.................................................. 247,152 122,793 --
---------- ---------- ----------
Total current assets................................................ 3,188,719 4,676,552 4,755,665
Furniture, fixtures and equipment, net.............................. 510,077 617,053 563,048
Other assets........................................................ 2,277 18,972 16,104
---------- ---------- ----------
Total assets........................................................ $3,701,073 $5,312,577 $5,334,817
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................. $ 550,000 $ 570,000 $ --
Current portion of long-term debt................................. -- -- 66,000
Accounts payable.................................................. 151,316 271,333 119,338
Accrued compensation and benefits................................. 117,995 81,924 160,949
Accrued profit sharing contribution............................... 160,398 245,819 285,750
Due to related parties............................................ -- -- 168,356
Other accrued expenses............................................ 888 2,863 --
---------- ---------- ----------
Total current liabilities........................................... 980,597 1,171,939 800,393
Long-term debt, less current portion................................ -- -- 89,699
---------- ---------- ----------
Total liabilities................................................... 980,597 1,171,939 890,092
Commitments
Stockholders' equity:
Common stock, $1 par value:
Authorized and outstanding shares -- 1,000..................... 1,000 1,000 1,000
Retained earnings.............................................. 2,744,489 4,164,651 4,539,088
Treasury stock................................................. (25,013) (25,013) (25,013)
Less note receivable from stockholder.......................... -- -- (70,350)
---------- ---------- ----------
Total stockholders' equity.......................................... 2,720,476 4,140,638 4,444,725
---------- ---------- ----------
Total liabilities and stockholders' equity.......................... $3,701,073 $5,312,577 $5,334,817
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-26
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue................................ $11,902,216 $13,325,350 $17,549,907 $12,431,874 $14,255,838
Operating expenses:
Physician compensation................... 6,741,664 7,711,380 9,288,516 7,546,155 8,051,782
Salaries and benefits.................... 2,623,412 3,288,766 3,874,636 1,916,237 2,205,990
Supplies, general and administrative
expenses............................... 2,022,581 2,066,795 2,792,588 2,108,595 3,512,248
Depreciation............................. 126,889 124,304 133,450 84,869 98,972
----------- ----------- ----------- ----------- -----------
Total operating expenses................... 11,514,546 13,191,245 16,089,190 11,655,856 13,868,992
----------- ----------- ----------- ----------- -----------
Income from operations..................... 387,670 134,105 1,460,717 776,018 386,846
Interest expense........................... (10,225) (5,302) (555) (1,936) (12,409)
----------- ----------- ----------- ----------- -----------
Net income................................. $ 377,445 $ 128,803 $ 1,460,162 $ 774,082 $ 374,437
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-27
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
NUMBER RECEIVABLE
OF COMMON RETAINED TREASURY FROM
SHARES STOCK EARNINGS STOCK STOCKHOLDER TOTAL
-------- -------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992................. 1,000 $1,000 $2,318,241 $ (25,013) $ -- $2,294,228
Net income............................... -- -- 377,445 -- -- 377,445
------ ------ ---------- --------- -------- ----------
Balance, December 31, 1993................. 1,000 1,000 2,695,686 (25,013) -- 2,671,673
Net income............................... -- -- 128,803 -- -- 128,803
Dividends paid........................... -- -- (80,000) -- -- (80,000)
------ ------ ---------- --------- -------- ----------
Balance, December 31, 1994................. 1,000 1,000 2,744,489 (25,013) -- 2,720,476
Net income............................... -- -- 1,460,162 -- -- 1,460,162
Dividends paid........................... -- -- (40,000) -- -- (40,000)
------ ------ ---------- --------- -------- ----------
Balance, December 31, 1995................. 1,000 1,000 4,164,651 (25,013) -- 4,140,638
Net income (unaudited)................... -- -- 374,437 -- -- 374,437
Purchase of treasury stock (unaudited)... (660) -- -- (141,700) -- (141,700)
Sale of treasury stock (unaudited)....... 660 -- -- 141,700 (70,350) 71,350
------ ------ ---------- --------- -------- ----------
Balance, September 30, 1996 (unaudited).... 1,000 $1,000 $4,539,088 $ (25,013) $(70,350) $4,444,725
------ ------ ---------- --------- ---------- ----------
------ ------ ---------- --------- ---------- ----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 377,445 $ 128,803 $ 1,460,162 $ 774,082 $ 374,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 126,889 124,304 133,450 84,869 98,972
Changes in assets and liabilities:
Accounts receivable.......................... (161,437) (167,932) (1,664,688) (900,289) 383,363
Inventories.................................. -- -- 6,100 -- --
Due from related parties..................... (39,629) 92,356 57,716 (580,214) --
Prepaid expenses............................. (112,300) (71,379) 124,359 176,117 122,793
Other assets................................. 6,927 (409) (16,695) (142,588) 2,868
Accounts payable............................. 9,900 14,321 120,017 90,228 (151,995)
Accrued compensation and benefits............ 6,684 32,695 (36,071) 42,692 79,025
Other accrued expenses....................... 11,697 (14,307) 1,975 34,766 (2,863)
Due to related parties....................... -- -- -- 58,885 26,656
Accrued profit sharing contribution.......... 30,225 97,423 85,421 19,602 39,931
Accrued bonuses.............................. -- -- -- 2,581,783 --
--------- --------- ----------- ---------- ---------
Net cash provided by operating activities.......... 256,401 235,875 271,746 2,239,933 973,187
INVESTING ACTIVITIES
Sale of investments................................ 75,000 69,631 -- -- --
Purchases of furniture, fixtures and equipment..... (216,383) (39,061) (240,426) (240,862) (44,967)
--------- --------- ----------- ---------- ---------
Net cash provided by (used in) investing
activities....................................... (141,383) 30,570 (240,426) (240,862) (44,967)
FINANCING ACTIVITIES
Proceeds from short-term borrowings................ -- -- 570,000 -- --
Repayment of short-term borrowings................. -- -- (550,000) (550,000) (570,000)
Proceeds from long-term debt....................... -- -- -- -- 200,000
Principal payments on long-term debt............... (47,000) (150,000) -- -- (44,301)
Proceeds from sale of treasury stock............... -- -- -- -- 71,350
Dividends paid..................................... -- (80,000) (40,000) -- --
--------- --------- ----------- ---------- ---------
Net cash used in financing activities.............. (47,000) (230,000) (20,000) (550,000) (342,951)
--------- --------- ----------- ---------- ---------
Net increase in cash and cash equivalents.......... 68,018 36,445 11,320 1,449,071 585,269
Cash and cash equivalents at beginning of year..... 130,420 198,438 234,883 234,883 246,203
--------- --------- ----------- ---------- ---------
Cash and cash equivalents at end of year........... $ 198,438 $ 234,883 $ 246,203 $1,683,954 $ 831,472
--------- --------- ----------- ---------- ---------
--------- --------- ----------- ---------- ---------
Supplemental noncash operating and financing
activities:
Acquisition of treasury stock for payable to
related parties.............................. $ -- $ -- $ -- $ -- $ 141,700
Sale of treasury stock for note receivable from
stockholder.................................. $ -- $ -- $ -- $ -- $ 70,350
</TABLE>
See accompanying notes.
F-29
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND 1996 AND SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Reconstructive Orthopaedic Associates, Inc. (the Company) is an orthopaedic
physician practice which services the surrounding communities of Philadelphia,
Pennsylvania. The Company is organized as a corporation under the laws of the
state of Pennsylvania.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity and contractual adjustments. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation is
determined using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives used are as follows:
Computer equipment and automobiles............................... 5 years
Furniture, fixtures and equipment................................ 7 years
Leasehold improvements........................................... 15 years
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through an
occurrence-based commercial insurance policy.
Income Taxes
The Company is a Subchapter S corporation under the Internal Revenue Code,
and, accordingly, is not taxed as a separate entity. The Company's taxable
income or loss is allocated to each stockholder and recognized as taxable income
on their individual tax returns.
F-30
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
---------- -----------
<S> <C> <C>
Gross patient accounts receivable........................... $6,433,550 $10,952,124
Less allowance for contractual adjustments and
uncollectibles............................................ 3,809,782 6,663,668
---------- -----------
$2,623,768 $ 4,288,456
---------- -----------
---------- -----------
</TABLE>
Net revenue consisted of the following:
<TABLE>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
Gross patient revenue........................................... $ 23,996,688 $ 29,666,524 $ 39,767,311
Less contractual adjustments and uncollectibles................. 12,094,472 16,341,174 22,217,404
-------------- -------------- --------------
$ 11,902,216 $ 13,325,350 $ 17,549,907
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Concentration of credit risk related to accounts receivable is limited by
the diversity and number of providers, patients and payors.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures........................................ $ 410,185 $ 475,394
Equipment..................................................... 289,715 463,757
Automobiles................................................... 171,432 171,432
Leasehold improvements........................................ 441,294 442,519
---------- ----------
1,312,626 1,553,102
Less accumulated depreciation................................. 802,549 936,049
---------- ----------
Furniture, fixtures and equipment, net........................ $ 510,077 $ 617,053
---------- ----------
---------- ----------
</TABLE>
F-31
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LINE OF CREDIT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
-------- --------
<S> <C> <C>
Line of credit with a bank, due on demand, plus interest at
8.50%........................................................... $550,000 $570,000
-------- --------
-------- --------
</TABLE>
The Company has a $700,000 line of credit with Mellon Bank, of which
$150,000 and $130,000 was available at December 31, 1994 and 1995, respectively.
Borrowings under the line of credit bear an interest rate equal to 8.50%.
Accounts receivable collateralize the line of credit with the bank.
6. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that covers substantially all of its
employees. Eligible employees may contribute up to 15% of their compensation.
The Company contributes a discretionary amount which is allocated proportionally
based upon the salaries of participating employees. The profit sharing plan
expense was $178,225, $263,898 and $247,894 for the years ended December 31,
1993, 1994 and 1995, respectively.
7. RELATED PARTY TRANSACTIONS
The Company advanced money to certain stockholders in exchange for notes
receivable. As of December 31, 1994, the outstanding balance was $57,716.
8. OPERATING LEASES
The Company leases its office facilities on an annual basis. Rent expense
for the years ended December 31, 1993, 1994 and 1995 totaled $121,259, $126,090
and $121,139, respectively.
9. SUBSEQUENT EVENT
Subsequent to year end, the Company reorganized by repurchasing a portion
of the outstanding common stock from the two existing stockholders and selling
additional common stock to several additional physicians. This transaction had
no effect on the total number of shares outstanding.
Effective November 12, 1996, the Company entered into a tax-free merger
(the Merger) with Specialty Care Network, Inc. (SCN) in a reorganization,
whereby the stockholders of the Company agreed to exchange their outstanding
common stock for 3,169,379 shares of common stock of SCN and $1,537,872 in cash.
In connection with the Merger, SCN will provide administrative services and
manage the non-medical operations of the Company and enter into a long-term
service agreement with the physician stockholders of the Company, pursuant to
which the physicians will continue to provide medical services through a new
entity. In addition, certain of the Company's physician stockholders have
purchased $550,000 of convertible debentures of SCN that are convertible into
common stock of SCN at $1 a share.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet as of September 30, 1996 and the statements of income,
stockholders' equity and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
F-32
<PAGE>
RECONSTRUCTIVE ORTHOPAEDIC ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. UNAUDITED INTERIM FINANCIAL INFORMATION -- (CONTINUED)
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
11. PRO FORMA TAX INFORMATION (UNAUDITED)
As discussed elsewhere in these footnotes, the Company operates under
Subchapter S of the Internal Revenue Code and is not subject to corporate
federal or state income taxes. In connection with the merger with Specialty Care
Network, Inc. (See Note 9), the Subchapter S election was terminated. As a
result, the Company will be subject to federal and state corporate income taxes
subsequent to the termination of the Subchapter S status. The Company had net
operating income for income tax purposes of $413,474, $168,556 and $1,510,336
for the years ended December 31, 1993, 1994 and 1995, respectively. The
corresponding net operating income for income tax purposes for the nine months
ended September 30, 1995 and 1996 were $797,297 and $378,552, respectively. Had
the Company filed federal and state income tax returns as a regular Subchapter C
corporation, the income tax expense under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, would have
been as follows:
Year ended December 31, 1993.................................. $ 152,158
Year ended December 31, 1994.................................. 62,029
Year ended December 31, 1995.................................. 555,804
Nine months ended September 30, 1995.......................... 293,405
Nine months ended September 30, 1996.......................... 139,307
The effect of recognizing the deferred taxes will be included in income
from continuing operations. If the termination of the Subchapter S corporation
status had occurred at September 30, 1996, the net deferred tax liability would
have been approximately $1,280,142.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Princeton Orthopaedic Associates, P.A.
We have audited the accompanying balance sheets of Princeton Orthopaedic
Associates, P.A. as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, l995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Princeton Orthopaedic
Associates, P.A. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-------------------------------------
Ernst & Young LLP
Denver, Colorado
August 28, 1996
F-34
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
---------------------- -------------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 63,242 $ 117,277 $ 632,059
Accounts receivable, net....................................... 1,826,429 1,954,380 2,338,764
Prepaid expenses............................................... 360,960 320,025 80,006
Due from related parties....................................... 2,700 49,866 465,924
---------- ---------- ----------
Total current assets............................................. 2,253,331 2,441,548 3,516,753
Furniture, fixtures and equipment, net........................... 1,401,552 1,143,174 934,883
---------- ---------- ----------
Total assets..................................................... $3,654,883 $3,584,722 $4,451,636
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term note payable...................... $ 70,000 $ 70,000 $ 70,000
Current portion of capital lease obligations................... 69,839 100,038 107,489
Deferred tax liability......................................... 361,170 242,928 251,635
Accounts payable............................................... 102,002 101,810 439,629
Accrued compensation and benefits.............................. 647,377 911,033 1,588,076
Accrued profit sharing contribution 293,529 432,100 300,000
Due to related parties......................................... 17,340 37,924 165,377
Other accrued expenses......................................... 59,853 41,554 --
---------- ---------- ----------
Total current liabilities........................................ 1,621,110 1,937,387 2,922,206
Long-term note payable, less current portion..................... 461,928 391,928 339,428
Capital lease obligations, less current portion.................. 950,735 850,697 769,123
---------- ---------- ----------
Total liabilities................................................ 3,033,773 3,180,012 4,030,757
Commitments
Stockholders' equity:
Common stock, no par value:
Authorized, issued and outstanding
shares--900........................................... -- -- --
Additional paid-in capital............................... 17,308 17,308 17,308
Retained earnings........................................ 853,802 637,402 653,571
Treasury stock........................................... (250,000) (250,000) (250,000)
---------- ---------- ----------
Total stockholders' equity....................................... 621,110 404,710 420,879
---------- ---------- ----------
Total liabilities and stockholders' equity....................... $3,654,883 $3,584,722 $4,451,636
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-35
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue................................. $11,552,476 $13,561,339 $13,298,164 $9,842,814 $11,152,357
Operating expenses:
Physician compensation.................... 4,273,893 5,194,385 4,968,251 3,854,871 4,084,772
Salaries and benefits..................... 3,904,184 4,099,459 4,057,086 2,758,435 3,350,844
Supplies, general and administrative
expenses................................ 3,623,877 3,837,396 4,235,715 2,937,658 3,464,665
Depreciation and amortization............. 246,815 218,440 258,497 193,872 137,054
----------- ----------- ----------- ---------- -----------
Total operating expenses.................... 12,048,769 13,349,680 13,519,549 9,744,836 11,037,335
----------- ----------- ----------- ---------- -----------
Income (loss) from operations............... (496,293) 211,659 (221,385) 97,978 115,022
Interest expense, net....................... (121,426) (116,288) (113,257) (123,249) (90,146)
----------- ----------- ----------- ---------- -----------
Income (loss) before income taxes........... (617,719) 95,371 (334,642) (25,271) 24,876
Income tax benefit (expense)................ 194,660 (35,385) 118,242 6,608 (8,707)
----------- ----------- ----------- ---------- -----------
Net income (loss)........................... $ (423,059) $ 59,986 $ (216,400) $ (18,663) $ 16,169
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
See accompanying notes.
F-36
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992................ 900 $ -- $17,308 $1,216,875 $(250,000) $ 984,183
Net loss................................ -- -- -- (423,059) -- (423,059)
---------- --------- --------- ---------- --------- ---------
Balance, December 31, 1993................ 900 -- 17,308 793,816 (250,000) 561,124
Net income.............................. -- -- -- 59,986 -- 59,986
---------- --------- --------- ---------- --------- ---------
Balance, December 31, 1994................ 900 -- 17,308 853,802 (250,000) 621,110
Net loss................................ -- -- -- (216,400) -- (216,400)
---------- --------- --------- ---------- --------- ---------
Balance, December 31, 1995................ 900 -- 17,308 637,402 (250,000) 404,710
Net income (unaudited).................. -- -- -- 16,169 -- 16,169
---------- --------- --------- ---------- --------- ---------
Balance, September 30, 1996............... --
(unaudited)............................. 900 $ -- $17,308 $ 653,571 $(250,000) $ 420,879
---------- --------- --------- ---------- --------- ---------
---------- --------- --------- ---------- --------- ---------
</TABLE>
See accompanying notes.
F-37
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $(423,059) $ 59,986 $(216,400) $ (18,663) $ 16,169
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 246,815 218,440 258,497 193,872 137,054
Deferred income tax provision.................... (194,660) 35,385 (118,242) (6,608) 8,707
Changes in assets and liabilities:
Accounts receivable, net....................... 305,886 (245,447) (127,951) (33,928) (384,384)
Due from related parties....................... 7,500 (2,700) (47,166) (103,224) (416,058)
Prepaid expenses............................... (19,219) (10,165) 40,935 270,720 240,019
Due to related parties......................... 29,722 (12,382) 20,584 (17,340) 127,453
Accounts payable............................... (6,332) 48,334 (192) 35,104 337,819
Accrued compensation and benefits.............. 422,642 (217,099) 263,656 811,292 677,043
Accrued profit sharing contribution............ 24,500 (30,971) 138,571 30,471 (132,100)
Other accrued expenses......................... 1,896 47,957 (18,299) (59,853) (41,554)
--------- --------- --------- ---------- ---------
Net cash provided by (used in) operating
activities......................................... 395,691 (108,662) 193,993 1,101,843 570,168
INVESTING ACTIVITIES
(Purchases) sales of furniture, fixtures and
equipment, net..................................... (72,073) 7,608 (119) 71,103 71,237
--------- --------- --------- ---------- ---------
Net cash provided by (used in) investing
activities......................................... (72,073) 7,608 (119) 71,103 71,237
FINANCING ACTIVITIES
Principal payments on long-term debt and capital
lease obligations.................................. (113,098) (83,600) (139,839) (104,246) (126,623)
--------- --------- --------- ---------- ---------
Net cash used in financing activities................ (113,098) (83,600) (139,839) (104,246) (126,623)
--------- --------- --------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents........................................ 210,520 (184,654) 54,035 1,068,670 514,782
Cash and cash equivalents at beginning of year....... 37,376 247,896 63,242 63,242 117,277
--------- --------- --------- ---------- ---------
Cash and cash equivalents at end of year............. $ 247,896 $ 63,242 $ 117,277 $1,131,912 $ 632,059
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
Supplemental noncash investing activities:
Acquisition of furniture, fixtures and equipment
under capital lease.............................. $ 730,720 $ -- $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-38
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND 1996 AND SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Princeton Orthopaedic Associates, P.A. (the Company) is an orthopaedic
physician practice which services the surrounding communities of Princeton, New
Jersey and effective January 1, 1996, operates an outpatient surgery center. The
Company is organized as a professional corporation under the laws of the state
of New Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity, and contractual adjustments. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives are as follows:
Furniture, fixtures and equipment............................... 5-7 years
Leasehold improvements.......................................... 15 years
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated occurrence-based commercial insurance policy.
Income Taxes
Deferred tax liabilities or assets (net of a valuation allowance) are
provided in the financial statements by applying the provisions of applicable
tax laws to measure the deferred tax consequences of temporary differences that
will result in net taxable or deductible amounts in future years as a result of
events recognized in the financial statements in the current or preceding years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-39
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and long-term debt. The carrying amounts
reported in the balance sheets for these items approximate fair value.
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995
--------- ----------
<S> <C> <C>
Gross patient accounts receivable..................................... $3,168,395 $4,011,580
Less allowances for contractual adjustments and uncollectibles........ 1,341,966 2,057,200
---------- ----------
$1,826,429 $1,954,380
---------- ----------
---------- ----------
</TABLE>
Net revenue consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Gross patient revenue................................ $12,836,084 $15,954,516 $15,643,395
Less contractual adjustments and uncollectibles...... 1,283,608 2,393,177 2,345,231
----------- ----------- -----------
$11,552,476 $13,561,339 $13,298,164
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Concentration of credit risk related to accounts receivable is limited by
the diversity and number of providers, patients and payors.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
---------- ----------
<S> <C> <C>
Purchased and leased furniture, fixtures and equipment................ $2,046,840 $2,046,959
Leasehold improvements................................................ 516,268 516,268
---------- ----------
2,563,108 2,563,227
Less accumulated depreciation and amortization........................ 1,161,556 1,420,053
---------- ----------
$1,401,552 $1,143,174
---------- ----------
---------- ----------
</TABLE>
F-40
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTE PAYABLE
Note payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
-------- --------
<S> <C> <C>
Note payable, due in monthly installments of $5,833 plus interest at 8.5%,
collateralized by certain equipment..................................... $531,928 $461,928
Less current portion...................................................... 70,000 70,000
-------- --------
$461,928 $391,928
-------- --------
-------- --------
</TABLE>
At December 31, 1995, the aggregate maturities of the note payable are as
follows: 1996-- $70,000; 1997--$70,000; 1998--$70,000; 1999--$251,928.
Interest expense approximates interest paid.
6. BENEFIT PLANS
The Company has a 401(k) plan and a defined contribution pension plan
covering all full-time employees with one year or more of service. Prior to
1994, the Company maintained a profit sharing plan. Effective in 1994, the
Company terminated the profit sharing plan and adopted the 401(k) plan.
Contributions under the 401(k) plan are determined annually by the Board of
Directors. The pension plan contribution is mandatory and is based upon a fixed
percentage of an employee's annual salary. The retirement plan expenses were
$423,500, $549,592 and $444,992 for the years ended December 31, 1993, 1994 and
1995, respectively.
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Capitalized lease............................................... $ -- $ 12,052
Cash-to-accrual adjustment...................................... 485,423 469,967
-------- --------
Total deferred tax liabilities............................... 485,423 482,019
-------- --------
Deferred tax assets:
Capitalized leases.............................................. 12,395 --
Net operating loss carryforward................................. 15,837 99,507
Depreciation and amortization................................... 96,021 139,584
-------- --------
Total deferred tax assets.................................... 124,253 239,091
Valuation allowance for deferred tax assets....................... -- --
-------- --------
Net deferred tax assets........................................... 124,253 239,091
-------- --------
Net deferred tax liabilities...................................... $361,170 $242,928
-------- --------
-------- --------
</TABLE>
The (provision for) benefit from income taxes is comprised of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current.............................................. $ -- $ -- $ --
Deferred............................................. 194,660 (35,385) 118,242
-------- -------- --------
Total................................................ $194,660 $(35,385) $118,242
-------- -------- --------
-------- -------- --------
</TABLE>
F-41
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES -- (CONTINUED)
At December 31, 1995, the Company has aggregate net operating loss
carryforwards of $284,308 for federal tax reporting purposes, which expire
through 2010, if not utilized.
The difference between the actual income tax provision and the tax
provision computed by applying the statutory Federal income tax rate to earnings
before taxes is attributable to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1995
------- ---------
<S> <C> <C>
Expected provision for (benefit from) federal income taxes at
statutory rate of 35%........................................... $33,380 $(117,125)
Other, net........................................................ 2,005 (1,117)
------- ---------
Income tax (benefit) expense...................................... $35,385 $(118,242)
------- ---------
------- ---------
</TABLE>
8. LEASES
The Company leases certain equipment under capitalized leases. The cost of
such equipment at both December 31, 1994 and 1995 was $985,158. Accumulated
amortization was $238,714 and $345,349 at December 31, 1994 and 1995,
respectively.
The Company also leases office and clinic space under noncancelable lease
arrangements. Future minimum payments under capital and noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
1996........................................................ $ 187,200 $ 1,203,430
1997........................................................ 187,200 1,203,430
1998........................................................ 187,200 1,203,430
1999........................................................ 187,200 1,203,430
2000........................................................ 187,200 1,203,430
Thereafter.................................................. 374,400 9,589,883
---------- -----------
Total minimum lease payments................................ 1,310,400 $15,607,033
-----------
-----------
Less amount representing interest........................... (359,665)
----------
Present value of net minimum lease payments................. 950,735
Less current portion........................................ 100,038
----------
Long-term portion........................................... $ 850,697
----------
----------
</TABLE>
The Company leases office space from various partnerships whose partners
are officers and shareholders of the Company. Rent expense, substantially all to
related parties, for the years ended December 31, 1993, 1994 and 1995 totaled
$978,873, $1,055,884 and $1,295,037, respectively.
9. SUBSEQUENT EVENTS
In January 1996, the Company entered into additional equipment leases. The
aggregate payments on these leases are as follows: 1996--$55,643; 1997--$63,758;
1998--$73,522; 1999--$90,166; 2000--$76,635; thereafter--$235,299.
Effective November 12, 1996, the stockholders of the Company entered into a
tax-free exchange (the Exchange) with Specialty Care Network Inc. (SCN) in a
reorganization, whereby the stockholders of the Company agreed to exchange their
outstanding common stock for 1,196,793 shares of common stock of SCN. In
connection with the Exchange, SCN will provide administrative services and
manage the non-medical operations of the Company and enter into a long-term
service agreement with the
F-42
<PAGE>
PRINCETON ORTHOPAEDIC ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS -- (CONTINUED)
physician stockholders of the Company, pursuant to which the physicians will
continue to provide medical services through a new entity. In addition, certain
of the Company's physician stockholders have purchased $310,000 of convertible
debentures of SCN that are convertible into common stock of SCN at $1 a share.
Before this exchange net assets of the outpatient surgery center of
approximately $577,000 were distributed to the shareholders.
The 401(k) and defined contribution pension plans were frozen as of the
date of the exchange transaction with all participants being fully vested in the
contributions that had been made to the plans.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the statements of operations,
stockholders' equity and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Tallahassee Orthopedic Clinic, Inc.
We have audited the accompanying balance sheets of Tallahassee Orthopedic
Clinic, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, l995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tallahassee Orthopedic Clinic,
Inc. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
------------------------------------
Ernst & Young LLP
Denver, Colorado
October 15, 1996
F-44
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
---------------------- ------------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 133,122 $ 74,803 $ 647,863
Accounts receivable, net.......................................... 2,391,173 2,248,046 2,611,574
Inventories....................................................... 22,210 55,720 68,224
Prepaid expenses and other current assets......................... 62,858 93,902 180,677
Due from related parties.......................................... 354,254 952,862 815,341
---------- ---------- ----------
Total current assets................................................ 2,963,617 3,425,333 4,323,679
Furniture, fixtures and equipment, net.............................. 142,042 2,044,174 1,744,788
Other assets........................................................ 138,595 12,110 9,540
---------- ---------- ----------
Total assets........................................................ $3,244,254 $5,481,617 $6,078,007
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable...................................................... $ -- $ 400,000 $ 400,000
Current portion of long-term debt................................. -- 389,218 409,708
Current portion of capital lease obligations...................... -- 52,797 49,976
Accounts payable.................................................. 142,006 261,030 113,613
Accrued compensation and benefits................................. 237,851 228,954 211,551
Accrued profit sharing contribution............................... 338,354 415,444 427,072
Accrued interest expense.......................................... -- 13,915 7,304
Due to related parties............................................ 207,851 27,718 201,173
---------- ---------- ----------
Total current liabilities........................................... 926,062 1,789,076 1,820,397
Long-term debt, less current portion................................ -- 1,211,857 896,077
Capital lease obligations, less current portion..................... -- 223,008 189,119
---------- ---------- ----------
Total liabilities................................................... 926,062 3,223,941 2,905,593
Commitments
Stockholders' equity:
Common stock, $1 par value:
Authorized 5,000 shares, issued and outstanding shares --
900 in 1994 and 1,100 in 1995............................ 900 1,100 1,100
Additional paid-in capital.................................. 157,221 202,473 213,786
Retained earnings........................................... 2,160,071 2,263,880 3,167,305
Treasury stock.............................................. -- (209,777) (209,777)
---------- ---------- ----------
Total stockholders' equity........................................ 2,318,192 2,257,676 3,172,414
---------- ---------- ----------
Total liabilities and stockholders' equity........................ $3,244,254 $5,481,617 $6,078,007
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-45
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............................ $8,040,293 $9,455,216 $10,420,265 $7,470,881 $10,053,710
Operating expenses:
Physician compensation............... 2,910,131 3,562,535 3,473,978 2,597,561 3,052,624
Salaries and benefits................ 2,700,058 3,194,994 4,028,185 2,993,544 3,453,082
Supplies, general and administrative
expenses.......................... 2,146,522 2,308,263 2,471,876 1,847,229 2,133,338
Depreciation and amortization........ 22,459 38,063 224,054 168,041 394,337
---------- ---------- ----------- ---------- -----------
Total operating expenses............... 7,779,170 9,103,855 10,198,093 7,606,375 9,033,381
---------- ---------- ----------- ---------- -----------
Income (loss) from operations.......... 261,123 351,361 222,172 (135,494) 1,020,329
Interest expense....................... -- -- (118,363) (32,116) (116,904)
---------- ---------- ----------- ---------- -----------
Net income (loss)...................... $ 261,123 $ 351,361 $ 103,809 $ (167,610) $ 903,425
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
</TABLE>
See accompanying notes.
F-46
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER ADDITIONAL
OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
------- ------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992................. 600 $ 600 $ 89,343 $1,547,587 $ -- $1,637,530
Net income............................... -- -- -- 261,123 -- 261,123
Stock issued............................. 200 200 -- -- -- 200
------- -------- ---------- ---------- --------- ----------
Balance, December 31, 1993................. 800 800 89,343 1,808,710 -- 1,898,853
Net income............................... -- -- -- 351,361 -- 351,361
Stock issued............................. 100 100 -- -- -- 100
Additional contributed capital........... -- -- 67,878 -- -- 67,878
------- -------- ---------- ---------- --------- ----------
Balance, December 31, 1994................. 900 900 157,221 2,160,071 -- 2,318,192
Net income............................... -- -- 103,809 -- 103,809
Stock issued............................. 200 200 -- -- -- 200
Additional contributed capital........... -- -- 45,252 -- -- 45,252
Treasury stock purchased................. -- -- -- -- (209,777) (209,777)
------- -------- ---------- ---------- --------- ----------
Balance, December 31, 1995................. 1,100 1,100 202,473 2,263,880 (209,777) 2,257,676
Net income (unaudited)................... -- -- -- 903,425 -- 903,425
Additional contributed capital
(unaudited)............................ -- -- 11,313 -- -- 11,313
------- -------- ---------- ---------- --------- ----------
Balance, September 30, 1996 (unaudited).... 1,100 $1,100 $213,786 $3,167,305 $(209,777) $3,172,414
------- -------- ---------- ---------- --------- ----------
------- -------- ---------- ---------- --------- ----------
</TABLE>
See accompanying notes.
F-47
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
--------------------------------- ---------------------
1993 1994 1995 1995 1996
---------- --------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 261,123 $ 351,361 $ 103,809 $ (167,610) $ 903,425
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 22,459 38,063 224,054 168,041 394,337
Changes in assets and liabilities:
Accounts receivable, net.............................. (48,024) (321,378) 143,127 136,811 (363,528)
Inventories........................................... (4,487) (6,385) (33,510) (25,133) (12,504)
Prepaid expenses and other current assets............. 57,040 (34,948) (31,044) (30,109) (86,775)
Due from related parties.............................. (294,163) (22,366) (598,608) (419,070) 137,521
Other assets.......................................... -- (138,595) 126,485 125,295 2,570
Accounts payable...................................... 29,125 58,441 119,024 49,525 (147,417)
Accrued compensation and benefits..................... 7,914 79,692 (8,897) 99,735 (17,403)
Accrued profit sharing contribution................... (83,103) 56,151 77,090 (12,095) 11,628
Accrued interest expense.............................. -- -- 13,915 -- (6,611)
Due to related parties................................ (48,000) 103,101 (180,133) (175,231) 173,455
---------- --------- ---------- ---------- ---------
Net cash provided by (used in) operating activities....... (100,116) 163,137 (44,688) (249,841) 988,698
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment............ (34,420) (118,730) (1,830,466) (1,759,209) (94,951)
---------- --------- ---------- ---------- ---------
Net cash used in investing activities..................... (34,420) (118,730) (1,830,466) (1,759,209) (94,951)
FINANCING ACTIVITIES
Proceeds from long-term debt.............................. -- -- 1,500,000 1,500,000 --
Proceeds from note payable................................ -- -- 400,000 400,000 --
Principal payments on long-term debt and capital lease
obligations............................................. -- -- (128,617) (14,311) (332,000)
Additional stock and contributed capital.................. 200 67,978 45,452 45,452 11,313
---------- --------- ---------- ---------- ---------
Net cash provided by (used in) financing activities....... 200 67,978 1,816,835 1,931,141 (320,687)
---------- --------- ---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents...... (134,336) 112,385 (58,319) (77,909) 573,060
Cash and cash equivalents at beginning of year............ 155,073 20,737 133,122 133,122 74,803
---------- --------- ---------- ---------- ---------
Cash and cash equivalents at end of year.................. $ 20,737 $ 133,122 $ 74,803 $ 55,213 $ 647,863
---------- --------- ---------- ---------- ---------
---------- --------- ---------- ---------- ---------
Supplemental noncash investing and financing activities:
Acquisition of furniture, fixtures and equipment under
capital lease obligations............................. $ -- $ -- $ 295,720 $ 150,059 $ --
Purchase of treasury stock for long-term debt........... $ -- $ -- $ 209,777 $ 209,777 $ --
</TABLE>
See accompanying notes.
F-48
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND
SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Tallahassee Orthopedic Clinic, Inc. is an orthopedic physician practice
which services the surrounding communities in northern Florida, southern Georgia
and southern Alabama. The Company is organized as a professional corporation
under the laws of the state of Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity, and contractual adjustments. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and long-term debt. The carrying amounts
reported in the balance sheets for these items approximate fair value.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated claims-made commercial insurance policy.
Income Taxes
The Company is a Subchapter S corporation under the Internal Revenue Code,
and, accordingly, is not taxed as a separate entity. The Company's taxable
income or loss is allocated to each stockholder and recognized as taxable income
on their individual tax returns.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-49
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Gross patient accounts receivable............................. $4,899,975 $4,893,690
Less allowances for contractual adjustments and
uncollectibles.............................................. 2,508,802 2,645,644
---------- ----------
$2,391,173 $2,248,046
---------- ----------
---------- ----------
</TABLE>
Net revenue consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Gross patient revenue................................ $12,909,244 $16,252,825 $18,394,960
Less contractual adjustments and uncollectibles...... 4,868,951 6,797,609 7,974,695
----------- ----------- -----------
$ 8,040,293 $ 9,455,216 $10,420,265
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Concentration of credit risk related to accounts receivable is limited by
the diversity and number of providers, patients and payors.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
-------- ----------
<S> <C> <C>
Furniture and fixtures.......................................... $ 79,417 $ 149,728
Equipment....................................................... 337,250 2,340,706
Computer software............................................... 48,003 100,522
-------- ----------
464,670 2,590,956
Less accumulated depreciation and amortization.................. 322,628 546,782
-------- ----------
$142,042 $2,044,174
-------- ----------
-------- ----------
</TABLE>
F-50
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTE PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1995
----------- ----------
<S> <C> <C>
Note payable to a bank, due in monthly installments of $38,768
including interest at .5% plus the First Union National Bank's
prime rate, maturing in May 1999.............................. $ -- $1,391,298
Note payable to former shareholder, due in monthly installments
of $6,250 including interest at 8.5%, maturing in June 1999... -- 209,777
----------- ----------
-- 1,601,075
Less current portion............................................ -- 389,218
----------- ----------
$ -- $1,211,857
----------- ----------
----------- ----------
</TABLE>
At December 31, 1995, the aggregate maturities of long-term debt are as
follows: 1996-$389,218; 1997-$445,573; 1998-$489,111; 1999-$277,173.
The proceeds from the First Union National Bank note, along with additional
contributed capital in 1995 and 1994 from all physician shareholders, was used
to purchase a Magnetic Resonance Imaging unit.
In September 1995, the Company borrowed $400,000 in the form of a note from
Barnett Bank of Tallahassee. Principal was due in one payment when the note
matured on September 8, 1996. This payment was not made by the Company. Barnett
Bank extended the note to December 8, 1996. Interest is payable quarterly
beginning December 1995 at an interest rate equal to .25% plus the bank's prime
rate. Borrowings are collateralized by the assets of the Company.
Interest paid for the year ended December 31, 1995 was $104,448.
6. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that covers all employees that have
completed a year of service and have attained the age of 21. The Company
contributes a discretionary amount which is allocated proportionately based upon
the salaries of participating employees. The profit sharing plan expense was
$312,248, $344,456 and $429,682 for the years ended December 31, 1993, 1994 and
1995, respectively.
7. RELATED PARTY TRANSACTIONS
Due from related parties consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1995
-------- --------
<S> <C> <C>
Officer salary advances........................................... $ 89,046 $203,160
Due from Tallahassee Orthopedic Center, L.C....................... 195,208 688,702
Due from Haney, Henderson et al Rental Partnership................ 70,000 61,000
-------- --------
$354,254 $952,862
-------- --------
-------- --------
</TABLE>
F-51
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS -- (CONTINUED)
Due to related parties consisted of the following:
DECEMBER 31
-----------------
1994 1995
-------- -------
Due to TOC Imaging, Inc................................$ 57,122 $18,968
Consulting fees payable................................ 60,750 8,750
Advances from officers................................. 89,979 --
-------- -------
$207,851 $27,718
-------- -------
-------- -------
The Company leases its primary facility from Tallahassee Orthopedic Center,
L.C. which is controlled by the shareholders. Rent expense resulting from this
lease for the years ended December 1, 1993, 1994 and 1995 was $451,831, $520,626
and $579,765, respectively.
8. LEASES
The Company leases certain equipment under capitalized leases. The cost and
net book value of such equipment at December 31, 1995 was $295,720.
The Company also leases office and clinic space under noncancelable lease
arrangements. Future minimum payments under capital and noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1996............................................................ $ 75,779 $ 322,253
1997............................................................ 69,972 590,394
1998............................................................ 69,972 590,394
1999............................................................ 69,972 590,394
2000............................................................ 55,333 567,844
Thereafter...................................................... -- 5,360,883
-------- ----------
Total minimum lease payments.................................... 341,028 $8,022,162
----------
----------
Less amount representing interest............................... (65,223)
--------
Present value of net minimum lease payments..................... 275,805
Less current portion............................................ 52,797
--------
Long-term portion............................................... $223,008
--------
--------
</TABLE>
The Company leases its office facilities on an annual basis. Rent expense,
substantially all to related parties, for the years ended December 31, 1993,
1994 and 1995 totaled $560,779, $521,894 and $630,715, respectively.
9. SUBSEQUENT EVENT
Effective November 12, 1996, the Company entered into a tax-free merger
(the Merger) with Specialty Care Network, Inc. (SCN) in a reorganization,
whereby the stockholders of the Company agreed to exchange their outstanding
common stock for 1,072,414 shares of common stock of SCN. In connection with the
Merger, SCN will provide administrative services and manage the non-medical
operations of the Company and enter into a long-term service agreement with the
physician stockholders of the Company, pursuant to which the physicians will
continue to provide medical services through a new entity. In addition, certain
of the Company's physician stockholders have purchased $300,000 of convertible
debentures of SCN at $3 a share.
F-52
<PAGE>
TALLAHASSEE ORTHOPEDIC CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the statements of income,
stockholders' equity and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
11. PRO FORMA TAX INFORMATION (UNAUDITED)
As discussed elsewhere in these footnotes, the Company operates under
Subchapter S of the Internal Revenue Code and is not subject to corporate
federal or state income taxes. In connection with the merger with Specialty Care
Network, Inc. (see Note 9), the Subchapter S election was terminated. As a
result, the Company will be subject to federal and state corporate income taxes
subsequent to the termination of the Subchapter S status. The Company had net
operating income for income tax purposes of $270,890, $370,548 and $139,549 for
the years ended December 31, 1993, 1994 and 1995, respectively. The
corresponding net operating income (loss) for income tax purposes for the nine
months ended September 30, 1995 and 1996 was $(140,805) and $924,198,
respectively. Had the Company filed federal and state income tax returns as a
regular Subchapter C corporation, the income tax expense (benefit) under the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, would have been as follows:
Year ended December 31, 1993............................. $104,645
Year ended December 31, 1994............................. 143,143
Year ended December 31, 1995............................. 53,908
Nine months ended September 30, 1995..................... (54,393)
Nine months ended September 30, 1996..................... 357,018
At the date of termination of the Subchapter S corporation status, the
Company will be required to provide deferred taxes for the cumulative temporary
differences between financial reporting and tax reporting bases of assets and
liabilities. Such deferred taxes will be based on the cumulative temporary
differences at the date of termination of the Subchapter S corporation status.
The effect of recognizing the deferred taxes will be included in income
from continuing operations. If the termination of the Subchapter S corporation
status had occurred at September 30, 1996, the net deferred tax liability would
have been approximately $1,045,422.
F-53
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Greater Chesapeake Orthopaedic Associates, LLC
We have audited the accompanying balance sheets of Greater Chesapeake
Orthopaedic Associates, LLC as of December 31, 1994 and 1995, and the related
statements of operations, members' equity, and cash flows for the period October
17, 1994 (inception) through December 31, 1994 and the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Greater Chesapeake Orthopaedic
Associates, LLC as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period October 17, 1994 (inception)
through December 31, 1994 and the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------------------------
Ernst & Young LLP
Denver, Colorado
October 11, 1996
F-54
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 12,025 $ 150,217 $ 448,196
Accounts receivable, net............................... 1,056,949 1,257,081 1,136,958
Prepaid expenses....................................... 45,920 229,424 49,892
---------- ---------- ----------
Total current assets 1,114,894 1,636,722 1,635,046
Furniture, fixtures and equipment, net................... -- 20,187 18,992
Intangibles, net......................................... 35,578 28,153 22,584
---------- ---------- ----------
Total assets............................................. $1,150,472 $1,685,062 $1,676,622
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 20,224 $ 19,340 $ 30,287
Accrued compensation and benefits...................... 982,391 1,313,971 1,431,935
Due to related parties................................. 66,359 72,682 122,932
---------- ---------- ----------
Total current liabilities................................ 1,068,974 1,405,993 1,585,154
Commitments
Members' equity.......................................... 81,498 279,069 91,468
---------- ---------- ----------
Total liabilities and members' equity.................... $1,150,472 $1,685,062 $1,676,622
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-55
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 17,
1994
(INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30
DECEMBER 31, DECEMBER 31, ------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue........................................ $1,542,250 $8,207,951 $5,855,525 $6,208,360
Operating expenses:
Physician compensation........................... 1,387,789 6,432,601 4,567,310 4,580,750
Salaries and benefits............................ 200,941 1,113,570 838,811 948,270
Supplies, general and administrative expenses.... 238,485 1,003,915 773,756 965,778
Depreciation and amortization.................... 1,547 12,338 8,127 12,205
---------- ---------- ---------- ----------
Total operating expenses........................... 1,828,762 8,562,424 6,188,004 6,507,003
Loss from operations............................... (286,512) (354,473) (332,479) (298,643)
Interest income (expense), net..................... 205 5,294 18,183 26,575
---------- ---------- ---------- ----------
Net loss........................................... $ (286,717) $ (349,179) $ (314,296) $ (272,068)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-56
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
MEMBER EARNINGS MEMBERS'
CONTRIBUTIONS (DEFICIT) EQUITY
------------- ---------- ----------
<S> <C> <C> <C>
Balance, October 17, 1994................................. $ -- $ -- $ --
Contributions from members.............................. 368,215 -- 368,215
Net loss................................................ -- (286,717) (286,717)
-------- --------- ---------
Balance, December 31, 1994................................ 368,215 (286,717) 81,498
Contributions from members.............................. 546,750 -- 546,750
Net loss................................................ -- (349,179) (349,179)
-------- --------- ---------
Balance, December 31, 1995................................ 914,965 (635,896) 279,069
Contributions from members
(unaudited).......................................... 84,467 -- 84,467
Net loss (unaudited).................................... -- (272,068) (272,068)
-------- --------- ---------
Balance, September 30, 1996
(unaudited)............................................. $999,432 $(907,964) $ 91,468
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
F-57
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 17,
1994
(INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30
DECEMBER 31, DECEMBER 31, -------------------------
1994 1995 1995 1996
------------- ------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $ (286,717) $(349,179) $(314,296) $(272,068)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................ 1,547 12,338 8,127 12,205
Changes in assets and liabilities:
Accounts receivable, net.................. (1,056,949) (200,132) (150,247) 120,123
Other assets.............................. (83,045) (183,504) 672 179,532
Accounts payable.......................... 20,224 (884) (4,195) 10,947
Due to related parties.................... 66,359 6,323 14,906 50,250
Accrued compensation and benefits......... 982,391 331,580 263,346 117,964
----------- --------- --------- ---------
Net cash used in operating activities............. (356,190) (383,458) (181,687) 218,953
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment.... -- (25,100) (17,590) (5,441)
----------- --------- --------- ---------
Net cash used in investing activities............. -- (25,100) (17,590) (5,441)
FINANCING ACTIVITIES
Contributions from members........................ 368,215 546,750 356,560 84,467
----------- --------- --------- ---------
Net cash provided by financing activities......... 368,215 546,750 356,560 84,467
----------- --------- --------- ---------
Net increase in cash and cash equivalents......... 12,025 138,192 157,283 297,979
Cash and cash equivalents at beginning of year.... -- 12,025 12,025 150,217
----------- --------- --------- ---------
Cash and cash equivalents at end of year.......... $ 12,025 $ 150,217 $ 169,308 $ 448,196
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-58
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND 1996 AND SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Greater Chesapeake Orthopaedic Associates, LLC (the Company) is an
orthopaedic physician practice which services the surrounding communities of
Baltimore, Maryland. The Company was formed on October 17, 1994, by a group of
eight physicians (the founding members) who desired to form a limited liability
company under the laws of the state of Maryland.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Limited Liability Company (LLC)
An LLC is an unincorporated association of two or more persons, whose
members have limited personal liability for the obligations or debts of the
entity. For federal income tax purposes, the entity is classified as a
partnership.
Under the Company's operating agreement, the Company is dissolved upon the
death, insanity, withdrawal, bankruptcy or expulsion of a member, or the
occurrence of any other event which terminates the continued membership of a
member in the Company (a Dissolution Event), unless a majority of the remaining
members, including in any event, all of the remaining founding members, consent
to the continuation of the business of the Company within 90 days of the
Dissolution Event. Notwithstanding the above, the Company will terminate on
October 17, 2044.
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity, and contractual adjustments. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
F-59
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Intangible Assets
Intangible assets consist of organization costs, and are amortized using
the straight-line method over five years.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated claims-made commercial insurance policy.
Physician Compensation
As the Company's Operating Agreement does not separate amounts to be paid
to the member physician owners between member distributions and physician
compensation, all payments to physicians have been classified as physician
compensation.
Income Taxes
No provision for income taxes has been provided since the members report
their distributive shares of income and deductions of the LLC in their personal
capacities, pursuant to election under Subchapter K of the Internal Revenue
Code.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable and certain current liabilities. The carrying amounts reported in the
balance sheets for these items approximate fair value.
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
F-60
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
---------- ----------
<S> <C> <C>
Gross patient accounts receivable............................. $2,264,890 $3,833,238
Less allowances for contractual adjustments and
uncollectibles.............................................. 1,207,941 2,576,157
---------- ----------
$1,056,949 $1,257,081
---------- ----------
---------- ----------
</TABLE>
Net revenue consists of the following:
<TABLE>
<CAPTION>
OCTOBER 17,
1994
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Gross patient revenue....................................... $3,408,509 $19,735,533
Less contractual adjustments and uncollectibles............. 1,866,259 11,527,582
---------- -----------
$1,542,250 $ 8,207,951
---------- -----------
---------- -----------
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1995
--------- -------
<S> <C> <C>
Furniture, fixtures and equipment.................................... $ -- $25,100
Less accumulated depreciation and amortization....................... $ -- 4,913
--------- -------
$ -- $20,187
--------- -------
--------- -------
</TABLE>
5. LINE OF CREDIT
In November 1995, the Company entered into a $250,000 line of credit with
NationsBank, N.A., all of which was available at December 31, 1995. Any amounts
outstanding under the line of credit mature December 21, 1996. Borrowings under
the line of credit bear an interest rate equal to .75% plus the NationsBank,
N.A. prime rate, published periodically; and borrowings are collateralized by
the assets of the Company.
6. RELATED PARTY TRANSACTIONS
The Company rents the clinic facility and certain equipment from University
Property Management and Associates, LLC (UPM&A). Seven of the eight physician
owners of the Company are the owners of UPM&A. Facility and equipment rent
expense owed to UPM&A was $89,031 and $427,150 for the period October 17, 1994
(inception) through December 31, 1994 and the year ended December 31, 1995,
respectively.
F-61
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LEASES
The Company leases its clinic facility from UPM&A under a noncancelable
operating lease arrangement. Future minimum payments under noncancelable
operating leases are as follows:
OPERATING
LEASES
----------
1996........................................................... $ 382,959
1997........................................................... 382,959
1998........................................................... 422,260
1999........................................................... 417,431
2000 and thereafter............................................ 3,741,730
----------
Total minimum lease payments................................... $5,347,339
----------
----------
8. SUBSEQUENT EVENT
Effective November 12, 1996, the Company entered into an Asset Exchange
Agreement (the Agreement) with Specialty Care Network Inc. (SCN), whereby the
Company agreed to exchange certain of its assets and liabilities, in exchange
for 1,568,922 shares of common stock of SCN. In connection with the Agreement,
SCN will provide administrative services and manage the non-medical operations
of the Company and enter into a long-term service agreement with the physician
members of the Company, pursuant to which the physicians will continue to
provide medical services.
9. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the statements of operations,
member's equity and cash flows for the nine months ended September 30, 1995 and
1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
10. PRO FORMA TAX INFORMATION (UNAUDITED)
As discussed elsewhere in these footnotes, the Company is classified as a
partnership for federal income tax purposes and is not subject to corporate
federal or state income taxes. In connection with the Agreement with Specialty
Care Network, Inc. (see Note 8) the Company will be subject to federal and state
corporate income taxes. The Company had net operating loss for income tax
purposes of $286,717 and $347,826 for the period October 17, 1994 (inception)
through December 31, 1994 and the year ended December 31, 1995, respectively.
The corresponding net operating loss for income tax purposes for the nine months
ended September 30, 1995 and 1996 was $314,296 and $533,839, respectively. Had
the Company filed federal and state income tax returns as a regular Subchapter C
corporation, the income tax benefit under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, would have
been as follows:
F-62
<PAGE>
GREATER CHESAPEAKE ORTHOPAEDIC ASSOCIATES, LLC
(A MARYLAND LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. PRO FORMA TAX INFORMATION (UNAUDITED)--(CONTINUED)
<TABLE>
<S> <C>
Period October 17, 1994 (inception) through December 31, 1994...................... $109,669
Year ended December 31, 1995....................................................... 133,043
Nine months ended September 30, 1995............................................... 120,218
Nine months ended September 30, 1996............................................... 204,193
</TABLE>
The effect of recognizing the deferred taxes will be included in income
from continuing operations. If the Agreement had been entered into at September
30, 1996, the net deferred tax liability would have been approximately $438,133.
F-63
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Vero Orthopaedics, P.A.
We have audited the accompanying balance sheets of Vero Orthopaedics, P.A. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, l995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vero Orthopaedics, P.A. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------------------------
Ernst & Young LLP
Denver, Colorado
August 20, 1996
F-64
<PAGE>
VERO ORTHOPAEDICS, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
-------------------- ------------
1994 1995 1996
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 65,907 $ 11,464 $ 135,228
Accounts receivable, net............................................ 435,065 592,157 564,425
Due from related parties............................................ 56,108 67,432 40,692
Prepaid expenses.................................................... -- -- 32,367
---------- --------- ---------
Total current assets.................................................. 557,080 671,053 772,712
Furniture, fixtures and equipment, net................................ 161,106 116,053 72,671
Net assets of discontinued operations................................. 743,395 -- --
Other assets.......................................................... 964 1,070 1,070
---------- --------- ---------
Total assets.......................................................... $1,462,545 $ 788,176 $ 846,453
---------- --------- ---------
---------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term notes payable.......................... $ 172,879 $ 203,514 $ 82,000
Current portion of capital lease obligations........................ 62,388 62,388 32,808
Accounts payable.................................................... -- -- 13,245
Income tax payable.................................................. -- -- 107,994
Accrued compensation and benefits................................... 155,860 62,210 40,676
---------- --------- ---------
Total current liabilities............................................. 391,127 328,112 276,723
Deferred tax liability................................................ 71 100,745 124,776
Notes payable, less current portion................................... 265,412 81,899 --
Capital lease obligations, less current portion....................... 74,342 20,076 9,747
---------- --------- ---------
Total liabilities..................................................... 730,952 530,832 411,246
Commitments
Stockholders' equity:
Common stock, $1 par value:
Authorized, issued and outstanding shares -- 100.................... 100 100 100
Additional paid-in capital.......................................... 683,950 683,950 683,950
Retained earnings (deficit)......................................... 65,664 (417,268) (242,939)
Less note receivable from stockholder............................... (18,121) (9,438) (5,904)
---------- --------- ---------
Total stockholders' equity.......................................... 731,593 257,344 435,207
---------- --------- ---------
Total liabilities and stockholders' equity............................ $1,462,545 $ 788,176 $ 846,453
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
F-65
<PAGE>
VERO ORTHOPAEDICS, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue...................... $2,545,263 $3,204,224 $4,208,470 $3,179,034 $2,953,351
Operating expenses:
Physician compensation......... 1,429,179 1,667,786 2,865,311 1,775,977 1,186,879
Salaries and benefits.......... 515,148 930,246 1,023,481 705,928 828,882
Supplies, general and
administrative expenses..... 683,231 740,494 786,036 603,183 571,716
Depreciation and
amortization................ 34,539 44,184 61,361 29,891 43,382
---------- ---------- ---------- ---------- ----------
Total operating expenses......... 2,662,097 3,382,710 4,736,189 3,114,979 2,630,859
---------- ---------- ---------- ---------- ----------
(116,834) (178,486) (527,719) 64,055 322,492
Interest expense, net............ (24,932) (23,779) (20,391) (15,738) (21,460)
Other income (expense), net...... -- (229) 6,460 843 5,322
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income
taxes.......................... (141,766) (202,494) (541,650) 49,160 306,354
Income tax benefit (expense)..... 49,618 69,646 (64,300) (5,021) (132,025)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations..................... (92,148) (132,848) (605,950) 44,139 174,329
Discontinued operations:
Income from operations (net of
income tax expense of
$10,500 and $30,874 for the
years ended December 31,
1994 and 1995, respectively
and $27,590 for the nine
months ended September 30,
1995)....................... -- 20,289 111,724 97,821 --
Gain on sale of investment in
discontinued operations (net
of income tax expense of
$5,500)..................... -- -- 11,294 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ (92,148) $ (112,559) $ (482,932) $ 141,960 $ 174,329
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-66
<PAGE>
VERO ORTHOPAEDICS, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE
NUMBER OF COMMON PAID-IN RETAINED FROM
SHARES STOCK CAPITAL EARNINGS STOCKHOLDER TOTAL
------ ------ ---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992............ 100 $100 $ -- $ 270,371 $ -- $ 270,471
Additional contributed capital...... -- -- 30,000 -- -- 30,000
Net loss............................ -- -- -- (92,148) -- (92,148)
----- ------ -------- --------- -------- ---------
Balance, December 31, 1993............ 100 100 30,000 178,223 -- 208,323
Additional contributed capital...... -- -- 653,950 -- (18,121) 635,829
Net loss............................ -- -- -- (112,559) -- (112,559)
----- ------ -------- --------- -------- ---------
Balance, December 31, 1994............ 100 100 683,950 65,664 (18,121) 731,593
Note payments....................... -- -- -- -- 8,683 8,683
Net loss............................ -- -- -- (482,932) -- (482,932)
----- ------ -------- --------- -------- ---------
Balance, December 31, 1995............ 100 100 683,950 (417,268) (9,438) 257,344
Note payments (unaudited)........... -- -- -- -- 3,534 3,534
Net income (unaudited).............. -- -- -- 174,329 -- 174,329
----- ------ -------- --------- -------- ---------
Balance, September 30, 1996
(unaudited)......................... 100 $100 $683,950 $(242,939) $ (5,904) $ 435,207
----- ------ -------- --------- -------- ---------
----- ------ -------- --------- -------- ---------
</TABLE>
See accompanying notes.
F-67
<PAGE>
VERO ORTHOPAEDICS, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ $ (92,148) $ (112,559) $ (482,932) $ 141,960 $ 174,329
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on sale of investment in discontinued
operations.................................... -- -- (16,794) -- --
Depreciation and amortization................... 34,539 44,184 61,361 29,891 43,382
Deferred income tax provision................... (49,618) (59,146) 100,674 100,140 24,031
Changes in assets and liabilities:
Accounts receivable, net...................... 242,170 193,258 (157,092) (54,059) 27,732
Due from related parties...................... 2,308 16,272 (11,324) 1,083 26,740
Prepaid expenses.............................. -- -- -- -- (32,367)
Other assets.................................. (4,549) 3,584 (106) (106) --
Accounts payable.............................. -- -- -- -- 13,245
Accrued compensation and benefits............. (33,110) 83,057 (93,650) (166) (21,534)
Income taxes payable.......................... -- -- -- -- 107,994
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities........................................ 99,592 168,650 (599,863) 218,743 363,552
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment...... (13,672) -- -- -- --
Net change in investment in discontinued operations
prior to sale..................................... -- -- (6,219) 5,391 --
Proceeds from sale of investment in discontinued
operations........................................ -- -- 750,100 -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities........................................ (13,672) -- 743,881 5,391 --
FINANCING ACTIVITIES
Principal payments on long-term debt and capital
lease obligations................................. (103,671) (143,019) (207,144) (164,599) (243,321)
Additional contributed capital...................... 30,000 -- 8,683 -- 3,533
---------- ---------- ---------- ---------- ----------
Net cash used in financing activities............... (73,671) (143,019) (198,461) (164,599) (239,788)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... 12,249 25,631 (54,443) 59,535 123,764
Cash and cash equivalents at beginning of year...... 28,027 40,276 65,907 65,907 11,464
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year............ $ 40,276 $ 65,907 $ 11,464 $ 125,442 $ 135,228
---------- ---------- ---------- ---------- ----------
Supplemental noncash investing and financing
activities:
Acquisition of furniture, fixtures and equipment
under capital lease........................... $ 237,339 $ -- $ -- $ -- $ --
Purchase of ownership interest for notes
payable....................................... $ -- $ 319,235 $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-68
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND
SUBSEQUENT TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Vero Orthopaedics, P.A. (the Company) is an orthopaedic physician practice
which services the surrounding communities of Vero Beach and Sebastian, Florida.
The Company is organized as a professional corporation under the laws of the
state of Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net revenue is recorded as services are rendered at established rates net
of provision for bad debts, charity, and contractual adjustments. During the
years ended December 31, 1993, 1994 and 1995, the Company received approximately
75% of its net revenue from Medicare and Medicaid reimbursement programs which
reimburse orthopaedic services on a prospective payment system. Contractual
adjustments arise due to the terms of certain reimbursement and managed care
contracts. Such adjustments represent the difference between charges at
established rates and estimated amounts to be reimbursed to the Company and are
recognized when the services are rendered. Any differences between estimated
contractual adjustments and actual final settlements under reimbursement
contracts are recognized when the final settlements are made.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated claims-made commercial insurance policy.
Income Taxes
Deferred tax liabilities or assets (net of a valuation allowance) are
provided in the financial statements by applying the provisions of applicable
tax laws to measure the deferred tax consequences of temporary differences that
will result in net taxable or deductible amounts in future years as a result of
events recognized in the financial statements in the current or preceding years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-69
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, certain current liabilities and long-term notes payable. The
carrying amounts reported in the balance sheets for these items approximate fair
value.
Newly Issued Accounting Standard
The Company has considered the impact of Statement of Financial Accounting
Standards No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of,' and does not believe that adoption of this
pronouncement would have a significant impact on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
-------- --------
<S> <C> <C>
Gross patient accounts receivable................................. $714,155 $877,346
Less allowances for contractual adjustments and uncollectibles.... 279,090 285,189
-------- --------
$435,065 $592,157
-------- --------
-------- --------
</TABLE>
Net revenue consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Gross patient revenue.................................... $3,249,198 $3,884,516 $5,146,178
Less contractual adjustments and
uncollectibles......................................... 703,935 680,292 937,708
---------- ---------- ----------
$2,545,263 $3,204,224 $4,208,470
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment................................. $332,533 $332,533
Less accumulated depreciation and amortization.................... 171,427 216,480
-------- --------
$161,106 $116,053
-------- --------
-------- --------
</TABLE>
F-70
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
-------- --------
<S> <C> <C>
Notes payable to a bank, due in monthly installments of $6,208
plus interest at .5% plus the Barnett Banks, Inc. prime rate,
maturing in 1997................................................ $161,403 $ 86,910
Notes payable to individual, due in monthly installments of $5,700
including interest at 6%, maturing in 1997...................... 143,628 82,174
Notes payable to individual, due in monthly installments of
$4,000, including interest at 6%, maturing in 1997.............. 133,260 96,329
Line of credit.................................................... -- 20,000
-------- --------
438,291 285,413
Less current portion.............................................. 172,879 203,514
-------- --------
$265,412 $ 81,899
-------- --------
-------- --------
</TABLE>
At December 31, 1995, the aggregate maturities of long-term debt are as
follows: 1996 -- $203,514; 1997 -- $81,899.
The Company has a $100,000 line of credit with Barnett Banks, Inc., of
which $80,000 was available at December 31, 1995, that matures December 21,
1996. Borrowings under the line of credit bear an interest rate equal to .5%
plus the Barnett Banks, Inc. prime rate, published periodically, and borrowings
are collateralized by the assets of the Company. Accounts receivable
collateralize the notes payable to the bank.
Interest expense approximates interest paid.
6. BENEFIT PLANS
The Company has a profit sharing plan for its employees. Employees are
eligible to participate if they have completed more than one thousand hours of
service with the Company in a given year and are over the age of eighteen. The
Company contributes a discretionary amount which is allocated proportionally
based upon the salaries of participating employees. The retirement plan expense
was approximately $179,000, $165,000 and $127,000 for the years ended December
31, 1993, 1994 and 1995, respectively.
F-71
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1994 1995
------- --------
<S> <C> <C>
Deferred tax liabilities:
Capitalized lease................................................ $30,622 $ 46,770
Cash-to-accrual adjustment....................................... 11,813 105,112
------- --------
Total deferred tax liabilities................................ 42,435 151,882
------- --------
Deferred tax assets:
Net operating loss carryforward.................................. 10,018 4,779
Depreciation and amortization.................................... 32,346 46,358
------- --------
Total deferred tax assets..................................... 42,364 51,137
Valuation allowance for deferred tax assets........................ -- --
------- --------
Net deferred tax assets............................................ 42,364 51,137
------- --------
Net deferred tax liabilities....................................... $ 71 $100,745
------- --------
------- --------
</TABLE>
The (provision for) benefit from income taxes is comprised of the
following:
YEAR ENDED DECEMBER 31
---------------------------
1993 1994 1995
------- ------- ---------
Current..................................... $ -- $ -- $ --
Deferred.................................... 49,618 59,146 (100,674)
------- ------- ---------
Total....................................... $49,618 $59,146 $(100,674)
------- ------- ---------
------- ------- ---------
At December 31, 1995, the Company has aggregate net operating loss
carryforwards of $13,653 for federal tax reporting purposes, which expire
beginning 2007 through 2008, if not utilized.
The difference between the actual income tax provision and the tax
provision computed by applying the statutory Federal income tax rate to earnings
before taxes is attributable to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995
-------- ----------
<S> <C> <C>
Expected benefit from federal income taxes at statutory rate of
35%............................................................ $(70,873) $(189,578)
Divestitures..................................................... -- 227,330
Other, net....................................................... 1,227 26,548
-------- ---------
Income tax (benefit) expense..................................... $(69,646) $ 64,300
-------- ---------
-------- ---------
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company rents the clinic office space and certain equipment from 1260
Associates, L.C. (1260 Corp.). The shareholders of the Company are stockholders
of 1260 Corp. Facility and equipment rent paid to 1260 Corp. was $141,098,
$150,168 and $150,168 for the years ended December 31, 1993, 1994 and 1995,
respectively.
The Company advances money to certain affiliates (1260 Corp. and the
individual stockholders) in exchange for notes receivable. As of December 31,
1993, 1994 and 1995, the amounts receivable are $66,317, $53,495, and $60,753,
respectively, from 1260 Corp. and $6,063, $2,613 and $5,996, respectively, from
the individual stockholders.
On October 1, 1994, the Company financed for a new physician stockholder
the purchase of one-fourth of the issued shares of the Company's stock from
existing stockholders for a note totaling
F-72
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS -- (CONTINUED)
$18,121. Principal and interest payments are due monthly until maturity at
October 20, 1996. The note bears 6% interest. The purchase of these issued
shares from existing stockholders has been reflected as an increase in
additional paid-in capital and the note receivable has been classified as a
reduction of stockholders' equity.
9. LEASES
The Company leases certain equipment under capitalized leases. The cost of
such equipment at both December 31, 1994 and 1995 was $237,339. Accumulated
amortization was $90,673 and $124,578 at December 31, 1994 and 1995,
respectively.
The Company also leases its clinic facility from 1260 Corp. under a
noncancelable operating lease arrangement. Future minimum payments under capital
and noncancelable operating leases are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1996..................................................... $62,388 $ 95,040
1997..................................................... 16,448 7,920
1998..................................................... 7,260 --
1999..................................................... 1,815 --
------- --------
Total minimum lease payments............................. 87,911 $102,960
--------
--------
Less amount representing interest........................ 5,447
-------
Present value of net minimum lease payments.............. 82,464
Less current portion..................................... 62,388
-------
Long-term portion........................................ $20,076
-------
-------
Rent expense for the years ended December 31, 1993, 1994 and 1995 totaled
$92,880, $95,040 and $95,040, respectively.
10. DISCONTINUED OPERATIONS
On December 27, 1995, the Company completed the sale of the net assets and
operations of Vero Physical Therapy (PT) to HealthSouth of Treasure Coast, Inc.
for $750,100. This sale was accounted for as discontinued operations and,
accordingly, the operations and assets sold related to this discontinued
business have been segregated in the accompanying financial statements. Revenues
from the PT operations, originally acquired by the Company in 1994, were
approximately $229,000 and $900,000 for the years ended December 31, 1994 and
1995, respectively. Net assets of discontinued operations are composed primarily
of accounts receivable and goodwill.
11. SUBSEQUENT EVENT
Effective November 12, 1996, the Company entered into a tax-free merger
(the Merger) with Specialty Care Network, Inc. (SCN) in a reorganization,
whereby the stockholders of the Company agreed to exchange their outstanding
common stock for approximately 651,607 shares of common stock of SCN. In
connection with the Merger, SCN will provide administrative services and manage
the non-medical operations of the Company and enter into a long-term service
agreement with the physician stockholders of the Company, pursuant to which the
physicians will continue to provide medical services through a new entity. In
addition, certain of the Company's physician stockholders have purchased
$115,000 of convertible debentures of SCN that are convertible into common stock
of SCN of $1 a share.
F-73
<PAGE>
VERO ORTHOPAEDICS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the statements of operations,
stockholders' equity and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
On January 8, 1997, SCN was sued by Michael A. Feiertag, M.D. (a former
physician at the Company) for alleged breach of his employment agreement. Dr.
Feiertag is seeking damages in excess of $500,000. Discovery in the case has not
yet commenced and, accordingly, SCN and the Company are not yet able to assess
their potential exposure, if any, in this case. However, SCN and the Company
believe that the ultimate resolution of the case will not have a material
adverse effect on the Company's accompanying financial statements.
F-74
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 15
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 17
Selected Unaudited Financial Data.............. 18
Management's Discussion and
Analysis of Financial Condition and
Results of Operations........................ 22
Business....................................... 26
Management..................................... 42
Certain Transactions........................... 49
Principal and Selling Stockholders............. 51
Description of Capital Stock................... 53
Shares Eligible for Future Sale................ 54
Underwriting................................... 55
Notice to Canadian Residents................... 56
Legal Matters.................................. 57
Experts........................................ 57
Additional Information......................... 57
Index to Financial Statements.................. F-1
------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
SPECIALTY CARE NETWORK, INC.
3,350,000 Shares
Common Stock
($.001 par value)
P R O S P E C T U S
CREDIT SUISSE FIRST BOSTON
EQUITABLE SECURITIES
CORPORATION
LEHMAN BROTHERS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table set forth fees payable to the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and The Nasdaq
Stock Market and other expenses expected to be incurred in connection with the
issuance and distribution of the securities being registered. All the fees and
expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee..................................... $ 13,063
National Association of Securities Dealers, Inc. Filing Fee............................. 4,604
The Nasdaq Stock Market Listing Fee..................................................... 50,000
Printing Expenses....................................................................... 150,000
Legal Fees and Expenses................................................................. 400,000
Accounting Fees and Expenses............................................................ 400,000
Blue Sky Qualification Fees and Expenses (including counsel fees)....................... 7,500
Transfer Agent Fees and Expenses........................................................ 2,500
Miscellaneous Expenses.................................................................. 82,333
----------
Total.............................................................................. $1,110,000
----------
----------
</TABLE>
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law (the 'DGCL')
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of directors
to the corporation or its stockholders for monetary damages for breaches of
fiduciary duty, except for liability (a) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the DGCL, or (d) for any transaction from which
the director derived an improper personal benefit. Article 7 of the registrant's
Certificate of Incorporation provides that the personal liability of directors
of the registrant is eliminated to the fullest extent permitted by Section
102(b)(7) of the DGCL.
Under Section 145 of the DGCL, a corporation has the power to indemnify
directors and officers under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorney's
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of being a director or officer of the
corporation if it is determined that the director or officer acted in accordance
with the applicable standard of conduct set forth in such statutory provision.
Article 6 of the registrant's Bylaws provides that the registrant will indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reasons of the
fact that he is or was a director, officer, employee or agent of the registrant,
or is or was serving at the request of the registrant as a director, officer,
employee or agent of another entity, against certain liabilities, costs and
expenses. Article 6 further permits the agent of the registrant, or is or was
serving at the request of the registrant as a director, officer, employee or
agent of another entity, against any liability asserted against such person and
incurred by such person in any such capacity or arising out of his status as
such, whether or not the registrant would have the power to indemnify such
person against such liability under the DGCL.
II-1
<PAGE>
15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 22, 1995, the date the Company was incorporated, the Company
has issued and sold the following unregistered securities:
1. On December 25, 1995, the Company issued 1,265,000 shares of Common
Stock to private investors for an aggregate price of $1,265 or $.001 per share.
In addition, on December 22, 1995, 500,000 Shares of Common Stock were issued to
an employee of the Company of which 425,000 shares were returned to the Company
in connection with the termination of such employee's employment with the
Company.
2. From January 15, 1996 through July 1, 1996, the Company issued
$1,869,999 of convertible debentures to private investors for an aggregate price
of $1,870,000. The convertible debentures bore interest at 5% per annum and were
converted at a rate of one share of Common Stock for each $1.00 of indebtedness
into 1,920,222 shares of Common Stock on November 12, 1996.
3. On October 1, 1996, the Company issued Debentures to a private investor
for an aggregate price of $300,000. The convertible debentures bore interest a
5% per annum and were converted at a rate of one share of common stock for each
$3.00 of indebtedness, into 100,569 shares of Common Stock on November 12, 1996.
4. On November 4, 1996, the Company issued 100,000 shares of Common Stock
to a private investor for an aggregate price of $300,000.
5. On November 12, 1996, pursuant to the Initial Affiliation Transactions,
the Company entered into agreements with the Predecessor Practices and issued an
aggregate of 7,659,115 shares of Common Stock to the physician owners of the
Predecessor Practices. See 'Certain Transactions' for a more detailed
description of the Initial Affiliation Transactions.
The Company believes that the transactions described above were exempt from
registration under Section 4(2) of the Act because the subject securities were
sold to a limited group of persons, each of whom was believed to have been a
sophisticated investor or had a pre-existing business or personal relationship
with the Company or its management and was purchasing for investment without a
view to further distribution. Restrictive legends were placed on stock
certificates evidencing the shares and/or agreements relating to the right to
purchase such shares described above.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed as part of this registration
statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1 Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Amended and Restated Bylaws
5* Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered
10.1+ Specialty Care Network, Inc. 1996 Equity Compensation Plan
10.2+ Specialty Care Network, Inc. 1996 Incentive and Non-Qualified Stock Option Plan
10.3+ Employment Agreement dated as of April 1, 1996 by and between Specialty Care Network, Inc. and Kerry
R. Hicks
10.4+ Employment Agreement dated as of April 1, 1996 by and between Specialty Care Network, Inc. and
Patrick M. Jaeckle
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.5+ Employment Agreement dated as of March 11, 1996 by and between Specialty Care Network, Inc. and
William Behrens
10.6+ Employment Agreement dated as of February 22, 1996 by and between Specialty Care Network, Inc. and
Paul Davis
10.7+ Employment Agreement dated as of March 1, 1996 by and between Specialty Care Network, Inc. and Peter
A. Fatianow
10.8+ Employment Agreement dated as of March 1, 1996 by and between Specialty Care Network, Inc. and David
Hicks
10.9+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and Reconstructive
Orthopaedic Assocs., Inc.
10.10**,+ Service Agreement dated as of November 12, 1996 by and between Specialty Care Network, Inc.,
Reconstructive Orthopaedic Associates II, P.C. and Richard H. Rothman, M.D., Robert E. Booth, Jr.,
M.D., Richard Balderston, M.D., Arthur R. Bartolozzi, M.D., William J. Hozack, M.D., Michael G.
Ciccotti, M.D., Todd J. Albert, M.D., Alexander R. Vaccaro, M.D. and Peter F. Sharkey, M.D.
10.11+ Letter agreement dated October 29, 1996 by and between Arthur R. Bartolozzi, M.D. and Specialty Care
Network, Inc.
10.12+ Letter agreement dated October 29, 1996 by and between Robert E. Booth, Jr., M.D. and Specialty Care
Network, Inc.
10.13+ Letter agreement dated November 11, 1996 by and between Richard H. Rothman, M.D. and Specialty Care
Network, Inc.
10.14+ Stock Exchange Agreement dated October 21, 1996 by and among Specialty Care Network, Inc. and Michael
N. Jolley, M.D., Harvey E. Smires, M.D., Robert N. Dunn, M.D., Jeffrey S. Abrams, M.D., Richard E.
Fleming, Jr., M.D., W. Thomas Gutowski, M.D., Steven R. Gecha, M.D., C. Alexander Moskwa, Jr., M.D.
and David M. Smith, M.D.
10.15**,+ Service Agreement dated as of November 1, 1996, by and between Specialty Care Network, Inc., SCN of
Princeton, Inc., Princeton Orthopedic Associates II, P.A. and Michael N. Jolley, M.D., Harvey E.
Smires, M.D., Robert N. Dunn, M.D., Jeffrey S. Abrams, M.D., Richard E. Fleming, Jr., M.D., W. Thomas
Gutowski, M.D., Steven R. Gecha, M.D., C. Alexander Moskwa, Jr., M.D. and David M. Smith, M.D.
10.16+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and TOC Services,
Inc.
10.17**,+ Service Agreement dated as of November 12, 1996 by and between TOC Specialists, P.L., (d/b/a
Tallahassee Orthopedic Clinic) TOC Services, Inc. (f/k/a Tallahassee Orthopedic Clinic, P.A.) and
Greg A. Alexander, M.D., David C. Berg, M.D., Richard E. Blackburn, M.D., Donald Dewey, M.D., Mark E.
Fahey, M.D., Tom C. Haney, M.D., William D. Henderson, Jr., M.D., Steve E. Jordan, M.D., J. Rick
Lyon, M.D., Kris D. Stowers, M.D., Robert L. Thornberry, M.D., Billy C. Weinstein, M.D. and Charles
H. Wingo, M.D.
10.18+ Asset Exchange Agreement dated as of November 12, 1996 by and among Specialty Care Network, Inc.,
Greater Chesapeake Orthopaedic Associates, L.L.C., Stuart D. Miller, M.D., Leslie S. Matthews, M.D.,
Paul L. Asdourian, M.D., Frank R. Ebert, M.D., Mark S. Myerson, M.D., John B. O'Donnell, M.D. and Lew
C. Schon, M.D.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.19**,+ Service Agreement dated as of November 12, 1996 by and between Speciality Care Network, Inc., Greater
Chesapeake Orthopaedic Associates, L.L.C., Stuart D. Miller, M.D., Leslie S. Matthews, M.D., Paul L.
Asdourian, M.D., Frank R. Ebert, M.D., Mark S. Myerson, M.D., John B. O'Donnell, M.D. and Lew C.
Schon, M.D.
10.20+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and Vero
Orthopaedic, Inc.
10.21**,+ Service Agreement dated as of November 12, 1996 by and between Specialty Care Network, Inc., Vero
Orthopaedics II, P.A. and James L. Cain, M.D., David W. Griffin, M.D., George K. Nichols, M.D., Peter
G. Wernicki, M.D. and Charlene Wilson, M.D.
10.22* Revolving Loan and Security Agreement dated as of November 1, 1996 among Specialty Care Network,
Inc., SCN of Princeton, Inc., NationsBank of Tennessee N.A. and NationsBank of Tennessee, N.A. as
Agent.
10.23 Merger Agreement dated December 6, 1996 by and among Specialty Care Network, Inc., Riyaz H. Jinnah,
M.D., P.A. and Riyaz H. Hinnah, M.D.
10.24 Merger Agreement dated December 6, 1996 by and among Specialty Care Network, Inc., Floyd Jaeggers,
M.D., P.C. and Floyd Jaggers, M.D.
10.25 Merger Agreement dated December 6, 1996 by and among Specialty Care Nettwork, Inc., Medical
Rehabilitation Specialists, P.A. and Kirk J. Mauro, M.D.
10.26** Term Sheet by and among Reconstructive Orthopaedic Associates II, P.C., Specialty Care Network, Inc.,
Robert E. Booth, Jr., M.D. and Arthur R. Bartolozzi, M.D.
11 Statement re: computation of per share earnings
21* Subsidiary of the Company
23.1 Consent of Ernst & Young LLP
23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto)
24+ Powers of Attorney (included as part of the signature page hereof)
27+ Financial Data Schedule
</TABLE>
- ------------------
* To be filed by amendment.
** Portions of this exhibit were omitted and filed separately with the Secretary
of the Commission pursuant to an application for confidential treatment filed
with the Commission pursuant to Rule 406 under the Securities Act.
+ Previously filed.
(b) Financial Statement Schedules
None.
17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the registrant's Articles of Incorporation, its Bylaws,
the Underwriting Agreement, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for
II-4
<PAGE>
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in Lakewood, Colorado, on January 21, 1997.
SPECIALTY CARE NETWORK, INC.
By: /s/ Patrick M. Jaeckle
---------------------------------
Patrick M. Jaeckle
Executive Vice President of
Financial Development
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of
- ------------------------------------- Directors
Richard H. Rothman, M.D., Ph.D.
* Principal Executive Officer
- ------------------------------------- and Director
Kerry R. Hicks
/s/ Patrick M. Jaeckle Principal Financial Officer January 21, 1997
- ------------------------------------- and Director
Patrick M. Jaeckle
* Principal Accounting Officer
- ------------------------------------- Officer
D. Paul Davis
* Director
- -------------------------------------
Robert E. Booth, Jr., M.D.
* Director
- -------------------------------------
James L. Cain, M.D.
* Director
- -------------------------------------
Peter H. Cheesbrough
* Director
- -------------------------------------
Richard E. Fleming, Jr., M.D.
* Director
- -------------------------------------
Thomas C. Haney, M.D.
* Director
- -------------------------------------
Leslie S. Matthews, M.D.
* Director
- -------------------------------------
Wiliam C. Behrens
*By: /s/ Patrick M. Jaeckle January 21, 1997
--------------------------------
As Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1 Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Amended and Restated Bylaws
5* Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered
10.1+ Specialty Care Network, Inc. 1996 Equity Compensation Plan
10.2+ Specialty Care Network, Inc. 1996 Incentive and Non-Qualified Stock Option Plan
10.3+ Employment Agreement dated as of April 1, 1996 by and between Specialty Care Network, Inc. and Kerry
R. Hicks
10.4+ Employment Agreement dated as of April 1, 1996 by and between Specialty Care Network, Inc. and
Patrick M. Jaeckle
10.5+ Employment Agreement dated as of March 11, 1996 by and between Specialty Care Network, Inc. and
William Behrens
10.6+ Employment Agreement dated as of February 22, 1996 by and between Specialty Care Network, Inc. and
Paul Davis
10.7+ Employment Agreement dated as of March 1, 1996 by and between Specialty Care Network, Inc. and Peter
A. Fatianow
10.8+ Employment Agreement dated as of March 1, 1996 by and between Specialty Care Network, Inc. and David
Hicks
10.9+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and Reconstructive
Orthopaedic Assocs., Inc.
10.10**,+ Service Agreement dated as of November 12, 1996 by and between Specialty Care Network, Inc.,
Reconstructive Orthopaedic Associates II, P.C. and Richard H. Rothman, M.D., Robert E. Booth, Jr.,
M.D., Richard Balderston, M.D., Arthur R. Bartolozzi, M.D., William J. Hozack, M.D., Michael G.
Ciccotti, M.D., Todd J. Albert, M.D., Alexander R. Vaccaro, M.D. and Peter F. Sharkey, M.D.
10.11+ Letter agreement dated October 29, 1996 by and between Arthur R. Bartolozzi, M.D. and Specialty Care
Network, Inc.
10.12+ Letter agreement dated October 29, 1996 by and between Robert E. Booth, Jr., M.D. and Specialty Care
Network, Inc.
10.13+ Letter agreement dated November 11, 1996 by and between Richard H. Rothman, M.D. and Specialty Care
Network, Inc.
10.14+ Stock Exchange Agreement dated October 21, 1996 by and among Specialty Care Network, Inc. and Michael
N. Jolley, M.D., Harvey E. Smires, M.D., Robert N. Dunn, M.D., Jeffrey S. Abrams, M.D., Richard E.
Fleming, Jr., M.D., W. Thomas Gutowski, M.D., Steven R. Gecha, M.D., C. Alexander Moskwa, Jr., M.D.
and David M. Smith, M.D.
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.15**,+ Service Agreement dated as of November 1, 1996, by and between Specialty Care Network, Inc., SCN of
Princeton, Inc., Princeton Orthopedic Associates II, P.A. and Michael N. Jolley, M.D., Harvey E.
Smires, M.D., Robert N. Dunn, M.D., Jeffrey S. Abrams, M.D., Richard E. Fleming, Jr., M.D., W. Thomas
Gutowski, M.D., Steven R. Gecha, M.D., C. Alexander Moskwa, Jr., M.D. and David M. Smith, M.D.
10.16+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and TOC Services,
Inc.
10.17**,+ Service Agreement dated as of November 12, 1996 by and between TOC Specialists, P.L., (d/b/a
Tallahassee Orthopedic Clinic) TOC Services, Inc. (f/k/a Tallahassee Orthopedic Clinic, P.A.) and
Greg A. Alexander, M.D., David C. Berg, M.D., Richard E. Blackburn, M.D., Donald Dewey, M.D., Mark E.
Fahey, M.D., Tom C. Haney, M.D., William D. Henderson, Jr., M.D., Steve E. Jordan, M.D., J. Rick
Lyon, M.D., Kris D. Stowers, M.D., Robert L. Thornberry, M.D., Billy C. Weinstein, M.D. and Charles
H. Wingo, M.D.
10.18+ Asset Exchange Agreement dated as of November 12, 1996 by and among Specialty Care Network, Inc.,
Greater Chesapeake Orthopaedic Associates, L.L.C., Stuart D. Miller, M.D., Leslie S. Matthews, M.D.,
Paul L. Asdourian, M.D., Frank R. Ebert, M.D., Mark S. Myerson, M.D., John B. O'Donnell, M.D. and Lew
C. Schon, M.D.
10.19**,+ Service Agreement dated as of November 12, 1996 by and between Speciality Care Network, Inc., Greater
Chesapeake Orthopaedic Associates, L.L.C., Stuart D. Miller, M.D., Leslie S. Matthews, M.D., Paul L.
Asdourian, M.D., Frank R. Ebert, M.D., Mark S. Myerson, M.D., John B. O'Donnell, M.D. and Lew C.
Schon, M.D.
10.20+ Merger Agreement dated November 12, 1996 by and among Specialty Care Network, Inc. and Vero
Orthopaedic, Inc.
10.21**,+ Service Agreement dated as of November 12, 1996 by and between Specialty Care Network, Inc., Vero
Orthopaedics II, P.A. and James L. Cain, M.D., David W. Griffin, M.D., George K. Nichols, M.D., Peter
G. Wernicki, M.D. and Charlene Wilson, M.D.
10.22* Revolving Loan and Security Agreement dated as of November 1, 1996 among Specialty Care Network,
Inc., SCN of Princeton, Inc., Nations Bank of Tennessee, N.A. and Nations Bank of Tennessee, N.A., as
Agent.
10.23 Merger Agreement dated December 6, 1996 by and among Specialty Care Network, Inc., Riyaz H. Jinnah,
M.D., P.A. and Riyaz H. Hinnah, M.D.
10.24 Merger Agreement dated December 6, 1996 by and among Specialty Care Network, Inc., Floyd Jaeggers,
M.D., P.C. and Floyd Jaggers, M.D.
10.25 Merger Agreement dated December 6, 1996 by and among Specialty Care Nettwork, Inc., Medical
Rehabilitation Specialists, P.A. and Kirk J. Mauro, M.D.
10.26** Term Sheet by and among Reconstructive Orthopaedic Associates II, P.C., Specialty Care Network, Inc.,
Robert E. Booth, Jr., M.D. and Arthur R. Bartolozzi, M.D.
11 Statement re: computation of per share earnings
21* Subsidiary of the Company
23.1 Consent of Ernst & Young LLP
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
<S> <C>
23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto)
24+ Powers of Attorney (included as part of the signature page hereof)
27+ Financial Data Schedule
</TABLE>
- ------------------
* To be filed by amendment.
** Portions of this exhibit were omitted and filed separately with the Secretary
of the Commission pursuant to an application for confidential treatment filed
with the Commission pursuant to Rule 406 under the Securities Act.
+ Previously filed.
(iii)
<PAGE>
3,000,000 Shares
SPECIALTY CARE NETWORK, INC.
Common Stock, par value $.001 per share
UNDERWRITING AGREEMENT
----------------------
, 1997
----------
CREDIT SUISSE FIRST BOSTON CORPORATION
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010
Dear Sirs:
1. Introductory. Specialty Care Network, Inc., a Delaware
corporation ("Company"), proposes to issue and sell 3,000,000 shares of its
Common Stock, par value $.001 per share ("Securities") and the stockholders
listed in Schedule A hereto ("Selling Stockholders") propose severally to sell
an aggregate of 280,400 outstanding shares of the Securities (such 3,280,400
shares of Securities being hereinafter referred to as the "Firm Securities").
The Company also proposes to issue and sell to the Underwriters, at the option
of the Underwriters, an aggregate of not more than 450,000 additional shares
("Optional Securities") of its Securities as set forth below. The Firm
Securities and the Optional Securities are herein collectively called the
"Offered Securities". The Company and the Selling Stockholders hereby agree with
the several Underwriters named in Schedule B hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the
Selling Stockholders. (a) The Company represents and warrants to, and agrees
with, the several Underwriters that:
(i) A registration statement (No. 333-17627) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either
<PAGE>
2
(A) has been declared effective under the Securities Act of 1933
("Act") and is not proposed to be amended or (B) is proposed to be
amended by amendment or post-effective amendment. If such registration
statement ("initial registration statement") has been declared
effective, either (A) an additional registration statement ("additional
registration statement") relating to the Offered Securities may have
been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)")
under the Act and, if so filed, has become effective upon filing
pursuant to such Rule and the Offered Securities all have been duly
registered under the Act pursuant to the initial registration statement
and, if applicable, the additional registration statement or (B) such
an additional registration statement is proposed to be filed with the
Commission pursuant to Rule 462(b) and will become effective upon
filing pursuant to such Rule and upon such filing the Offered
Securities will all have been duly registered under the Act pursuant to
the initial registration statement and such additional registration
statement. If the Company does not propose to amend the initial
registration statement or if an additional registration statement has
been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the
Act or, in the case of the additional registration statement, Rule
462(b). For purposes of this Agreement, "Effective Time" with respect
to the initial registration statement or, if filed prior to the
execution and delivery of this Agreement, the additional registration
statement means (A) if the Company has advised the Representatives that
it does not propose to amend such registration statement, the date and
time as of which such registration statement, or the most recent
post-effective amendment thereto (if any) filed prior to the execution
and delivery of this Agreement, was declared effective by the
Commission or has become effective upon filing pursuant to Rule 462(c),
or (B) if the Company has advised the Representatives that it proposes
to file an amendment or post-effective amendment to such registration
statement, the date and time as of which such registration statement,
as amended by such amendment or post-effective amendment, as the case
may be, is declared effective by the
<PAGE>
3
Commission. If an additional registration statement has not been filed
prior to the execution and delivery of this Agreement but the Company
has advised the Representatives that it proposes to file one,
"Effective Time" with respect to such additional registration statement
means the date and time as of which such registration statement is
filed and becomes effective pursuant to Rule 462(b). "Effective Date"
with respect to the initial registration statement or the additional
registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its
Effective Time, including all information contained in the additional
registration statement (if any) and deemed to be a part of the initial
registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form
on which it is filed and including all information (if any) deemed to
be a part of the initial registration statement as of its Effective
Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement". The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement
incorporated by reference therein and including all information (if
any) deemed to be a part of the additional registration statement as of
its Effective Time pursuant to Rule 430A(b), is hereinafter referred to
as the "Additional Registration Statement". The Initial Registration
Statement and the Additional Registration Statement are herein referred
to collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the
Offered Securities, as first filed with the Commission pursuant to and
in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no
such filing is required) as included in a Registration Statement, is
hereinafter referred to as the "Prospectus". No document has been or
will be prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A)
on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all respects to the
requirements of the Act and the rules and regulations of the Commission
("Rules and Regulations") and did not include any untrue statement of a
<PAGE>
4
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (B)
on the Effective Date of the Additional Registration Statement (if
any), each Registration Statement conformed, or will conform, in all
respects to the requirements of the Act and the Rules and Regulations
and did not include, or will not include, any untrue statement of a
material fact and did not omit, or will not omit, to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading and (C) on the date of this Agreement, the
Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included,
each Registration Statement and the Prospectus will conform, in all
respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all respects to the requirements of the Act and the Rules
and Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c).
(iii) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
<PAGE>
5
Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and
the Company is duly qualified to do business as a foreign corporation
in good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification.
(iv) Each subsidiary of the Company has been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; each subsidiary of the Company is duly qualified to
do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification; all of the issued
and outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
(v) Each physician practice with which the Company is
affiliated through a service agreement is listed on Schedule C hereto.
Such physician practices are referred to herein individually as an
"Affiliated Practice" and collectively as the "Affiliated Practices",
and such service agreements are referred to herein individually as a
"Service Agreement". Each of the Affiliated Practices has been duly
organized and is existing in good standing, with power and authority
(corporate and other) to own its properties and conduct its business as
presently conducted. Each Service Agreement has been duly authorized,
executed and delivered by the parties thereto and constitutes a valid
and legally binding agreement of the parties thereto, enforceable
against the parties thereto in accordance with its terms.
(vi) The Offered Securities and all other outstanding shares
of capital stock of the Company have been duly authorized; all
outstanding shares of capital stock of the Company are, and, when the
Offered Securities to be issued and sold by the Company hereunder have
been delivered and paid for in accordance with this Agreement on each
Closing Date (as defined below), such Offered Securities will have
<PAGE>
6
been, validly issued, fully paid and nonassessable, and the Offered
Securities conform or will conform to the description thereof contained
in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Securities.
(vii) Except for this Agreement, there are no contracts,
agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter
for a brokerage commission, finder's fee or other like payment in
connection with the transactions contemplated hereby.
(viii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act.
(ix) The Offered Securities have been approved for listing on
the Nasdaq Stock Market's National Market, subject to notice of
issuance.
(x) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities, except
such as have been obtained and made under the Act and such as may be
required under state securities laws.
(xi) The execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated
hereby, will not result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or
any court, domestic or foreign, having jurisdiction over the Company or
any subsidiary of the Company or any of their properties, or any
<PAGE>
7
agreement or instrument to which the Company or any such subsidiary is
a party or by which the Company or any such subsidiary is bound or to
which any of the properties of the Company or any such subsidiary is
subject, or the charter or by-laws of the Company or any such
subsidiary.
(xii) This Agreement has been duly authorized, executed and
delivered by the Company.
(xiii) Except as disclosed in the Prospectus, the Company, its
subsidiaries and the Affiliated Practices have good and marketable
title to all real properties and all other properties and assets owned
by them, in each case free from liens, encumbrances and defects that
would materially affect the value thereof or materially interfere with
the use made or to be made thereof by them; and except as disclosed in
the Prospectus, the Company, its subsidiaries and the Affiliated
Practices hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them.
(xiv) The Company, its subsidiaries and the Affiliated
Practices possess adequate certificates (including certificates of
need), authorities, licenses or permits issued by appropriate
governmental agencies or bodies necessary to conduct the businesses now
operated by them (including, without limitation, such as are required
(x) under such federal and state healthcare laws, statutes and
regulations as are applicable to the Company, its subsidiaries and the
Affiliated Practices, (y) in the case of the Affiliated Practices, to
receive reimbursement under Medicare/Medicaid and (z) under such
insurance laws and regulations as are applicable to the Company, its
subsidiaries and the Affiliated Practices) and have not received any
notice of proceedings relating to the revocation or modification of any
such certificate, authority, license or permit that, if determined
adversely to the Company, any of its subsidiaries or any of the
Affiliated Practices, as the case may be, would individually or in the
aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole.
<PAGE>
8
(xv) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(xvi) The Company and its subsidiaries own, possess or can
acquire on reasonable terms, adequate trademarks, trade names and other
rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively,
"intellectual property rights") necessary to conduct the business now
operated by them, or presently employed by them, and have not received
any notice of infringement of or conflict with asserted rights of
others with respect to any intellectual property rights that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
Company and its subsidiaries taken as a whole.
(xvii) Neither the Company, any of its subsidiaries nor any of
the Affiliated Practices is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "environmental laws"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole; and the Company is not aware of any
pending investigation which might lead to such a claim.
(xviii) There are no pending actions, suits or proceedings
against or affecting the Company, any of its subsidiaries, any of the
Affiliated Practices or any of their respective properties that, if
determined adversely to the Company, any of its subsidiaries or any of
the Affiliated Practices, as the case may be, would individually or in
the aggregate have a material adverse effect on the condition
<PAGE>
9
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, or would materially
and adversely affect the ability of the Company to perform its
obligations under this Agreement, or which are otherwise material in
the context of the sale of the Offered Securities; and no such actions,
suits or proceedings are threatened or, to the Company's knowledge,
contemplated.
(xix) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the entities to which such financial statements relate as of the dates
shown and their results of operations and cash flows for the periods
shown, and such financial statements have been prepared in conformity
with the generally accepted accounting principles in the United States
applied on a consistent basis; the assumptions used in preparing the
pro forma financial statements included in each Registration Statement
and the Prospectus provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those assumptions and the pro forma columns therein reflect
the proper application of those adjustments to the corresponding
historical financial statement amounts; and the financial information
for the combined Predecessor Practices (as defined in the Prospectus)
included in each Registration Statement and the Prospectus reflect an
accurate summation of the applicable historical financial data of the
Predecessor Practices.
(xx) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements of the Company included in the
Prospectus there has been no material adverse change, nor any
development or event involving a prospective material adverse change,
in the condition (financial or other), business, properties or results
of operations of the Company and its subsidiaries, taken as a whole,
and, except as disclosed in or contemplated by the Prospectus, there
has been no dividend or distribution of any kind declared, paid or made
by the Company on any class of its capital stock; and, except as
disclosed in the Prospectus, there has been no material adverse change,
nor any development or event involving a prospective material adverse
<PAGE>
10
change, in the condition (financial or other), business, properties or
results of operations of any Affiliated Practice since the date of the
latest audited financial statements of such Affiliated Practice or the
predecessor to such Affiliated Practice, as the case may be, included
in the Prospectus.
(xxi) There are no material Medicare, Medicaid, managed care
or other third party payor recoupment being sought, threatened,
requested or claimed against the Company, any of its subsidiaries, any
of the Affiliated Practices or any physician-owner or
physician-employee of any of the Affiliated Practices.
(xxii) Neither the Company, any of its subsidiaries nor any of
the Affiliated Practices is in, or operates in, violation of any
healthcare law, ordinance, administrative or governmental rule or
regulation including, without limitation, those relating to
reimbursement by government agencies, fraudulent or wrongful billings,
and legislation commonly referred to as the "Stark" legislation, and
those prohibiting fee-splitting or fees for the referral of patients.
(xxiii) Neither the Company nor any of its subsidiaries (x)
employs any of the physician-owners or physician-employees of any of
the Affiliated Practices, (y) exercises any influence or control over
the practice of medicine by any such physicians or (z) represents to
the public that it offers medical services.
(xxiv) The Company and each of the Affiliated Practices
maintains medical malpractice insurance. Such insurance is adequate in
accordance with customary industry practice, and all such insurance is
outstanding and duly in force.
(xxv) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940.
(b) Each Selling Stockholder severally represents and warrants to, and
agrees with, the several Underwriters that:
<PAGE>
11
(i) Such Selling Stockholder has and on the First Closing Date
(as defined herein) will have valid and unencumbered title to the
Offered Securities to be delivered by such Selling Stockholder on such
Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by such Selling Stockholder on such Closing
Date hereunder; and upon the delivery of and payment for the Offered
Securities on such Closing Date hereunder the several Underwriters will
acquire valid and unencumbered title to the Offered Securities to be
delivered by such Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A)
on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all respects to the
requirements of the Act and the Rules and Regulations and did not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the
Act and the Rules and Regulations and did not include, or will not
include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (C) on
the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior to
the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required)
at the Effective Date of the Additional Registration Statement in which
the Prospectus is included, each Registration Statement and the
Prospectus will conform, in all respects to the requirements of the Act
and the Rules and Regulations, and neither of such documents includes,
or will include, any untrue statement of a material fact or omits, or
will omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. If the
Effective Time of the Initial Registration Statement is subsequent to
the execution and delivery of
<PAGE>
12
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all respects to the requirements of the Act and the Rules
and Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c).
3. Purchase, Sale and Delivery of Offered Securities. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company and each
Selling Stockholder agree, severally and jointly, to sell to each Underwriter,
and each Underwriter agrees, severally and not jointly, to purchase from the
Company and each Selling Stockholder, at a purchase price of $ per share,
that number of Firm Securities (rounded up or down, as determined by Credit
Suisse First Boston Corporation ("Credit Suisse First Boston") in its
discretion, in order to avoid fractions) obtained by multiplying 3,000,000 Firm
Securities in the case of the Company and the number of Firm Securities set
forth opposite the name of such Selling Stockholder in Schedule A hereto, in the
case of a Selling Stockholder, in each case by a fraction the numerator of which
is the number of Firm Securities set forth opposite the name of such Underwriter
in Schedule B hereto and the denominator of which is the total number of Firm
Securities.
Certificates in negotiable form for the Offered Securities to
be sold by the Selling Stockholders hereunder have been placed in custody, for
delivery under this Agreement, under custody agreements (each, a "Custody
Agreement" and collectively, the "Custody Agreements") made with , as
custodian ("Custodian"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders shall
<PAGE>
13
not be terminated by operation of law, whether by the death of any individual
Selling Stockholder or the occurrence of any other event, or in the case of a
trust, by the death of any trustee or trustees or the termination of such trust.
If any individual Selling Stockholder or any such trustee or trustees should
die, or if any other such event should occur, or if any of such trusts should
terminate, before the delivery of the Offered Securities hereunder, certificates
for such Offered Securities shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death or other event
or termination had not occurred, regardless of whether or not the Custodian
shall have received notice of such death or other event or termination.
The Company and the Custodian will deliver the Firm Securities
to the Representatives for the accounts of the Underwriters, against payment of
the purchase price in funds available on the same day by wire transfer to the
account of in the case of 3,000,000 shares of Firm Securities and in
the case of 280,400 shares of Firm Securities, in each case at a bank acceptable
to Credit Suisse First Boston or by official Federal Reserve Bank check or
checks drawn to the order of in the case of 3,000,000 shares of Firm
Securities and in the case of 280,400 shares of Firm Securities
at the office of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New
York at 9:00 A.M., New York time, on , or at such other time not later than
seven full business days thereafter as Credit Suisse First Boston and the
Company determine, such time being herein referred to as the "First Closing
Date". The certificates for the Firm Securities so to be delivered will be in
such form, in such denominations and registered in such names as Credit Suisse
First Boston requests and will be made available for checking and packaging at
the above office of Simpson Thacher & Bartlett at least 24 hours prior to the
First Closing Date.
In addition, upon written notice from Credit Suisse First
Boston given to the Company from time to time not more than 30 days subsequent
to the date of the Prospectus, the Underwriters may purchase all or less than
all of the Optional Securities at the purchase price per Security to be paid for
the Firm Securities. The Company agrees to sell to the Underwriters the number
of shares of Optional Securities specified in such notice and the Underwriters
agree, severally and not jointly, to purchase such Optional Securities. Such
<PAGE>
14
Optional Securities shall be purchased for the account of each Underwriter in
the same proportion as the number of shares of Firm Securities set forth
opposite such Underwriter's name bears to the total number of shares of Firm
Securities (subject to adjustment by Credit Suisse First Boston to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by Credit Suisse First Boston
to the Company.
Each time for the delivery of and payment for the Optional
Securities, being herein referred to as an "Optional Closing Date", which may be
the First Closing Date (the First Closing Date and each Optional Closing Date,
if any, being sometimes referred to as a "Closing Date"), shall be determined by
Credit Suisse First Boston but shall be not later than five full business days
after written notice of election to purchase Optional Securities is given. The
Company will deliver the Optional Securities being purchased on each Optional
Closing Date to the Representatives for the accounts of the several
Underwriters, against payment of the purchase price in funds available on the
same day by wire transfer to the account of at a bank acceptable to Credit
Suisse First Boston or by official Federal Reserve Bank check or checks drawn to
the order of , at the above office of Simpson Thacher & Bartlett.
The certificates for the Optional Securities being purchased on each Optional
Closing Date will be in such form, in such denominations and registered in such
names as Credit Suisse First Boston requests upon reasonable notice prior to
such Optional Closing Date and will be made available for checking and packaging
at the above office of Simpson Thacher & Bartlett at a reasonable time in
advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the
several Underwriters propose to offer the Offered Securities for sale to the
public as set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling
Stockholders. The Company agrees with the several Underwriters and the Selling
Stockholders that:
<PAGE>
15
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by Credit Suisse First Boston, subparagraph (4)) of Rule 424(b) not
later than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth business
day after the Effective Date of the Initial Registration Statement. The
Company will advise Credit Suisse First Boston promptly of any such
filing pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement and an additional registration statement is necessary to
register a portion of the Offered Securities under the Act but the
Effective Time thereof has not occurred as of such execution and
delivery, the Company will file the additional registration statement
or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior
to 10:00 P.M., New York time, on the date of this Agreement or, if
earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later
date as shall have been consented to by Credit Suisse First Boston.
(b) The Company will advise Credit Suisse First Boston
promptly of any proposal to amend or supplement the initial or any
additional registration statement as filed or the related prospectus or
the Initial Registration Statement, the Additional Registration
Statement (if any) or the Prospectus and will not effect such amendment
or supplementation without Credit Suisse First Boston's consent; and
the Company will also advise Credit Suisse First Boston promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any
amendment or supplementation of a Registration Statement or the
Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its
best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its lifting, if issued.
<PAGE>
16
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify Credit Suisse First Boston of such
event and will promptly prepare and file with the Commission, at its
own expense, an amendment or supplement which will correct such
statement or omission or an amendment which will effect such
compliance. Neither Credit Suisse First Boston's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally
available to its securityholders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the
Initial Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the
provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the
end of the fourth fiscal quarter following the fiscal quarter that
includes such Effective Date, except that, if such fourth fiscal
quarter is the last quarter of the Company's fiscal year, "Availability
Date" means the 90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (four of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so
long as delivery of a prospectus relating to the Offered Securities is
required to be delivered under the Act in connection with sales by any
Underwriter or dealer, the Prospectus and all amendments and
supplements to such documents, in each case in such quantities as
Credit Suisse First Boston requests. The Prospectus shall be so
<PAGE>
17
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or
the Effective Time of the Initial Registration Statement. All other
documents shall be so furnished as soon as available. The Company will
pay the expenses of printing and distributing to the Underwriters all
such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as
Credit Suisse First Boston designates and will continue such
qualifications in effect so long as required for the distribution.
(g) During the period of five years hereafter, the Company
will furnish to the Representatives and, upon request, to each of the
other Underwriters, as soon as practicable after the end of each fiscal
year, a copy of its annual report to stockholders for such year; and
the Company will furnish to the Representatives (i) as soon as
available, a copy of each report and any definitive proxy statement of
the Company filed with the Commission under the Securities Exchange Act
of 1934 or mailed to stockholders, and (ii) from time to time, such
other information concerning the Company as Credit Suisse First Boston
may reasonably request.
(h) The Company and each Selling Stockholder agree with the
several Underwriters that the Company and such Selling Stockholder will
pay all expenses incident to the performance of the obligations of the
Company and such Selling Stockholders, as the case may be, under this
Agreement and will jointly and severally reimburse the Underwriters (if
and to the extent incurred by them) for any filing fees and other
expenses (including fees and disbursements of counsel) incurred by them
in connection with qualification of the Offered Securities for sale and
determination of their eligibility for investment under the laws of
such jurisdictions as Credit Suisse First Boston designates and the
printing of memoranda relating thereto, for the filing fee of the
National Association of Securities Dealers, Inc. relating to the
Offered Securities, for any travel expenses of the Company's officers
and employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
<PAGE>
18
Stockholders of the Offered Securities to the Underwriters and for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
(i) For a period of 180 days after the date of the initial
public offering of the Offered Securities, the Company will not, and,
prior to the First Closing Date, the Company will obtain written
agreements from its directors and officers and from [CSFB STILL
CONSIDERING] to the effect that they will not, offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, or file
with the Commission a registration statement under the Act relating to,
any additional shares of its Securities or securities convertible into
or exchangeable or exercisable for any shares of its Securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposal or filing, without the prior written consent of Credit Suisse
First Boston, except (i) subsequent sales of Offered Securities, (ii)
issuances of unregistered Securities by the Company in connection with
affiliations with physicians and physician practices and (iii)
issuances of Securities by the Company pursuant to the exercise of
employee stock options outstanding on the date of the initial public
offering of the Offered Securities.
(j) Each Selling Stockholder agrees, for a period of 180 days
after the date of the initial public offering of the Offered
Securities, not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any additional shares of the
Securities or securities convertible into or exchangeable or
exercisable for any shares of Securities, or publicly disclose the
intention to make any such offer, sale, pledge or disposal, without the
prior written consent of Credit Suisse First Boston.
(k) Each Selling Stockholder agrees to deliver to Credit
Suisse First Boston, attention: Transactions Advisory Group on or prior
to the First Closing Date a properly completed and executed United
States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu
thereof).
<PAGE>
19
6. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities to be purchased
on each Optional Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders herein, to the accuracy of the statements of Company officers made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Stockholders of their obligations hereunder and to the following
additional conditions precedent:
(a) The Representatives shall have received a letter, dated
the date of delivery thereof (which, if the Effective Time of the
Initial Registration Statement is prior to the execution and delivery
of this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement, shall be
prior to the filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective
Time), of Ernst & Young LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements
examined by them and included in the Registration Statements
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
Rules and Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial
Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim
financial statements of the Company and the Predecessor
Practices, inquiries of officials of the Company and the
Affiliated Practices who have responsibility for financial and
<PAGE>
20
accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
(A) the unaudited financial statements included in
the Registration Statements do not comply as to form in all
material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations or
any material modifications should be made to such unaudited
financial statements for them to be in conformity with
generally accepted accounting principles;
(B) at the date of the latest available balance sheet
of the Company read by such accountants, and at a subsequent
specified date not more than five days prior to the date of
this Agreement, there was any change in the capital stock of
the Company, increase in short-term indebtedness or long-term
debt of the Company and its consolidated subsidiaries or
decrease in consolidated net current assets or net assets of
the Company, as compared with amounts shown on the latest
balance sheet of the Company included in the Prospectus; or
(C) for the period from the closing date of the
latest statement of operations or income, as the case may be,
of the Predecessor Practices included in the Prospectus to the
closing date of the latest available statement of operations
of the Affiliated Practices read by such accountants, and for
the period from the closing date of the latest statement of
operations or income, as the case may be, of the Predecessor
Practices included in the Prospectus to a specified date not
more than three days prior to the date of this Agreement,
there were any decreases in the net practice revenue or income
from continuing operations of the combined Affiliated
Practices as compared with the net practice revenue and income
from continuing operations of the combined Predecessor
Practices in the corresponding period of the previous year.
except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter;
<PAGE>
21
(iv) they have reviewed the unaudited pro forma
financial data included in the Registration Statements, and on
the basis of such review, inquiries of officials of the
Company who have responsibility for financial and accounting
matters and other specified procedures, nothing came to their
attention that caused them to believe that the unaudited pro
forma financial data included in the Registration Statements
do not comply as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation
S-X under the Act or Commission Staff Accounting Bulletin No.
48 and that the pro forma adjustments have not been properly
applied to the historical amounts; and
(v) they have compared specified dollar amounts
(or percentages derived from such dollar amounts) and
other financial information contained in the Registration
Statements (in each case to the extent that such dollar
amounts, percentages and other financial information are
derived from the general accounting records of the Company and
its subsidiaries or the Predecessor Practices subject to the
internal controls of the Company's or the Predecessor
Practices' accounting system, as the case may be, or are
derived directly from such records by analysis or computation)
with the results obtained from inquiries, a reading of such
general accounting records and other procedures specified in
such letter and have found such dollar amounts, percentages
and other financial information to be in agreement with such
results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration is subsequent to such
execution and delivery, "Registration Statements" shall mean the
<PAGE>
22
Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the
post-effective amendment to be filed shortly prior to its Effective
Time, and (iii) "Prospectus" shall mean the prospectus included in the
Registration Statements.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or such later date as shall
have been consented to by Credit Suisse First Boston. If the Effective
Time of the Additional Registration Statement (if any) is not prior to
the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by Credit Suisse First Boston. If
the Effective Time of the Initial Registration Statement is prior to
the execution and delivery of this Agreement, the Prospectus shall have
been filed with the Commission in accordance with the Rules and
Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration
Statement shall have been issued and no proceedings for that purpose
shall have been instituted or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, properties or results of operations of
the Company or its subsidiaries which, in the judgment of a majority in
interest of the Underwriters including the Representatives, is material
and adverse and makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical
rating organization" (as defined for purposes of Rule 436(g) under the
Act), or any public announcement that any such organization has under
<PAGE>
23
surveillance or review its rating of any debt securities of the Company
(other than an announcement with positive implications of a possible
upgrading, and no implication of a possible downgrading, of such
rating); (iii) any suspension or limitation of trading in securities
generally on the New York Stock Exchange, or any setting of minimum
prices for trading on such exchange, or any suspension of trading of
any securities of the Company on any exchange or in the
over-the-counter market; (iv) any banking moratorium declared by U.S.
Federal or New York authorities; or (v) any outbreak or escalation of
major hostilities in which the United States is involved, any
declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of a majority
in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or
emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Morgan, Lewis & Bockius LLP, counsel for the
Company, to the effect that:
(i) the Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own
its properties and conduct its business as described in the
Prospectus; and the Company is duly qualified to do business
as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification;
(ii) the Offered Securities delivered on such Closing
Date and all other outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are
fully paid and nonassessable and conform to the description
thereof contained in the Prospectus; and the stockholders of
the Company have no preemptive rights with respect to the
Securities;
(iii) except as disclosed in the Prospectus, there
are no contracts, agreements or understandings known to such
counsel between the Company and any person granting such
<PAGE>
24
person the right to require the Company to file a registration
statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the
Company to include such securities in the securities
registered pursuant to a Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act;
(iv) the Company is not and, after giving effect to
the offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940.
(v) no consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required for the consummation of the transactions
contemplated by this Agreement in connection with the issuance
or sale of the Offered Securities, except such as have been
obtained and made under the Act and such as may be required
under state securities laws;
(vi) the execution, delivery and performance of this
Agreement, and the issuance and sale of the Offered
Securities, will not result in a breach or violation of any of
the terms and provisions of, or constitute a default under,
any statute, any rule, regulation or order of any governmental
agency or body or any court having jurisdiction over the
Company or any subsidiary of the Company or any of their
properties, or any agreement or instrument to which the
Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject,
or the charter or by-laws of the Company or any such
subsidiary;
(vii) the Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any)
<PAGE>
25
was filed and became effective under the Act as of the date
and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on
the date specified therein or was included in the Initial
Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the
knowledge of such counsel, no stop order suspending the
effectiveness of a Registration Statement or any part thereof
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the Act, and
each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective
effective or issue dates, complied as to form in all material
respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any
part of a Registration Statement or any amendment thereto, as
of its effective date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto, as of its
issue date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements
and Prospectus of statutes, legal and governmental proceedings
and contracts and other documents are accurate and fairly
present the information required to be shown; and such counsel
do not know of any legal or governmental proceedings required
to be described in a Registration Statement or the Prospectus
which are not described as required or of any contracts or
documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as
exhibits to a Registration Statement which are not described
and filed as required; it being understood that such counsel
need express no opinion as to the financial statements or
other financial data contained in the Registration Statements
or the Prospectus;
<PAGE>
26
(viii) This Agreement has been duly authorized,
executed and delivered by the Company; and
(ix) each Service Agreement has been duly authorized,
executed and delivered by the Company and, assuming the due
authorization, execution and delivery thereof by the other
Parties thereto, constitutes a valid and legally binding
agreement of the Parties thereto, enforceable against the
Parties thereto in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to
or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing.
(e) The Representatives shall have received the opinion
contemplated in the Power of Attorney executed and delivered by each
Selling Stockholder and an opinion, dated such Closing Date, of Morgan,
Lewis & Bockius LLP, to the effect that:
(i) each Selling Stockholder had valid and
unencumbered title to the Offered Securities delivered by such
Selling Stockholder on such Closing Date and had full right,
power and authority to sell, assign, transfer and deliver the
Offered Securities delivered by such Selling Stockholder on
such Closing Date hereunder; and the several Underwriters have
acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Stockholders on
such Closing Date hereunder;
(ii) no consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by any Selling Stockholder
for the consummation of the transactions contemplated by the
Custody Agreement or this Agreement in connection with the
sale of the Offered Securities sold by the Selling
Stockholders, except such as have been obtained and made under
the Act and such as may be required under state securities
laws;
<PAGE>
27
(iii) the execution, delivery and performance of the
Custody Agreement and this Agreement and the consummation of
the transactions therein and herein contemplated will not
result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body
or any court having jurisdiction over any Selling Stockholder
or any of their properties or any agreement or instrument to
which any Selling Stockholder is a party or by which any
Selling Stockholder is bound or to which any of the properties
of any Selling Stockholder is subject;
(iv) the Power of Attorney and related Custody
Agreement with respect to each Selling Stockholder has been
duly authorized, executed and delivered by such Selling
Stockholder and constitute valid and legally binding
obligations of each Selling Stockholder enforceable in
accordance with their terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) and
an implied covenant of good faith and fair dealing; and
(v) this Agreement has been duly authorized, executed
and delivered by each Selling Stockholder.
(f) The Representatives shall have received an opinion, dated
such Closing Date, of Baker, Donelson, Bearman & Caldwell, special
healthcare counsel for the Company, to the effect set forth in Exhibit
A hereto.
(g) The Representatives shall have received from Simpson
Thacher & Bartlett, counsel for the Underwriters, such opinion or
opinions, dated such Closing Date, with respect to the incorporation of
the Company, the validity of the Offered Securities delivered on such
Closing Date, the Registration Statements, the Prospectus and other
related matters as the Representatives may require, and the Company
shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
<PAGE>
28
(h) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Vice-President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of
the Company in this Agreement are true and correct; the Company has
complied with all agreements and satisfied all conditions on its part
to be performed or satisfied hereunder at or prior to such Closing
Date; no stop order suspending the effectiveness of any Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance
with Rule 111(a) or (b) under the Act, prior to the time the Prospectus
was printed and distributed to any Underwriter; and, subsequent to the
date of the most recent financial statements of the Company in the
Prospectus, there has been no material adverse change, nor any
development or event involving a prospective material adverse change,
in the condition (financial or other), business, properties or results
of operations of the Company and its subsidiaries taken as a whole
except as set forth in or contemplated by the Prospectus or as
described in such certificate.
(i) The Representatives shall have received a letter, dated
such Closing Date, of Ernst & Young LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred
to in such subsection will be a date not more than three days prior to
such Closing Date for the purposes of this subsection.
The Company and the Selling Stockholders will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. Credit Suisse First Boston may in its
sole discretion waive on behalf of the Underwriters compliance with any
conditions to the obligations of the Underwriters hereunder, whether in respect
of an Optional Closing Date or otherwise.
7. Indemnification and Contribution. (a) The Company will
indemnify and hold harmless each Underwriter against any losses, claims, damages
<PAGE>
29
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below.
(b) The Selling Stockholders, jointly and severally, will
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by the
Selling Stockholders specifically for use therein, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
<PAGE>
30
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by the Selling Stockholders
consists of the following information in the Prospectus furnished on behalf of
each Selling Stockholder: the information under the caption "Principal and
Selling Stockholders", but only to the extent the information relates to Selling
Stockholders.
(c) Each Underwriter will severally and not jointly indemnify
and hold harmless the Company and each Selling Stockholder against any losses,
claims, damages or liabilities to which the Company or such Selling Stockholder
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company and each Selling Stockholder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the last paragraph at the
bottom of the cover page concerning the terms of the offering by the
Underwriters, the legend concerning over-allotments, stabilizing and possible
market making on the inside front cover page, the concession and reallowance
figures appearing in the fifth paragraph under the caption "Underwriting" and
the information contained in the sixth paragraph under the caption
"Underwriting".
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under subsection (a), (b) or (c) above, notify the indemnifying party of the
<PAGE>
31
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a), (b) or (c)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
<PAGE>
32
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (d). Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling
Stockholders under this Section shall be in addition to any liability which the
Company and the Selling Stockholders may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
<PAGE>
33
8. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date,
Credit Suisse First Boston may make arrangements satisfactory to the Company and
the Selling Stockholders for the purchase of such Offered Securities by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date, the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Offered Securities that such defaulting Underwriters agreed but failed to
purchase on such Closing Date. If any Underwriter or Underwriters so default and
the aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to Credit Suisse First Boston, the Company and the
Selling Stockholders for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Stockholders, except as provided in Section 9 (provided
that if such default occurs with respect to Optional Securities after the First
Closing Date, this Agreement will not terminate as to the Firm Securities or any
Optional Securities purchased prior to such termination). As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Selling Stockholders, of the Company or its officers and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to
<PAGE>
34
Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company and the Selling
Stockholders will, jointly and severally, reimburse the Underwriters for all
out-of-pocket expenses (including fees and disbursements of counsel) reasonably
incurred by them in connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing
and, if sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives, c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue, New York, N.Y. 10010, Attention: Investment Banking
Department -- Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 44 Union Blvd., Suite
600, Lakewood, CO 80228, Attention: Kerry R. Hicks, or, if sent to the Selling
Stockholders or any of them, will be mailed, delivered or telegraphed and
confirmed to at ; provided, however, that any notice to an
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective personal
representatives and successors and the officers and directors and controlling
persons referred to in Section 7, and no other person will have any right or
obligation hereunder.
12. Representation of Underwriters. The Representatives will
act for the several Underwriters in connection with this financing, and any
action under this Agreement taken by the Representatives jointly or by Credit
<PAGE>
35
Suisse First Boston will be binding upon all the Underwriters.
will act for the Selling Stockholders in connection with such
transactions, and any action under or in respect of this Agreement taken by
will be binding upon all the Selling Stockholders.
13. Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original, but
all such counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, without regard
to principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction
of the Federal and state courts in the Borough of Manhattan in The City of New
York in any suit or proceeding arising out of or relating to this Agreement or
the transactions contemplated hereby.
<PAGE>
36
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
SPECIALTY CARE NETWORK, INC.
By.........................
Title:
JEFFREY S. ABRAMS, M.D.
GREGG A. ALEXANDER, M.D.
D. CHRISTIAN BERG, M.D.
RICHARD E. BLACKBURN, M.D.
DONALD M. DEWEY, M.D.
ROBERT N. DUNN, M.D.
MARK E. FAHEY, M.D.
STEVEN R. GECHA, M.D.
W.THOMAS GUTOWSKI, M.D.
WILLIAM D. HENDERSON, M.D.
WILLIAM J. HOZACK, M.D.
MICHAEL N. JOLLEY, M.D.
STEVE E. JORDAN, M.D.
C. ALEXANDER MOSKWA, JR., M.D.
HARVEY E. SMIRES, M.D.
KRIS D. STOWERS, M.D.
By.........................
Title: Attorney-in-Fact
The foregoing Underwriting
Agreement is hereby confirmed and
accepted as of the date first
above written.
CREDIT SUISSE FIRST BOSTON
CORPORATION
EQUITABLE SECURITIES
CORPORATION
<PAGE>
37
LEHMAN BROTHERS INC.
By CREDIT SUISSE FIRST
BOSTON CORPORATION
By..........................
Title:
<PAGE>
SCHEDULE A
Number of
Firm Securities
Selling Stockholder to be Sold
- ------------------- ----------
Jeffrey S. Abrams, M.D. 24,000
Gregg A. Alexander, M.D. 3,600
D. Christian Berg, M.D. 15,500
Richard E. Blackburn, M.D. 4,700
Donald M. Dewey, M.D. 10,300
Robert N. Dunn, M.D. 24,000
Mark E. Fahey, M.D. 8,300
Steven R. Gecha, M.D. 24,000
W. Thomas Gutowski, M.D. 24,000
William D. Henderson, M.D. 7,600
William J. Hozack, M.D. 51,000
Michael N. Jolley, M.D. 24,000
Steve E. Jordan, M.D. 10,300
C. Alexander Moskwa, Jr., M.D. 24,000
Harvey E. Smires, M.D. 24,000
Kris D. Stowers, M.D. 1,100
<PAGE>
SCHEDULE B
Number of
Firm Securities
---------------
Underwriter
-----------
CREDIT SUISSE FIRST BOSTON CORPORATION................
EQUITABLE SECURITIES CORPORATION......................
LEHMAN BROTHERS INC...................................
---------------
Total...................... ===============
<PAGE>
SCHEDULE C
Greater Chesapeake Orthopaedic Associates, L.L.C.
Princeton Orthopaedic Associates II, P.A.
Reconstructive Orthopaedic Associates II, P.C.
TOC Specialists, P.L.
Vero Orthopaedics II, P.A.
<PAGE>
EXHIBIT A
[TO COME]
Specialty Care Network, Inc.
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Pro Forma Pro Forma
For the Year For the Year
Ended Ended
December 31, 1995 September 30, 1996
----------------- -----------------
<S> <C> <C>
Average shares outstanding ................. 1,517,905 1,517,905
Net effect of convertible debentures ....... 2,020,841 2,020,841
Acquisition shares issued .................. 7,659,115 7,659,115
Dividends paid to promoters --
see SAB topic 1.B.3 and E&Y SEC
Manual page 7,402
using treasury stock method ................ 153,787 153,787
Stock sold to TOC -- working capital ....... 100,000 100,000
Net effect of common stock,
stock options and warrants -- based
on the treasury stock method using
estimated initial public offering price .... 1,040,249 1,040,249
----------- -----------
Total Pro forma Average weighted number of
shares outstanding ......................... 12,491,897 12,491,897
=========== ===========
Net Income ................................. $ 3,388,459 $ 2,639,864
----------- -----------
Pro forma per share amount ................. $ 0.27 $ 0.21
=========== ===========
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' and to
the use of our reports dated November 12, 1996, except Note 9, as to which the
date is January 17, 1997, (Specialty Care Network, Inc.), July 12, 1996
(Reconstructive Orthopaedic Associates, Inc.), August 28, 1996 (Princeton
Orthopaedic Associates, P.A.), October 15, 1996 (Tallahassee Orthopedic Clinic,
Inc.), October 11, 1996 (Greater Chesapeake Orthopaedic Associates, LLC) and
August 20, 1996 (Vero Orthopaedics, P.A.) in Amendment No. 2 to the Registration
Statement (Form S-1) and related Prospectus of Specialty Care Network, Inc.
dated January 21, 1997.
[SIGNATURE CUT]
ERNST & YOUNG LLP
Denver, Colorado
January 20, 1997
MERGER AGREEMENT
BY AND AMONG
SPECIALTY CARE NETWORK, INC.,
RIYAZ H. JINNAH, M.D., P.A.
AND
RIYAZ H. JINNAH, M.D.
______________, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions........................................................ 1
2. Basic Transaction.................................................. 3
(a) The Merger.................................................. 3
(b) The Closing................................................. 3
(c) Actions at the Closing...................................... 3
(d) Effect of Merger............................................ 3
3. Representations and Warranties of JINNAH and the JINNAH
Stockholder....................................................... 4
(a) Organization, Qualification, and Corporate Power............ 4
(b) Capitalization.............................................. 4
(c) Authorization of Transaction................................ 4
(d) Noncontravention............................................ 4
(e) Subsidiaries and Investments................................ 5
(f) Financial Statement......................................... 5
(g) Undisclosed Liabilities..................................... 5
(h) Brokers' Fees............................................... 5
(i) Material Contracts.......................................... 5
(j) Insurance; Malpractice...................................... 6
(k) No Changes Prior to Closing Date............................ 6
(l) Title; Condition............................................ 7
(m) Litigation.................................................. 7
(n) Permits and Licenses........................................ 7
(o) Tax Matters................................................. 7
(p) Employee Benefit Plans...................................... 7
(q) Third-Party Relations....................................... 8
(r) Compliance with Applicable Laws............................. 8
(s) Employee Compensation....................................... 9
(t) Environmental Matters....................................... 9
(u) Healthcare Compliance....................................... 9
(v) Fraud and Abuse............................................ 10
(w) Practice Compliance........................................ 10
(x) Rates and Reimbursement Policies........................... 10
(y) Accounts Receivable........................................ 10
(z) Guaranties................................................. 11
(aa) Powers of Attorney........................................ 11
(bb) Tangible Assets........................................... 11
(cc) SCN Share Ownership; Investment Intent.................... 11
(dd) Full Disclosure........................................... 12
4. Representations and Warranties of SCN............................. 12
(a) Organization............................................... 12
(b) Capitalization............................................. 12
(c) Authorization of Transaction............................... 12
(d) Noncontravention........................................... 12
(e) Brokers' Fees.............................................. 12
(f) Private Placement Memorandum............................... 13
i
<PAGE>
Page
----
5. Covenants......................................................... 13
(a) General.................................................... 13
(b) Notices and Consents....................................... 13
(c) Regulatory Matters and Approvals........................... 13
(d) Operation of Business...................................... 13
(e) Full Access................................................ 14
(f) Notice of Developments..................................... 14
(g) Exclusivity................................................ 14
(h) Collection of Accounts Receivable.......................... 14
(i) Payment of Expenses........................................ 14
(j) Completion of Schedules.................................... 14
(k) Corporate Authorization.................................... 15
(l) Malpractice Insurance...................................... 15
(m) Distribution of Excluded Assets............................ 15
(n) Establishment of Accruals.................................. 15
(o) Satisfaction of Indebtedness............................... 15
(p) Accrued Vacation and Sick Time............................. 15
6. Conditions to Obligation to Close................................. 15
(a) Conditions to Obligation of SCN............................ 15
(b) Conditions to Obligation of JINNAH......................... 16
7. Items to be Delivered at or Prior to Closing...................... 17
(a) By the JINNAH Stockholder or JINNAH........................ 17
(b) By SCN..................................................... 17
8. Termination....................................................... 18
(a) Termination of Agreement................................... 18
(b) Effect of Termination...................................... 18
9. Indemnification................................................... 18
(a) Indemnification by the JINNAH Stockholder.................. 18
(b) Notice to the JINNAH Stockholder; Opportunity to Defend.... 18
(c) General Indemnification by SCN............................. 19
(d) Notice to SCN; Opportunity to Defend....................... 19
(e) Survival................................................... 19
10. Miscellaneous.................................................... 19
(a) No Third-Party Beneficiaries............................... 19
(b) Entire Agreement........................................... 19
(c) Succession and Assignment.................................. 19
(d) Counterparts............................................... 19
(e) Headings................................................... 19
(f) Notices.................................................... 19
(g) Governing Law.............................................. 20
(h) Amendments and Waivers..................................... 20
(i) Severability............................................... 20
(j) Expenses................................................... 20
(k) Construction............................................... 20
ii
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Page
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(l) Incorporation of Exhibits and Schedules.................... 21
EXHIBIT 5(m) - Excluded Assets..................................... (5)-1
EXHIBIT 7(a)(vi) - JINNAH Opinion Letter...................... 7(a)(vi)-1
EXHIBIT 7(b)(iii) - SCN Opinion Letter....................... 7(b)(iii)-1
EXHIBIT 7(a)(iv) - Service Agreement.......................... 7(a)(iv)-1
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MERGER AGREEMENT
THIS MERGER AGREEMENT ("Agreement") is entered into this the ____ day of
___________, 1996, by and among SPECIALTY CARE NETWORK, INC., a Delaware
corporation ("SCN"), RIYAZ H. JINNAH, M.D., P.A., a Maryland corporation
("JINNAH") and RIYAZ H. JINNAH, M.D. (the "JINNAH Stockholder"). SCN, JINNAH and
the JINNAH Stockholder are referred to collectively herein as the "Parties."
W I T N E S S E T H:
WHEREAS, JINNAH is a Maryland corporation which owns the assets which are
used by and/or result from the JINNAH Stockholder's practice of medicine;
WHEREAS, the JINNAH Stockholder is a medical doctor practicing medicine in
the State of Maryland;
WHEREAS, this Agreement contemplates a tax-free merger of JINNAH with and
into SCN in a reorganization pursuant to Code Section 368(a)(1)(A);
WHEREAS, the JINNAH Stockholder will receive capital stock in SCN in
exchange for his capital stock in JINNAH;
WHEREAS, the Parties anticipate that the Merger contemplated by this
Agreement will further certain of their business objectives; and
WHEREAS, the Parties desire to set forth in writing the terms and
conditions under which said transaction will be consummated.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the Parties, it is agreed as
follows:
1. Definitions.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Closing Date" has the meaning set forth in Section 2(b) below.
"Closing" has the meaning set forth in Section 2(b) below.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Conversion Ratio" has the meaning set forth in Section 2(d)(v) below.
"Delaware Articles of Merger" shall have the meaning set forth in Section
2(c) below.
"Delaware General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended.
"Disclosure Schedule" has the meaning set forth in Section 3 below.
<PAGE>
"Effective Time" has the meaning set forth in Section 2(d)(i) below.
"Environmental Laws" means all federal, state, and local laws, rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder and other governmental requirements relating to pollution,
control of chemicals, storage and handling of petroleum products, management of
waste (including biohazardous or biomedical waste), discharges of materials into
the environment, health, safety, natural resources, and the environment,
including laws relating to emissions, discharges, releases, or threatened
releases of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes into ambient air, surface water, ground water, or
lands or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Hazardous Materials" has the meaning set forth in Section 3(t) below.
"IRS" means the Internal Revenue Service.
"JINNAH" has the meaning set forth in the preface above.
"JINNAH Share" means any share of the issued and outstanding Common Stock,
of JINNAH as of the date of this Agreement.
"JINNAH Stockholder" means Riyaz H. Jinnah, M.D.
"Knowledge" means actual knowledge after reasonable investigation.
"Maryland Articles of Merger" shall have the meaning set forth in Section
2(c) below.
"Maryland Business Corporation Act" means the Business Corporation Act of
the State of Maryland, as amended.
"Merger" has the meaning set forth in Section 2(a) below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice.
"Person" means an individual, a partnership, a limited liability company,
a corporation, an association, a joint stock company, a trust, a joint venture,
an unincorporated organization, or a governmental entity (or any department,
agency, or political subdivision thereof).
"Practice Assets" has the meaning set forth in Section 3(l) below.
"Private Placement Memorandum" means the confidential private placement
memorandum of SCN dated November 27, 1996, relating to the offering of the SCN
Shares under the Securities Act.
"SCN Share" means any share of the Common Stock, $.001 par value per
share, of SCN.
"SCN" has the meaning set forth in the preface above.
"Securities Act" means the Securities Act of 1933, as amended.
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"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge
or other security interest other than (a) mechanic's, materialmen's, and similar
liens, (b) liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Surviving Corporation" has the meaning set forth in Section 2(a) below.
2. Basic Transaction.
(a) The Merger. On and subject to the terms and conditions of this
Agreement, JINNAH will merge with and into SCN (the "Merger") at the Effective
Time. SCN shall be the corporation surviving the Merger (the "Surviving
Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Baker, Donelson,
Bearman & Caldwell commencing at 9:00 A.M. local time on the second business day
following the day on which the last of the conditions set forth in Article VI
have been fulfilled or waived or at such other date or such other place as the
Parties may mutually determine (the "Closing Date").
(c) Actions at the Closing. At the Closing, (i) JINNAH will deliver to SCN
the various certificates, instruments, and documents referred to in Section 7(a)
below, (ii) SCN will deliver to JINNAH the various certificates, instruments,
and documents referred to in Section 7(b) below, (iii) SCN and JINNAH will file
with the Secretary of State of the State of Delaware both Articles of Merger and
a Plan of Merger in the form required by SCN's legal counsel (the "Delaware
Articles of Merger"), and (iv) SCN and JINNAH will file with the State
Department of Assessments and Taxation of the State of Maryland both Articles of
Merger and a Plan of Merger in the form required by SCN's legal counsel (the
"Maryland Articles of Merger").
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time (the
"Effective Time") SCN and JINNAH file the Delaware Articles of Merger with
the Secretary of State of the State of Delaware and file the Maryland
Articles of Merger with the State Department of Assessments and Taxation
of the State of Maryland. The Merger shall have the effect set forth in
the Delaware General Corporation Law and the Maryland Business Corporation
Act. The Surviving Corporation may, at any time after the Effective Time,
take any action (including executing and delivering any document) in the
name and on behalf of either SCN or JINNAH in order to carry out and
effectuate the transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. The Certificate of Incorporation
of SCN in effect at and as of the Effective Time will remain the
Certificate of Incorporation of the Surviving Corporation without any
modification or amendment in the Merger.
(iii) Bylaws. The Bylaws of SCN in effect at and as of the Effective
Time will remain the Bylaws of the Surviving Corporation without any
modification or amendment in the Merger.
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(iv) Directors and Officers. The directors and officers of SCN in
office at and as of the Effective Time will remain the directors and
officers of the Surviving Corporation (retaining their respective
positions and terms of office).
(v) Conversion of JINNAH Shares. At and as of the Effective Time,
all of the issued and outstanding JINNAH Shares shall be converted into
the right to receive a total of 97,333 SCN Shares (the ratio of 97,333 SCN
Shares divided by the total number of JINNAH Shares outstanding is
referred to herein as the "Conversion Ratio"). The Conversion Ratio shall
be subject to equitable adjustment in the event of any stock split, stock
dividend, reverse stock split, or other change in the number of JINNAH
Shares or SCN Shares outstanding. For all purposes, each SCN Share is
agreed to have a value of $9.00 per share.
(vi) SCN Shares. Each SCN Share issued and outstanding at and as of
the Effective Time will remain issued and outstanding.
3. Representations and Warranties of JINNAH and the JINNAH Stockholder.
JINNAH and the JINNAH Stockholder, jointly and severally represent and warrant
to SCN that the statements contained in this Section 3 are correct and complete
as of the date of this Agreement and will be correct and complete as of the
Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 3), except as
set forth in the disclosure schedule (the "Disclosure Schedule"). The Disclosure
Schedule will be arranged in paragraphs corresponding to the lettered and
numbered paragraphs contained in this Section 3 and will be completed pursuant
to Section 5(j).
(a) Organization, Qualification, and Corporate Power. JINNAH is a
corporation duly incorporated, validly existing, and in good standing under the
laws of the State of Maryland. JINNAH is duly authorized to conduct business and
is in good standing under the laws of each jurisdiction in which the character
or location of the properties owned or the business conducted by JINNAH makes
such qualification necessary. JINNAH has the corporate power and authority to
carry on the business in which it is engaged and to own and use the properties
owned and used by it.
(b) Capitalization. The entire authorized capital stock of JINNAH is set
forth on Section 3(b) of the Disclosure Schedule. All of the issued and
outstanding JINNAH Shares have been duly authorized and are validly issued,
fully paid, and nonassessable. The JINNAH Stockholder is the sole stockholder of
JINNAH. There are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights or other
contracts or commitments that could require JINNAH to issue, sell or otherwise
cause to become outstanding any of its capital stock. There are no outstanding
or authorized stock appreciation, phantom stock, profit participation, or
similar rights with respect to JINNAH.
(c) Authorization of Transaction. JINNAH has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of JINNAH, enforceable in accordance with its terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, professional regulatory organization or court to which
JINNAH is subject or any provision of the charter or bylaws of JINNAH or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which JINNAH is a party or by which it is
bound or to which any of its assets is subject (or result in the imposition of
any Security Interest upon any of its assets). JINNAH is not required to give
any notice to, make any filing with, or obtain any authorization,
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<PAGE>
consent, or approval of any government or governmental agency in order for the
Parties to consummate the transactions contemplated by this Agreement.
(e) Subsidiaries and Investments. JINNAH does not own, directly or
indirectly, any capital stock or other equity or ownership or proprietary
interest in any other corporation, partnership, association, limited liability
company, trust, joint venture, or other entity.
(f) Financial Statement. JINNAH has furnished SCN with unaudited balance
sheets dated December 31, 1994 and 1995, and unaudited income statements for the
twelve (12) month periods ending December 31, 1995, 1994 and 1993. Such
financial statements, including the notes thereto, except as indicated therein,
were prepared on a basis consistent with past accounting practices of JINNAH and
fairly present the results of operations for the periods noted therein. The
balance sheets of JINNAH delivered by JINNAH to SCN fairly present the financial
condition of JINNAH at the date thereof, and except as indicated therein,
reflect all claims against and all debts and liabilities of JINNAH, fixed or
contingent, as of the date thereof.
(g) Undisclosed Liabilities. JINNAH has no uninsured liability (whether
known or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated, and whether due or to become due),
including any liability for taxes, except for (i) liabilities set forth on the
face of the balance sheet dated as of December 31, 1995 and (ii) liabilities
which have arisen after December 31, 1995 in the Ordinary Course of Business
(none of which results from, arises out of, relates to, is in the nature of, or
was caused by any breach of contract, breach of warranty, tort, infringement, or
violation of law).
(h) Brokers' Fees. JINNAH does not have any liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
(i) Material Contracts. Section 3(i) of the Disclosure Schedule lists the
following contracts and other material agreements to which JINNAH is a party:
(i) any agreement (or group of related agreements) for the lease of
real or personal property to or from any Person;
(ii) any agreement (or group of related agreements) for the purchase
or sale of supplies, products, or other personal property or for the
furnishing or receipt of services;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which
JINNAH has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation pursuant to which it
has imposed a Security Interest in respect of any of its assets, tangible
or intangible;
(v) any agreement concerning confidentiality or noncompetition;
(vi) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of JINNAH's current or former directors,
officers, and employees;
(vii) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $25,000 or providing severance benefits;
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(viii) any agreement pursuant to which JINNAH has advanced or loaned
any amount to any of its directors, officers, and employees;
(ix) any agreement pursuant to which the consequences of a default
or termination could have a material adverse effect on the business,
financial condition, operations, results of operations, or future
prospects of JINNAH; or
(x) any other agreement (or group of related agreements) outside the
ordinary course of JINNAH's business or operations the performance of
which involves consideration in excess of $15,000.
JINNAH has delivered or given SCN access to a correct and complete copy of each
written agreement listed in Section 3(i) of the Disclosure Schedule (as amended
through the Closing Date) and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 3(i) of the Disclosure
Schedule. With respect to each such agreement: (A) the agreement is legal,
valid, binding, enforceable, and in full force and effect; (B) except as set
forth in Section 3(i) of the Disclosure Schedule, no notice of this Agreement or
consent of any third party is required in order to execute and deliver this
Agreement or to consummate the transaction contemplated hereby, and, after
assignment to SCN at Closing, the agreement will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms; (C) to
JINNAH's Knowledge, no party is in breach or default, and no event has occurred
which with notice or lapse of time would constitute a breach or default, or
permit termination, modification, or acceleration, under the agreement; and (D)
no party has repudiated any provision of the agreement.
(j) Insurance; Malpractice. Section 3(j) of the Disclosure Schedule
contains a list and brief description of all policies or binders of fire,
liability, product liability, workers compensation, health and other forms of
insurance policies or binders currently in force insuring against risks which
will remain in full force and effect at least through the Closing Date. Section
3(j) of the Disclosure Schedule contains a description of all current
malpractice liability insurance policies of the JINNAH Stockholder, JINNAH and
JINNAH's professional employees and all predecessor policies in effect since
February 1, 1990. Except as set forth on Section 3(j) of the Disclosure Schedule
(a) neither JINNAH, the JINNAH Stockholder, nor its professional employees have,
in the last seven (7) years, filed a written application for any insurance
coverage relating to JINNAH's business or property which has been denied by an
insurance agency or carrier and (b) JINNAH, JINNAH's professional employees and
the JINNAH Stockholder have been continuously insured for professional
malpractice claims during the same period. Section 3(j) of the Disclosure
Schedule also sets forth a list of all claims for any insured loss in excess of
Five Thousand Dollars ($5,000.00) per occurrence filed by JINNAH, JINNAH's
professional employees or the JINNAH Stockholder during the three (3) year
period immediately preceding the date hereof, including workers compensation,
general liability, environmental liability and professional malpractice
liability claims. None of JINNAH, JINNAH's professional employees nor the JINNAH
Stockholder is in material default with respect to any provision contained in
any such policy and none of them has failed to give any notice or present any
claim under any such policy in due and timely fashion.
(k) No Changes Prior to Closing Date. During the period from December 31,
1995 through the date hereof, JINNAH has not (i) incurred any liability or
obligation of any nature (whether known or unknown, asserted or unasserted,
absolute or contingent, accrued or unaccrued, liquidated or unliquidated and
whether due or to become due), except in the Ordinary Course of Business, (ii)
written off as uncollectible any notes or accounts receivable, except write-offs
in the Ordinary Course of Business charged to applicable reserves, none of which
individually or in the aggregate is material to JINNAH, (iii) conducted its
business in such a manner so as to materially increase its accounts payable or
so as to materially decrease its accounts receivable, (iv) granted any increase
in the rate of wages, salaries, bonuses, or other remunerations of any employee,
except in the Ordinary Course of Business, (v) canceled or waived any claims or
rights of substantial value, (vi) made any change in any method of accounting,
(vii) otherwise conducted its business or entered into any transaction, except
in the
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usual and ordinary manner and in the Ordinary Course of Business, (viii) agreed,
whether or not in writing, to do any of the foregoing, or (ix) disposed of its
assets other than in the Ordinary Course of Business.
(l) Title; Condition. Section 3(l) of the Disclosure Schedule contains a
complete, true and correct list of those assets which are material to the
business or operations of JINNAH (the "Practice Assets"). JINNAH has good and
marketable title to, or leasehold interests in, all of the Practice Assets.
Except as disclosed on Section 3(l) of the Disclosure Schedule, none of the
Practice Assets is subject to a contract or other agreement of sale or subject
to security interests, mortgages, encumbrances, liens (including income,
personal property and other tax liens) or charges of any kind or character. Upon
completion of the merger, JINNAH shall own or lease the Practice Assets free and
clear of all liens and encumbrances, except as disclosed in Section 3(l) of the
Disclosure Schedule.
(m) Litigation. Except as set forth in Section 3(m) of the Disclosure
Schedule, there is no suit, action, proceeding at law or in equity, arbitration,
administrative proceeding or other proceeding or investigation by any
governmental entity pending, or, to the Knowledge of JINNAH, threatened against,
or affecting JINNAH or any of the Practice Assets, or any physician or other
health care professional engaged or employed by JINNAH, and to the best of
JINNAH and the JINNAH Stockholder's Knowledge there is no basis for any of the
foregoing. None of the actions, suits, proceedings, hearings, and investigations
set forth in Section 3(m) of the Disclosure Schedule could result in any
material adverse change in the operations, results of operations, or future
prospects of the business assets to be operated by SCN after the Closing.
(n) Permits and Licenses. JINNAH and all physicians and other health care
professionals engaged or employed by JINNAH have all permits and licenses
required by all applicable laws; have made all regulatory filings necessary for
the conduct of JINNAH's business; and are not in violation of any of said
permitting or licensing requirements.
(o) Tax Matters. Except as set forth in Section 3(o) of the Disclosure
Schedule, JINNAH has filed or caused to be filed all federal, state and local
tax returns which are required to have been filed by JINNAH, including all
income, excise, franchise, and payroll tax returns, and JINNAH has paid for all
taxes through the Effective Time of the Merger and has otherwise complied with
all federal, state, local and other tax laws applicable to it.
(p) Employee Benefit Plans.
(i) List of Plans. Section 3(p) of the Disclosure Schedule contains
an accurate and complete list of all employee benefit plans ("Employee
Benefit Plans") within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), whether or
not any Employee Benefit Plans are otherwise exempt from the provisions of
ERISA, established, maintained or contributed to by JINNAH (including all
employers (whether or not incorporated) which by reason of common control
are treated together with JINNAH and/or the JINNAH Stockholder as a single
employer within the meaning of Section 414 of the Code) since September 2,
1974.
(ii) Status of Plans. JINNAH has never maintained and does not now
maintain or contribute to any Employee Benefit Plan subject to ERISA which
is not in substantial compliance with ERISA, or which has incurred any
accumulated funding deficiency within the meaning of Section 412 or 418B
of the Code, or which has applied for or obtained a waiver from the
Internal Revenue Service of any minimum funding requirement under Section
412 of the Code or which is subject to Title IV of ERISA. JINNAH has not
incurred any liability to the Pension Benefit Guaranty Corporation
("PBGC") in connection with any Employee Benefit Plan covering any
employees of JINNAH or ceased operations at any facility or withdrawn
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from any such Plan in a manner which could subject it to liability under
Section 4062(f), 4063 or 4064 of ERISA, and knows of no facts or
circumstances which might give rise to any liability of JINNAH to the PBGC
under Title IV of ERISA which could reasonably be anticipated to result in
any claims being made against the JINNAH by the PBGC. JINNAH has not
incurred any withdrawal liability (including any contingent or secondary
withdrawal liability) within the meaning of Sections 4201 and 4202 of
ERISA, to any Employee Benefit Plan which is a Multiemployer Plan (as
defined in Section 4001 of ERISA), and no event has occurred, and there
exists no condition or set of circumstances, which represent a material
risk of the occurrence of any withdrawal from or the partition,
termination, reorganization or insolvency of any Multiemployer Plan which
would result in any liability of JINNAH.
(iii) Contributions. Full payment has been made of all amounts which
JINNAH is required, under applicable law or under any Employee Benefit
Plan or any agreement relating to any Employee Benefit Plan to which
JINNAH is a party, to have paid as contributions thereto as of the last
day of the most recent plan year of such Employee Benefit Plan ended prior
to the date hereof. JINNAH has made adequate provision for reserves to
meet contributions that have not been made because they are not yet due
under the terms of any Employee Benefit Plan or related agreements.
Benefits under all Employee Benefit Plans are as represented and have not
been increased subsequent to the date as of which documents have been
provided.
(iv) Tax Qualification. Each Employee Benefit Plan intended to be
qualified under Section 401(a) of the Code has been determined to be so
qualified by the Internal Revenue Service and, to the Knowledge of JINNAH,
nothing has occurred since the date of the last such determination which
resulted or is likely to result in the revocation of such determination.
(v) Transactions. JINNAH has not engaged in any transaction with
respect to the Employee Benefit Plans which would subject it to a material
tax, penalty or liability for prohibited transactions under ERISA or the
Code nor have any of its directors, officers or employees to the extent
they or any of them are fiduciaries with respect to such plans, breached
any of their responsibilities or obligations imposed upon fiduciaries
under Title I of ERISA which would result in any material claim being made
under or by or on behalf of any such plans by any party with standing to
make such claim.
(vi) Other Plans. JINNAH presently does not maintain any employee
benefit plans or any other foreign pension, welfare or retirement benefit
plans other than those listed on Section 3(p) of the Disclosure Schedule.
(vii) Documents. JINNAH has delivered or caused to be delivered to
SCN true and complete copies of (i) all Employee Benefit Plans as in
effect, together with all amendments thereto which will become effective
at a later date, as well as the latest Internal Revenue Service
determination letter obtained with respect to any such Employee Benefit
Plan qualified under Section 401 or 501 of the Code, and (ii) the most
recently filed Form 5500 for each Employee Benefit Plan required to file
such form.
(q) Third-Party Relations. JINNAH has not received any notice that any
material patient, supplier, employee or associated physician intends to cease
doing business with JINNAH.
(r) Compliance with Applicable Laws. Except as set forth in Section 3(r)
of the Disclosure Schedule, to JINNAH's Knowledge, JINNAH has operated in
compliance with all federal, state, county and municipal laws, constitutions,
ordinances, statutes, rules, regulations and orders applicable thereto
("Applicable Laws"). No
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item disclosed in Section 3(r) of the Disclosure Schedule has a material effect
on the operations of JINNAH. To JINNAH's Knowledge, neither JINNAH nor any
physician associated with or employed by JINNAH has received payment or any
remuneration whatsoever to induce or encourage the referral of patients or the
purchase of goods and/or services as prohibited under 42 U.S.C. ss. 1320a-7b(b),
or otherwise perpetrated any Medicare or Medicaid fraud or abuse nor has any
fraud or abuse been alleged within the last five (5) years by any government
agency.
(s) Employee Compensation. JINNAH has paid or discharged or will pay or
discharge or assume all liabilities for compensation and benefits to which all
physician employees are entitled through the Closing Date, including but not
limited to all salaries, wages, bonuses, incentive compensation, payroll taxes,
hospitalization and medical expenses, deferred compensation, and vacation and
sick pay, as well as any severance pay becoming due as a result of the
termination of certain of JINNAH's physician employees.
(t) Environmental Matters.
(i) Except as set forth in Section 3(t) of the Disclosure Schedule,
JINNAH is in material compliance with all applicable Environmental Laws.
(ii) JINNAH has not authorized or conducted nor does JINNAH have
Knowledge of the disposal or release, or other handling of any hazardous
substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas, biohazardous
or biomedical material, or other material defined, regulated, controlled
or potentially subject to any remediation requirement under any
Environmental Law (collectively "Hazardous Materials"), on, in, under or
affecting any property owned or leased by JINNAH.
(iii) JINNAH has, and is in compliance with, all licenses, permits,
registrations, and government authorizations necessary to operate under
all applicable Environmental Laws. Section 3(t) of the Disclosure Schedule
lists all such licenses, permits, registrations and government
authorizations required by any Environmental Law.
(iv) Except as disclosed in Section 3(t) of the Disclosure Schedule,
JINNAH has not received any written or oral notice from any governmental
agency or entity or any other Person and there is no pending or threatened
claim, litigation or any administrative agency proceeding that: (a)
alleges a violation of any Environmental Law(s) by JINNAH or, with respect
to the Practice Assets or any property owned or leased by JINNAH (b)
alleges that JINNAH is a liable party or potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. ss. 9601, et seq., or any analogous state law, (c) has
resulted or could result in the attachment of an environmental lien on any
of the Practice Assets or property owned or leased by JINNAH, or (d)
alleges that JINNAH is liable for any contamination of the environment,
contamination of any property owned or leased by JINNAH, damage to natural
resources, property damage, or personal injury based on its activities or
the activities of any predecessor or third parties involving Hazardous
Materials, whether arising under the Environmental Laws, common law
principles, or other legal standards.
(u) Healthcare Compliance. Except as disclosed in Section 3(u) of the
Disclosure Schedule, JINNAH is participating in or otherwise authorized to
receive reimbursement from Medicare and Medicaid and is a party to other
third-party payor agreements if any, discussed in Section 3(i) of the Disclosure
Schedule. 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, and no condition exists or
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. JINNAH is in compliance in
all material respects with the requirements of all such third-party payors
applicable thereto.
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JINNAH, its Stockholder, and its physician employees do not have any financial
relationship (whether investment interest, compensation interest, or otherwise)
with any entity to which any of the foregoing refer patients, except for such
financial relationships that qualify for exceptions to state and federal laws
restricting physician referrals to entities in which they have a financial
interest.
(v) Fraud and Abuse. To JINNAH's Knowledge, JINNAH, the JINNAH Stockholder
and persons and entities providing professional services for JINNAH have not
engaged in any activities which are prohibited under 42 U.S.C. ss. 1320a-7b, or
the regulations promulgated thereunder pursuant to such statutes, or related
state or local statutes or regulations, or which are prohibited by rules of
professional conduct, including 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 its own behalf or on
behalf of another, with intent to fraudulently secure such benefit or payment;
and (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.
(w) Practice Compliance. JINNAH is duly licensed as a medical practice and
is lawfully operated in accordance with the requirements of all Applicable Laws
and has all necessary authorizations for the use and operation of a medical
practice, all of which are in full force and effect. There are no outstanding
notices of deficiencies relating to JINNAH issued by any governmental authority
or third-party payor requiring conformity or compliance with any applicable law
or condition for participation with such governmental authority or third-party
payor, and after reasonable and independent inquiry and due diligence and
investigation, JINNAH 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 of Business.
(x) Rates and Reimbursement Policies. The jurisdiction in which JINNAH is
located does not currently impose any restrictions or limitations on rates which
may be charged to private pay patients receiving services provided by JINNAH.
JINNAH does not have any rate appeal currently pending before any governmental
authority or any administrator of any third-party payor program. JINNAH has no
Knowledge of any Applicable Law which affects rates or reimbursement procedures
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 JINNAH is located, which could
have a material adverse effect on JINNAH or may result in the imposition of
additional Medicaid, Medicare, charity, free care, welfare, or other discounted
or government assisted patients at JINNAH or require JINNAH to obtain any
necessary authorization which JINNAH does not currently possess.
(y) Accounts Receivable. All accounts receivable, unbilled invoices and
other debts due or recorded in the respective records and books of account of
JINNAH, as being due to JINNAH, as at the Closing Date have arisen in the
Ordinary Course of Business; and none of such accounts receivable or other debts
is or will at the Closing Date be subject to any counterclaim or set-off except
to the extent of any such provision or reserve. There has been no material
adverse change since December 31, 1995 in the amount of accounts receivable or
other debts due JINNAH, the allowances with respect thereto, or accounts payable
of JINNAH from that reflected in the Balance Sheet previously delivered by
JINNAH to SCN.
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(z) Guaranties. JINNAH is not a guarantor and otherwise is not liable for
any liability or obligation (including indebtedness) of any other Person.
(aa) Powers of Attorney. There are no outstanding powers of attorney
executed by JINNAH, except as may be contained in financing documents or
security agreements listed in Section 3(i) of the Disclosure Schedule.
(bb) Tangible Assets. JINNAH owns or leases all land, buildings,
machinery, equipment, and other tangible assets necessary for the conduct of its
business as presently conducted. To JINNAH's knowledge, each tangible asset has
been maintained in accordance with normal industry practice, is in good
operating condition and repair (subject to normal wear and tear).
(cc) SCN Share Ownership; Investment Intent.
(i) Neither JINNAH nor the JINNAH Stockholder owns, beneficially or
otherwise, any SCN Shares.
(ii) The SCN Shares issuable in the Merger are being acquired by the
JINNAH Stockholder for investment and not with a view to the distribution
thereof, and the JINNAH Stockholder acknowledges and understands that the
certificate(s) representing such SCN Shares will bear a legend in
substantially the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
ANY STATE SECURITIES ACT AND CANNOT BE SOLD, TRANSFERRED, OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER SUCH ACTS OR UNLESS
EXEMPTIONS FROM REGISTRATION ARE AVAILABLE.
THE COMPANY WILL FURNISH THE HOLDER HEREOF INFORMATION REGARDING THE
DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES, AND LIMITATIONS
APPLICABLE TO EACH CLASS AND THE VARIATIONS AND RIGHTS, PREFERENCES
AND LIMITATIONS DETERMINED FOR EACH SERIES OF STOCK ISSUED BY THE
COMPANY (AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE
VARIATIONS FOR FUTURE SERIES) UPON REQUEST IN WRITING AND WITHOUT
CHARGE.
(iii) The JINNAH Stockholder represents and warrants as follows:
(A) The JINNAH Stockholder is an "accredited investor" as
defined under Rule 501 of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
(B) The JINNAH Stockholder has received and reviewed the SCN
Private Placement Memorandum which contains certain information
regarding SCN and its business. The JINNAH Stockholder confirms that
SCN has made available to him or to his representatives the
opportunity to ask questions of SCN's officers and directors and to
acquire such information about the SCN Shares and the business and
financial condition of SCN as the JINNAH Stockholder has requested,
which additional information has been received.
(C) In deciding to acquire the SCN Shares pursuant to this
Agreement, the JINNAH Stockholder has consulted with his legal,
financial, and tax advisers with respect to the Merger and the
nature of the investment together with additional information
concerning SCN set forth
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in the SCN Private Placement Memorandum and any additional
information provided under subsection (B) above.
(D) The JINNAH Stockholder has adequate means of providing for
his current needs and personal contingencies and has no need for
liquidity in his investment in SCN. The JINNAH Stockholder, either
alone or with his representatives, has such knowledge and experience
in financial and business matters that he is capable of evaluating
the merits and risks of an investment in SCN.
(dd) Full Disclosure. No representation or warranty made by JINNAH 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.
4. Representations and Warranties of SCN. SCN represents and warrants to
JINNAH that the statements contained in this Section 4 are correct and complete
as of the date of this Agreement and will be correct and complete as of the
Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 4.
(a) Organization. SCN is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of its incorporation.
(b) Capitalization. As of the date of this Agreement, the entire
authorized capital stock of the SCN consists of 50,000,000 SCN Shares, of which
11,045,015 SCN Shares are issued and outstanding and zero SCN Shares are held in
treasury and 2,000,000 shares of preferred stock, no par value, of which none
are issued and outstanding. All of the SCN Shares to be issued in the Merger
have been duly authorized and, upon consummation of the Merger, will be validly
issued, fully paid, and nonassessable.
(c) Authorization of Transaction. SCN has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement, to issue the SCN Shares and otherwise to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of SCN, enforceable in accordance with its terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, professional regulatory organization or court to which SCN
is subject, or may become subject as a result of the transaction contemplated by
this Agreement, or any provision of the charter or bylaws of SCN or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which SCN is a party or by which it is bound
or to which any of its assets is subject. Other than state and federal filings
required by the Securities Act and similar state statutes, SCN does not need to
give any notice to, make any filing with, or obtain any authorization, consent,
or approval of any government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement.
(e) Brokers' Fees. SCN does not have any liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which SCN could become liable or
obligated.
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(f) Private Placement Memorandum. The Private Placement Memorandum does
not contain any untrue statement of material fact or omit to state a material
fact necessary to make the statements therein not misleading.
5. Covenants. The Parties agree as follows with respect to the period from
and after the execution of this Agreement.
(a) General. Each of the Parties will use its and his best efforts to take
all action and to do all things necessary in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction of the closing conditions set forth in Section 6 below) to be
satisfied by him or it. This paragraph shall not be construed to obligate any of
its parties to waive any condition precedent to his or its obligations to
perform hereunder.
(b) Notices and Consents. JINNAH will give any notices to third parties,
and will use its best efforts to obtain any third party consents, that SCN
reasonably may request in connection with the matters referred to in Section
3(i) above.
(c) Regulatory Matters and Approvals. Each of the parties to this
Agreement will give any notices to, make any filings with, and use its
reasonable best efforts to obtain any authorizations, consents, and approvals of
governments and governmental agencies in connection with the transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing:
(i) General Corporation Law. SCN will call a special meeting of its
Board of Directors (the "Special SCN Meeting") as soon as practicable in
order that the Board of Directors may consider and vote upon the adoption
of this Agreement and the approval of the Merger in accordance with the
Delaware General Corporation Law.
(ii) Tax Reporting. The Merger shall constitute a reorganization
under Code Section 368(a)(1)(A). Each of the parties agrees to report this
transaction for income tax purposes in accordance with the foregoing.
(d) Operation of Business. From the date of this Agreement through the
Closing Date, JINNAH will not engage in any practice, take any action, or enter
into any transaction outside the Ordinary Course of Business. Without limiting
the generality of the foregoing:
(i) JINNAH will not authorize or effect any change in its charter or
bylaws;
(ii) JINNAH will not grant any options, warrants, or other rights to
purchase or obtain any of its capital stock or issue, sell, or otherwise
dispose of any of its capital stock (except upon the conversion or
exercise of options, warrants, and other rights currently outstanding);
(iii) except as required by this Agreement, JINNAH will not declare,
set aside, or pay any dividend or distribution with respect to its capital
stock (whether in cash or in kind), or redeem, repurchase, or otherwise
acquire any of its capital stock in either case outside the Ordinary
Course of Business without the consent of SCN, which consent shall not be
unreasonably withheld;
(iv) JINNAH will not issue any note, bond, or other debt security or
create, incur, assume, or guarantee any indebtedness for borrowed money or
capitalized lease obligation outside the Ordinary Course of Business;
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(v) JINNAH will not impose any Security Interest upon any of its
assets outside the Ordinary Course of Business;
(vi) JINNAH will not make any capital investment in, make any loan
to, or acquire the securities or assets of any other Person outside the
Ordinary Course of Business;
(vii) JINNAH will not make any change in employment terms for any of
its directors, officers, and employees outside the Ordinary Course of
Business; and
(viii) JINNAH will not commit to any of the foregoing.
(e) Full Access. Upon three (3) days prior notice, JINNAH will permit
representatives of SCN to have full access to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to JINNAH during normal business hours. SCN will treat and hold as
such any confidential information it receives from JINNAH in the course of the
reviews contemplated by this Section 5(e), will not use any of the confidential
information except in connection with this Agreement, and, if this Agreement is
terminated for any reason whatsoever, agrees to return to JINNAH all tangible
embodiments (and all copies) thereof which are in its possession.
(f) Notice of Developments. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of any of its own
representations and warranties in Section 3 and Section 4 above. No disclosure
by any Party pursuant to this Section 5(f), however, shall be deemed to amend or
supplement the Disclosure Schedule or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant.
(g) Exclusivity. Until the earlier of (i) March 31, 1997, or (ii) the
Effective Time, JINNAH will not solicit, initiate, or encourage the submission
of any proposal or offer from any Person relating to the acquisition of all or
substantially all of the capital stock or assets of JINNAH (including any
acquisition structured as a merger, consolidation, or share exchange). JINNAH
shall notify SCN immediately if any Person makes any proposal, offer, inquiry,
or contact with respect to any of the foregoing.
(h) Collection of Accounts Receivable. The JINNAH Stockholder agrees to
cooperate with SCN in the collection of accounts receivable owned by JINNAH as
of the Effective Time acquired pursuant to this Agreement. SCN, at its option,
shall have the right to require the collection of said accounts receivable
through a lockbox or bank account sweep arrangement. In connection therewith,
the JINNAH Stockholder agrees to execute the necessary documents and follow the
necessary procedures as described in the Service Agreement between the parties
which is attached hereto as Exhibit 7(a)(iv) to accommodate the collection of
the accounts receivable in such manner.
(i) Payment of Expenses. On or before the Effective Time, JINNAH shall
have paid or discharged any and all liabilities or charges for costs or fees
owed as a result of the transaction contemplated by this Agreement.
(j) Completion of Schedules. The parties hereto acknowledge that this
Agreement is being executed and delivered before the Disclosure Schedule has
been completed and attached hereto. SCN therefore agrees that JINNAH and the
JINNAH Stockholder may complete the Disclosure Schedule and that said Disclosure
Schedule may be attached hereto after the execution and delivery of this
Agreement; provided, however, that the Disclosure Schedule shall be in form,
substance and content acceptable to SCN in its sole discretion and shall be
completed and delivered to SCN by JINNAH and the JINNAH Stockholder on or prior
to December 31, 1996. SCN shall have the right to terminate this Agreement at
any time on or prior to March 31, 1997, in its sole discretion, based upon its
review of the Disclosure Schedule furnished by JINNAH and the JINNAH Stockholder
and the documents, events, facts or other circumstances referred to therein. In
the event that this Agreement is
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terminated pursuant to this Section 5(j), neither party shall be obligated to
the other, except as set forth in Section 8(b).
(k) Corporate Authorization. By execution of this Agreement, the JINNAH
Stockholder agrees to vote his JINNAH Shares in favor of the Merger and to
complete all other acts necessary to Close under this Agreement.
(l) Malpractice Insurance. On or before the Effective Time, all physicians
and employees of JINNAH must be covered by medical malpractice insurance and, if
required by SCN, medical malpractice tail insurance to cover prior occurrences
shall be procured by JINNAH; provided, however, JINNAH shall only be required to
pay the first $10,000 of any premium for such tail policy.
(m) Distribution of Excluded Assets. Prior to the Effective Time, JINNAH
shall have distributed to the JINNAH Stockholder all of the assets listed on
Exhibit 5(m), which constitute the entirety of the assets owned by JINNAH not
being acquired by SCN (the "Excluded Assets"). Additionally, with respect to
Employee Benefit Plans, on or before the Effective Time all Plans shall be
transferred to a new entity controlled by the JINNAH Stockholder, and the
instrument of transfer shall provide that the new entity assumes all of the
liabilities of the Plans, including, but not limited to any current or future
funding liabilities.
(n) Establishment of Accruals. Prior to the Effective Time, JINNAH shall
have paid all taxes owed with respect to the taxable periods or portion thereof
ended as of the Effective Time of the Merger contemplated herein.
(o) Satisfaction of Indebtedness. Prior to the Effective time, JINNAH
shall have caused the payoff of all liabilities owed to third parties and all
indebtedness owed to banks or other financial institutions or lenders or shall
have caused the assumption thereof by a new entity organized by the JINNAH
Stockholder. In the event such indebtedness is not paid off prior to the
Effective Time, the number of SCN shares described in Section 2 shall be reduced
by an amount equal to the principal amount of such debt divided by $9.00. In
such case, SCN shall be responsible for either assuming or paying off such debt.
JINNAH shall not be required to pay off accounts payable of JINNAH, not more
than thirty (30) days old, and arising in the Ordinary Course of Business,
capital leases or purchase money obligations secured by assets of JINNAH.
(p) Accrued Vacation and Sick Time. On or before the Closing Date, JINNAH
will satisfy and discharge any and all liabilities to any employee of JINNAH for
accrued vacation time in excess of one week and accrued sick time in excess of
one week.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of SCN. The obligation of SCN to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
(i) JINNAH shall have procured all of the third party consents
specified in Section 5(b) above;
(ii) the representations and warranties set forth in Section 3 above
shall be true and correct in all material respects at and as of the
Closing Date;
(iii) JINNAH shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iv) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any
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arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) materially affect adversely the right of the
Surviving Corporation to own the former assets or to operate the former
business of the JINNAH;
(v) SCN shall have received the resignations, effective as of the
Closing, of each director and officer of JINNAH other than those whom SCN
shall have specified in writing at least five (5) business days prior to
the Closing;
(vi) all actions to be taken by JINNAH in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be satisfactory in form and
substance to SCN;
(vii) the issuance of the SCN Shares to JINNAH or the JINNAH
Stockholder will not violate federal securities laws or the securities
laws of any state of the United States;
(viii) SCN and JINNAH shall have all licenses and permits necessary
to operate their respective businesses;
(ix) JINNAH and the JINNAH Stockholder shall have taken all steps
necessary to enable the merger of JINNAH with and into SCN, including, if
necessary, the conversion of JINNAH from a Maryland Professional
Association to a Maryland Business Corporation;
(x) SCN shall have completed and be satisfied with the results of
its due diligence review; and
(xi) SCN's Board of Directors shall have approved the Merger in
their sole and absolute discretion.
SCN may waive any condition specified in this Section 6(a) if it executes a
writing so stating at or prior to the Closing.
(b) Conditions to Obligation of JINNAH. The obligation of JINNAH to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have received the approval
of the SCN Board of Directors;
(ii) the representations and warranties set forth in Section 4 above
shall be true and correct in all material respects at and as of the
Closing Date;
(iii) SCN shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing; and
(iv) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) materially affect adversely the right of the Surviving Corporation to
own the former assets of JINNAH.
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JINNAH may waive any condition specified in this Section 6(b) if it executes a
writing so stating at or prior to the Closing.
7. Items to be Delivered at or Prior to Closing.
(a) By the JINNAH Stockholder or JINNAH. The JINNAH Stockholder or JINNAH,
as applicable, shall execute and deliver to JINNAH, prior to or at the Closing:
(i) Certified resolutions of JINNAH authorizing the execution of all
documents and the consummation of all transactions contemplated hereby;
(ii) The Maryland Articles of Merger which shall be in the form
required by SCN's legal counsel;
(iii) Stock Certificates representing ownership of all shares of
JINNAH, duly endorsed to SCN;
(iv) A Service Agreement in substantially the form attached hereto
as Exhibit 7(a)(iv);
(v) A Certificate fully executed by the JINNAH Stockholder and the
President of JINNAH stating as of the Closing Date, all representations
and warranties are true, all covenants and agreements contained in the
Agreement to be performed by JINNAH and the JINNAH Stockholder have been
performed or complied with and all conditions to Closing have been
complied with;
(vi) An opinion from JINNAH's counsel in substantially the form
attached hereto as Exhibit 7(a)(vi);
(vii) A Specialty Care Network, Inc. Stockholder's Agreement; and
(viii) Such other instruments as may be reasonably requested by SCN
in order to effect to or carry out the intent of this Agreement.
(b) By SCN. SCN shall deliver to JINNAH at or prior to the Closing:
(i) Stock Certificates representing the SCN Shares being issued to
each of the JINNAH Stockholder pursuant to Section 2(d)(v);
(ii) The Delaware Articles of Merger in the form required by SCN's
legal counsel;
(iii) An opinion from SCN's counsel in substantially the form
attached hereto as Exhibit 7(b)(iii);
(iv) A Certificate, duly executed by the President of SCN, stating
as of the Closing Date, all representations and warranties of SCN are
true, all covenants and agreements contained in the Agreement to be
performed by SCN have been performed or complied with and all conditions
to Closing have been satisfied;
(v) A Specialty Care Network, Inc. Stockholder's Agreement;
(vi) A Service Agreement in the form attached hereto as Exhibit
7(a)(iv); and
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(vii) Such other instruments as may be reasonably requested by the
JINNAH Stockholder in order to effect to or carry out the intent of this
Agreement.
8. Termination.
(a) Termination of Agreement. Either of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after stockholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Effective Time;
(ii) SCN may terminate this Agreement by giving written notice to
JINNAH at any time prior to the Effective Time (A) in the event JINNAH has
breached any representation, warranty, or covenant contained in this
Agreement in any material respect, SCN has notified JINNAH of the breach,
and the breach has continued without cure for a period of 30 days after
the notice of breach, (B) if the Closing shall not have occurred on or
before March 31, 1996 by reason of the failure of any condition precedent
under Section 6(a) hereof (unless the failure results primarily from SCN
breaching any representation, warranty, or covenant contained in this
Agreement) or (C) in accordance with Section 5(j); or
(iii) JINNAH may terminate this Agreement by giving written notice
to SCN at any time prior to the Effective Time (A) in the event SCN has
breached any representation, warranty, or covenant contained in this
Agreement in any material respect, JINNAH has notified SCN of the breach,
and the breach has continued without cure for a period of 30 days after
the notice of breach or (B) if the Closing shall not have occurred on or
before March 31, 1997 by reason of the failure of any condition precedent
under Section 6(b) hereof (unless the failure results primarily from
JINNAH breaching any representation, warranty, or covenant contained in
this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement pursuant
to Section 8(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any party to any other Party (except for any
liability of any Party then in breach).
9. Indemnification.
(a) Indemnification by the JINNAH Stockholder. The JINNAH Stockholder
agrees to and shall defend, indemnify and hold harmless SCN, its successors and
assigns, officers and directors against any and all losses, liabilities,
expenses (including, but without limitation, reasonable attorneys fees) and
damages resulting from or arising out of the breach, untruth or inaccuracy of
any representation, warranty or covenant of JINNAH or the JINNAH Stockholder set
forth in this Agreement. The JINNAH Stockholder shall not be liable to SCN for
any claims against the JINNAH Stockholder under this Section 9(a) unless and
until the aggregate of all claims against the JINNAH Stockholder exceeds the sum
of $25,000.00, whereupon SCN shall be entitled to recover the full amount of all
claims, including the initial $25,000.00. Notwithstanding the foregoing
provisions, the obligations of the JINNAH Stockholder to indemnify SCN shall not
exceed the value of the portion of the SCN Shares delivered to the JINNAH
Stockholder at the Closing.
(b) Notice to the JINNAH Stockholder; Opportunity to Defend. SCN agrees to
give prompt notice to the JINNAH Stockholder of the assertion of any claim, or
the commencement of any suit, action or proceeding, in respect of which
indemnity may be sought under Section 9(a). The JINNAH Stockholder may
participate in and at his election, or at the request of SCN, assume the defense
of any such suit, action or proceeding at the JINNAH Stockholder's expense. The
JINNAH Stockholder shall not be liable under Section 9(a) for any settlement
effected without his consent of any claim, litigation or proceeding in respect
of which indemnity may be sought under Section 9(a) which consent shall not be
unreasonably withheld.
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<PAGE>
(c) General Indemnification by SCN. SCN agrees to and shall defend,
indemnify and hold harmless the JINNAH Stockholder, his heirs and assigns
against any and all losses, liabilities, expenses (including, but without
limitation, reasonable attorneys fees) and damages resulting from the breach,
untruth or inaccuracy of any representation, warranty or covenant of SCN set
forth in this Agreement. SCN shall not be liable to the JINNAH Stockholder for
any claims against JINNAH under this Section 9(c) unless and until the aggregate
of all claims against JINNAH exceeds the sum of $25,000.00, whereupon the JINNAH
Stockholder shall be entitled to recover the full amount of all claims,
including the initial $25,000.00.
(d) Notice to SCN; Opportunity to Defend. The JINNAH Stockholder agrees to
give prompt notice to SCN of the assertion of any claim, or the commencement of
any suit, action or proceeding in respect of which indemnity may be sought under
Section 9(c). SCN may participate in and at its election, or at the request of
the JINNAH Stockholder, assume the defense of any such suit, action or
proceeding at SCN's expense. SCN shall not be liable under Section 9(c) for any
settlement effected without its consent of any claim, litigation or proceeding
in respect of which indemnity may be sought hereunder, which consent shall not
be unreasonably withheld.
(e) Survival. The representations and warranties of the JINNAH
Stockholder, JINNAH and SCN contained in this Agreement and the indemnifications
contained herein shall survive the Closing. No claim for indemnification with
respect to any alleged misrepresentation or breach of warranty may be made after
two (2) years following the Closing Date. Any matter to which indemnification
pertains and with respect to which a claim has been asserted or threatened
following the Closing Date shall continue to be subject to the indemnification
under this Agreement until finally terminated, settled, resolved or adjudicated;
and all terms, conditions and stipulations of this Agreement shall likewise
continue to apply.
10. Miscellaneous.
(a) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the parties and their respective
successors and permitted assigns.
(b) Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the parties and supersedes any
prior understandings, agreements, or representations by or between the parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(c) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties named herein and their respective successors
and permitted assigns. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party.
(d) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(e) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
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<PAGE>
If to JINNAH: Copy to:
Riyaz H. Jinnah, M.D. Gary Hyman
724 Maiden Choice Lane Denick & Hyman, P.A.
Suite 204 10 E. Baltimore St.
Baltimore, Maryland 21228 Suite 1600
Baltimore, MD 21202
If to SCN: Copy to:
Kerry R. Hicks, President David T. Popwell, Esq.
Specialty Care Network, Inc. Baker, Donelson, Bearman & Caldwell
44 Union Boulevard, Suite 600 165 Madison Ave, Suite 2100
Lakewood, Colorado 80228 Memphis, Tennessee 38103
Facsimile: (303) 716-1298 Facsimile: (901) 577-2303
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Delaware.
(h) Amendments and Waivers. The parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time with the prior
authorization of their respective boards of directors; provided, however, that
any amendment effected subsequent to stockholder approval will be subject to the
restrictions contained in the Delaware General Corporation Law and the Maryland
General Corporation Law. No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and signed by both of the parties.
No waiver by any party of any default, misrepresentation, or breach of warranty
or covenant hereunder, whether intentional or not, shall be deemed to extend to
any prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
(i) Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(j) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(k) Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations
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<PAGE>
promulgated thereunder, unless the context otherwise requires. The word
"including" shall mean including without limitation.
(l) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
SPECIALTY CARE NETWORK, INC.
By:__________________________________
Title:_______________________________
RIYAZ H. JINNAH, M.D., P.A.
By:__________________________________
Title:_______________________________
_____________________________________
RIYAZ H. JINNAH, M.D., Stockholder
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<PAGE>
EXHIBIT 5(m)
Excluded Assets
"Excluded Assets" shall mean (i) employment or noncompete agreements between
JINNAH, the JINNAH Stockholder, and those licensed medical individuals under
contract with JINNAH to provide professional services to patients of JINNAH and
claims arising thereunder; (ii) all patient medical records and patient lists;
(iii) all insurance policies of JINNAH and claims arising thereunder and all
prepaid expenses on malpractice insurance premiums; (iv) the inventories, cash
and Accounts Receivable disposed of, cancelled, expended or collected, as the
case may be, by JINNAH after the date hereof and prior to the Closing in the
Ordinary Course of Business and consistent with past practice; (v) personal
property of individual physicians which is not included on the financial
statements of JINNAH; (vi) JINNAH's Employee Benefit Plans and all liabilities
related thereto; (vii) JINNAH's cash (other than any cash reserved for the
payment of any accrued liabilities) on hand as of the Closing Date, (viii)
JINNAH's third party provider agreements; and (ix) all drugs owned by JINNAH.
(5) - 1
<PAGE>
EXHIBIT 7(a)(vi)
JINNAH Opinion Letter
See Attached.
7(a)(vi)-1
<PAGE>
EXHIBIT 7(b)(iii)
SCN Opinion Letter
See Attached.
7(b)(iii)-1
<PAGE>
EXHIBIT 7(a)(iv)
Service Agreement
7(a)(iv)-1
MERGER AGREEMENT
BY AND AMONG
SPECIALTY CARE NETWORK, INC.,
FLOYD JAGGEARS, M.D., P.C.
AND
FLOYD JAGGEARS, M.D.
November _____, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions........................................................1
2. Basic Transaction..................................................3
(a) The Merger..................................................3
(b) The Closing.................................................3
(c) Actions at the Closing......................................3
(d) Effect of Merger............................................3
3. Representations and Warranties of FJMDPC and JAGGEARS..............4
(a) Organization, Qualification, and Corporate Power............4
(b) Capitalization..............................................4
(c) Authorization of Transaction................................4
(d) Noncontravention............................................4
(e) Subsidiaries and Investments................................5
(f) Financial Statement.........................................5
(g) Undisclosed Liabilities.....................................5
(h) Brokers' Fees...............................................5
(i) Material Contracts..........................................5
(j) Insurance; Malpractice......................................6
(k) No Changes Prior to Closing Date............................6
(l) Title; Condition............................................7
(m) Litigation..................................................7
(n) Permits and Licenses........................................7
(o) Tax Matters.................................................7
(p) Employee Benefit Plans......................................7
(q) Third-Party Relations.......................................8
(r) Compliance with Applicable Laws.............................8
(s) Employee Compensation.......................................9
(t) Environmental Matters.......................................9
(u) Healthcare Compliance.......................................9
(v) Fraud and Abuse............................................10
(w) Practice Compliance........................................10
(x) Rates and Reimbursement Policies...........................10
(y) Accounts Receivable........................................10
(z) Guaranties.................................................11
(aa) Powers of Attorney.........................................11
(bb) Tangible Assets............................................11
(cc) SCN Share Ownership; Investment Intent.....................11
(dd) Full Disclosure............................................12
4. Representations and Warranties of SCN.............................12
(a) Organization...............................................12
(b) Capitalization.............................................12
(c) Authorization of Transaction...............................12
(d) Noncontravention...........................................12
(e) Brokers' Fees..............................................12
(f) Private Placement Memorandum...............................12
i
<PAGE>
Page
----
5. Covenants.........................................................13
(a) General....................................................13
(b) Notices and Consents.......................................13
(c) Regulatory Matters and Approvals...........................13
(d) Operation of Business......................................13
(e) Full Access................................................14
(f) Notice of Developments.....................................14
(g) Exclusivity................................................14
(h) Collection of Accounts Receivable..........................14
(i) Payment of Expenses........................................14
(j) Completion of Schedules....................................14
(k) Corporate Authorization....................................14
(l) Malpractice Insurance......................................15
(m) Distribution of Excluded Assets............................15
(n) Establishment of Accruals..................................15
(o) Satisfaction of Indebtedness...............................15
(p) Accrued Vacation and Sick Time.............................15
6. Conditions to Obligation to Close.................................15
(a) Conditions to Obligation of SCN............................15
(b) Conditions to Obligation of FJMDPC.........................16
7. Items to be Delivered at or Prior to Closing......................16
(a) By JAGGEARS or FJMDPC......................................16
(b) By SCN.....................................................17
8. Termination.......................................................18
(a) Termination of Agreement...................................18
(b) Effect of Termination......................................18
9. Indemnification...................................................18
(a) Indemnification by JAGGEARS................................18
(b) Notice to JAGGEARS; Opportunity to Defend..................18
(c) General Indemnification by SCN.............................19
(d) Notice to SCN; Opportunity to Defend.......................19
(e) Survival...................................................19
10. Miscellaneous....................................................19
(a) No Third-Party Beneficiaries...............................19
(b) Entire Agreement...........................................19
(c) Succession and Assignment..................................19
(d) Counterparts...............................................19
(e) Headings...................................................19
(f) Notices....................................................19
(g) Governing Law..............................................20
(h) Amendments and Waivers.....................................20
(i) Severability...............................................20
(j) Expenses...................................................20
(k) Construction...............................................20
(l) Incorporation of Exhibits and Schedules....................21
ii
<PAGE>
Page
----
EXHIBIT 5(m) - Excluded Assets..................................5(m) - 1
EXHIBIT 7(a)(vi) - FJMDPC Opinion Letter....................7(a)(vi) - 1
EXHIBIT 7(b)(iii) - SCN Opinion Letter.....................7(b)(iii) - 1
iii
<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT ("Agreement") is entered into this the _______ day
of November, 1996, by and among SPECIALTY CARE NETWORK, INC., a Delaware
corporation ("SCN") and FLOYD JAGGEARS, M.D., P.C., a Georgia corporation
("FJMDPC") and FLOYD JAGGEARS, M.D. ("JAGGEARS"). SCN, FJMDPC and JAGGEARS are
referred to collectively herein as the "Parties."
W I T N E S S E T H:
WHEREAS, FJMDPC is a Georgia corporation which owns the assets which are
used by and/or result from JAGGEARS's practice of medicine;
WHEREAS, JAGGEARS is a medical doctor practicing medicine in the State of
Georgia;
WHEREAS, this Agreement contemplates a tax-free merger of FJMDPC with and
into SCN in a reorganization pursuant to Code Section 368(a)(1)(A);
WHEREAS, JAGGEARS will receive capital stock in SCN in exchange for his
capital stock in FJMDPC;
WHEREAS, the Parties anticipate that the Merger contemplated by this
Agreement will further certain of their business objectives; and
WHEREAS, the Parties desire to set forth in writing the terms and
conditions under which said transaction will be consummated.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the Parties, it is agreed as
follows:
1. Definitions.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Closing Date" has the meaning set forth in Section 2(b) below.
"Closing" has the meaning set forth in Section 2(b) below.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Conversion Ratio" has the meaning set forth in Section 2(d)(v) below.
"Delaware Articles of Merger" shall have the meaning set forth in Section
2(c) below.
"Delaware General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended.
"Disclosure Schedule" has the meaning set forth in Section 3 below.
"Effective Time" has the meaning set forth in Section 2(d)(i) below.
<PAGE>
"Environmental Laws" means all federal, state, and local laws, rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder and other governmental requirements relating to pollution,
control of chemicals, storage and handling of petroleum products, management of
waste (including biohazardous or biomedical waste), discharges of materials into
the environment, health, safety, natural resources, and the environment,
including laws relating to emissions, discharges, releases, or threatened
releases of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes into ambient air, surface water, ground water, or
lands or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes.
"Georgia Articles of Merger" shall have the meaning set forth in Section
2(c) below.
"Georgia Business Corporation Act" means the Business Corporation Act of
the State of Georgia, as amended.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Hazardous Materials" has the meaning set forth in Section 3(t) below.
"IRS" means the Internal Revenue Service.
"Knowledge" means actual knowledge after reasonable investigation.
"Merger" has the meaning set forth in Section 2(a) below.
"FJMDPC Share" means any share of the issued and outstanding stock Common
Stock, of FJMDPC at the date of this Agreement.
"FJMDPC Stockholder" means Floyd Jaggears, M.D.
"FJMDPC" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice.
"Person" means an individual, a partnership, a limited liability company,
a corporation, an association, a joint stock company, a trust, a joint venture,
an unincorporated organization, or a governmental entity (or any department,
agency, or political subdivision thereof).
"Practice Assets" has the meaning set forth in Section 3(l) below.
"Private Placement Memorandum" means the confidential private placement
memorandum of SCN dated November 27, 1996 relating to the offering of the SCN
Shares under the Securities Act.
"SCN Share" means any share of the Common Stock, $.001 par value per
share, of SCN.
"SCN" has the meaning set forth in the preface above.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
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<PAGE>
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge
or other security interest other than (a) mechanic's, materialmen's, and similar
liens, (b) liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Surviving Corporation" has the meaning set forth in Section 2(a) below.
2. Basic Transaction.
(a) The Merger. On and subject to the terms and conditions of this
Agreement, FJMDPC will merge with and into SCN (the "Merger") at the Effective
Time. SCN shall be the corporation surviving the Merger (the "Surviving
Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Baker, Donelson,
Bearman & Caldwell, First Tennessee Building, Memphis, Tennessee 38103,
commencing at 9:00 A.M. local time on the second business day following the day
on which the last of the conditions set forth in Article VI have been fulfilled
or waived, or such other date as the Parties may mutually determine (the
"Closing Date").
(c) Actions at the Closing. At the Closing, (i) FJMDPC will deliver to SCN
the various certificates, instruments, and documents referred to in Section 7(a)
below, (ii) SCN will deliver to FJMDPC the various certificates, instruments,
and documents referred to in Section 7(b) below, (iii) SCN and FJMDPC will file
with the Secretary of State of the State of Delaware both Articles of Merger and
a Plan of Merger in the form required by SCN's legal counsel (the "Delaware
Articles of Merger"), and (iv) SCN and FJMDPC will file with the Department of
State of the State of Georgia both Articles of Merger and a Plan of Merger in
the form required by SCN's legal counsel (the "Georgia Articles of Merger").
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time (the
"Effective Time") SCN and FJMDPC file the Delaware Articles of Merger with
the Secretary of State of the State of Delaware and file the Georgia
Articles of Merger with the Department of State of the State of Georgia.
The Merger shall have the effect set forth in the Delaware General
Corporation Law and the Georgia Business Corporation Act. The Surviving
Corporation may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on
behalf of either SCN or FJMDPC in order to carry out and effectuate the
transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. The Certificate of Incorporation
of SCN in effect at and as of the Effective Time will remain the
Certificate of Incorporation of the Surviving Corporation without any
modification or amendment in the Merger.
(iii) Bylaws. The Bylaws of SCN in effect at and as of the Effective
Time will remain the Bylaws of the Surviving Corporation without any
modification or amendment in the Merger.
- 3 -
<PAGE>
(iv) Directors and Officers. The directors and officers of SCN in
office at and as of the Effective Time will remain the directors and
officers of the Surviving Corporation (retaining their respective
positions and terms of office).
(v) Conversion of FJMDPC Shares. At and as of the Effective Time,
all of the issued and outstanding FJMDPC Shares shall be converted into
the right to receive a total of 68,056 SCN Shares (the ratio of 68,056 SCN
Shares divided by the total number of FJMDPC Shares outstanding is
referred to herein as the "Conversion Ratio"). The Conversion Ratio shall
be subject to equitable adjustment in the event of any stock split, stock
dividend, reverse stock split, or other change in the number of FJMDPC
Shares or SCN Shares outstanding. For all purposes, each SCN Share is
agreed to have a value of $9.00 per share.
(vi) SCN Shares. Each SCN Share issued and outstanding at and as of
the Effective Time will remain issued and outstanding.
3. Representations and Warranties of FJMDPC and JAGGEARS. FJMDPC and
JAGGEARS, jointly and severally, represent and warrant to SCN that the
statements contained in this Section 3 are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this Section 3), except as set forth in the disclosure
schedule (the "Disclosure Schedule"). The Disclosure Schedule will be arranged
in paragraphs corresponding to the lettered and numbered paragraphs contained in
this Section 3 and will be completed pursuant to Section 5(j).
(a) Organization, Qualification, and Corporate Power. FJMDPC is a
corporation duly incorporated, validly existing, and in good standing under the
laws of the State of Georgia. FJMDPC is duly authorized to conduct business and
is in good standing under the laws of each jurisdiction in which the character
or location of the properties owned or the business conducted by FJMDPC makes
such qualification necessary. FJMDPC has the corporate power and authority to
carry on the business in which it is engaged and to own and use the properties
owned and used by it.
(b) Capitalization. The entire authorized capital stock of FJMDPC is set
forth in Section 3(b) of the Disclosure Schedule. All of the issued and
outstanding FJMDPC Shares have been duly authorized and are validly issued,
fully paid, and nonassessable. JAGGEARS is the sole stockholder of FJMDPC. There
are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights or other contracts or
commitments that could require FJMDPC to issue, sell or otherwise cause to
become outstanding any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or similar
rights with respect to FJMDPC.
(c) Authorization of Transaction. FJMDPC has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of FJMDPC, enforceable in accordance with its terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, professional regulatory organization or court to which
FJMDPC is subject or any provision of the charter or bylaws of FJMDPC or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which FJMDPC is a party or by which it is
bound or to which any of its assets is subject (or result in the imposition of
any Security Interest upon any of its assets). FJMDPC is not required to give
any notice to, make any filing with, or obtain any
- 4 -
<PAGE>
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement.
(e) Subsidiaries and Investments. FJMDPC does not own, directly or
indirectly, any capital stock or other equity or ownership or proprietary
interest in any other corporation, partnership, association, limited liability
company, trust, joint venture, or other entity.
(f) Financial Statement. FJMDPC has furnished SCN with unaudited balance
sheets dated December 31, 1994 and 1995, and unaudited income statements for the
twelve (12) month periods ending December 31, 1995, 1994 and 1993. Such
financial statements, including the notes thereto, except as indicated therein,
were prepared on a basis consistent with past accounting practices of FJMDPC and
fairly present the results of operations for the periods noted therein. The
balance sheets of FJMDPC delivered by FJMDPC to SCN fairly present the financial
condition of FJMDPC at the date thereof, and except as indicated therein,
reflect all claims against and all debts and liabilities of FJMDPC, fixed or
contingent, as of the date thereof.
(g) Undisclosed Liabilities. FJMDPC has no uninsured liability (whether
known or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated, and whether due or to become due),
including any liability for taxes, except for (i) liabilities set forth on the
face of the balance sheet dated as of December 31, 1995 and (ii) liabilities
which have arisen after December 31, 1995 in the Ordinary Course of Business
(none of which results from, arises out of, relates to, is in the nature of, or
was caused by any breach of contract, breach of warranty, tort, infringement, or
violation of law).
(h) Brokers' Fees. FJMDPC does not have any liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
(i) Material Contracts. Section 3(i) of the Disclosure Schedule lists the
following contracts and other material agreements to which FJMDPC is a party:
(i) any agreement (or group of related agreements) for the lease of
real or personal property to or from any Person;
(ii) any agreement (or group of related agreements) for the purchase
or sale of supplies, products, or other personal property or for the
furnishing or receipt of services;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which
FJMDPC has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation pursuant to which it
has imposed a Security Interest in respect of any of its assets, tangible
or intangible;
(v) any agreement concerning confidentiality or noncompetition;
(vi) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of FJMDPC's current or former directors,
officers, and employees;
(vii) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $25,000 or providing severance benefits;
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(viii) any agreement pursuant to which FJMDPC has advanced or loaned
any amount to any of its directors, officers, and employees;
(ix) any agreement pursuant to which the consequences of a default
or termination could have a material adverse effect on the business,
financial condition, operations, results of operations, or future
prospects of FJMDPC; or
(x) any other agreement (or group of related agreements) outside the
ordinary course of FJMDPC's business or operations the performance of
which involves consideration in excess of $15,000.
FJMDPC has delivered or given SCN access to a correct and complete copy of each
written agreement listed in Section 3(i) of the Disclosure Schedule (as amended
through the Closing Date) and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 3(i) of the Disclosure
Schedule. With respect to each such agreement: (A) the agreement is legal,
valid, binding, enforceable, and in full force and effect; (B) except as set
forth in Section 3(i) of the Disclosure Schedule, no notice of this Agreement or
consent of any third party is required in order to execute and deliver this
Agreement or to consummate the transaction contemplated hereby, and, after
assignment to SCN at Closing, the agreement will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms; (C) to
FJMDPC's Knowledge, no party is in breach or default, and no event has occurred
which with notice or lapse of time would constitute a breach or default, or
permit termination, modification, or acceleration, under the agreement; and (D)
no party has repudiated any provision of the agreement.
(j) Insurance; Malpractice. Section 3(j) of the Disclosure Schedule
contains a list and brief description of all policies or binders of fire,
liability, product liability, workers compensation, health and other forms of
insurance policies or binders currently in force insuring against risks which
will remain in full force and effect at least through the Closing Date. Section
3(j) of the Disclosure Schedule contains a description of all current
malpractice liability insurance policies of JAGGEARS, FJMDPC and FJMDPC's
professional employees and all predecessor policies in effect since February 1,
1990. Except as set forth on Section 3(j) of the Disclosure Schedule (a) neither
FJMDPC, JAGGEARS, nor its professional employees have, in the last seven (7)
years, filed a written application for any insurance coverage relating to
FJMDPC's business or property which has been denied by an insurance agency or
carrier and (b) FJMDPC, FJMDPC's professional employees and JAGGEARS have been
continuously insured for professional malpractice claims during the same period.
Section 3(j) of the Disclosure Schedule also sets forth a list of all claims for
any insured loss in excess of Five Thousand Dollars ($5,000.00) per occurrence
filed by FJMDPC, FJMDPC's professional employees or JAGGEARS during the three
(3) year period immediately preceding the date hereof, including workers
compensation, general liability, environmental liability and professional
malpractice liability claims. None of FJMDPC, FJMDPC's professional employees
nor JAGGEARS is in material default with respect to any provision contained in
any such policy and none of them has failed to give any notice or present any
claim under any such policy in due and timely fashion.
(k) No Changes Prior to Closing Date. Except as set forth in the
Disclosure Schedule during the period from December 31, 1995 through the date
hereof, FJMDPC has not (i) incurred any liability or obligation of any nature
(whether known or unknown, asserted or unasserted, absolute or contingent,
accrued or unaccrued, liquidated or unliquidated and whether due or to become
due), except in the Ordinary Course of Business, (ii) written off as
uncollectible any notes or accounts receivable, except write-offs in the
Ordinary Course of Business charged to applicable reserves, none of which
individually or in the aggregate is material to FJMDPC, (iii) conducted its
business in such a manner so as to materially increase its accounts payable or
so as to materially decrease its accounts receivable, (iv) granted any increase
in the rate of wages, salaries, bonuses, or other remunerations of any employee,
except in the Ordinary Course of Business, (v) canceled or waived any claims or
rights of substantial value, (vi) made any change in any method of accounting,
(vii) otherwise conducted its business or entered into any transaction, except
in the usual and ordinary manner and in the
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Ordinary Course of Business, (viii) agreed, whether or not in writing, to do any
of the foregoing, or (ix) disposed of its assets other than in the Ordinary
Course of Business.
(l) Title; Condition. Section 3(l) of the Disclosure Schedule contains a
complete, true and correct list of those assets which are material to the
business or operations of FJMDPC (the "Practice Assets"). FJMDPC has good and
marketable title to, or leasehold interests in, all of the Practice Assets.
Except as disclosed on Section 3(l) of the Disclosure Schedule, none of the
Practice Assets is subject to a contract or other agreement of sale or subject
to security interests, mortgages, encumbrances, liens (including income,
personal property and other tax liens) or charges of any kind or character. Upon
completion of the merger, SCN shall own or lease the Practice Assets free and
clear of all liens and encumbrances, except as disclosed in Section 3(l) of the
Disclosure Schedule or except as otherwise disclosed elsewhere in this
Agreement.
(m) Litigation. Except as set forth in Section 3(m) of the Disclosure
Schedule, there is no suit, action, proceeding at law or in equity, arbitration,
administrative proceeding or other proceeding or investigation by any
governmental entity pending, or, to the Knowledge of FJMDPC, threatened against,
or affecting FJMDPC or any of the Practice Assets, or any physician or other
health care professional engaged or employed by FJMDPC, and to the best of
FJMDPC and JAGGEARS's Knowledge there is no basis for any of the foregoing. None
of the actions, suits, proceedings, hearings, and investigations set forth in
Section 3(m) of the Disclosure Schedule could result in any material adverse
change in the operations, results of operations, or future prospects of the
business assets to be operated by SCN after the Closing.
(n) Permits and Licenses. FJMDPC and all physicians and other health care
professionals engaged or employed by FJMDPC have all permits and licenses
required by all applicable laws; have made all regulatory filings necessary for
the conduct of FJMDPC's business; and are not in violation of any of said
permitting or licensing requirements.
(o) Tax Matters. Except as set forth in Section 3(o) of the Disclosure
Schedule, FJMDPC has filed or caused to be filed all federal, state and local
tax returns which are required to have been filed by FJMDPC, including all
income, excise, franchise, and payroll tax returns, and FJMDPC has paid or
established an adequate accrual reserve for all taxes accrued through the
Effective Time of the Merger and has otherwise complied with all federal, state,
local and other tax laws applicable to it.
(p) Employee Benefit Plans.
(i) List of Plans. Section 3(p) of the Disclosure Schedule contains
an accurate and complete list of all employee benefit plans ("Employee
Benefit Plans") within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), whether or
not any Employee Benefit Plans are otherwise exempt from the provisions of
ERISA, established, maintained or contributed to by FJMDPC (including all
employers (whether or not incorporated) which by reason of common control
are treated together with FJMDPC and/or JAGGEARS as a single employer
within the meaning of Section 414 of the Code) since September 2, 1974.
(ii) Status of Plans. FJMDPC has never maintained and does not now
maintain or contribute to any Employee Benefit Plan subject to ERISA which
is not in substantial compliance with ERISA, or which has incurred any
accumulated funding deficiency within the meaning of Section 412 or 418B
of the Code, or which has applied for or obtained a waiver from the
Internal Revenue Service of any minimum funding requirement under Section
412 of the Code or which is subject to Title IV of ERISA. FJMDPC has not
incurred any liability to the Pension Benefit Guaranty Corporation
("PBGC") in connection with any Employee Benefit Plan covering any
employees of FJMDPC or ceased operations at any facility or withdrawn
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from any such Plan in a manner which could subject it to liability under
Section 4062(f), 4063 or 4064 of ERISA, and knows of no facts or
circumstances which might give rise to any liability of FJMDPC to the PBGC
under Title IV of ERISA which could reasonably be anticipated to result in
any claims being made against the FJMDPC by the PBGC. FJMDPC has not
incurred any withdrawal liability (including any contingent or secondary
withdrawal liability) within the meaning of Sections 4201 and 4202 of
ERISA, to any Employee Benefit Plan which is a Multiemployer Plan (as
defined in Section 4001 of ERISA), and no event has occurred, and there
exists no condition or set of circumstances, which represent a material
risk of the occurrence of any withdrawal from or the partition,
termination, reorganization or insolvency of any Multiemployer Plan which
would result in any liability of FJMDPC.
(iii) Contributions. Full payment has been made of all amounts which
FJMDPC is required, under applicable law or under any Employee Benefit
Plan or any agreement relating to any Employee Benefit Plan to which
FJMDPC is a party, to have paid as contributions thereto as of the last
day of the most recent plan year of such Employee Benefit Plan ended prior
to the date hereof. FJMDPC has made adequate provision for reserves to
meet contributions that have not been made because they are not yet due
under the terms of any Employee Benefit Plan or related agreements.
Benefits under all Employee Benefit Plans are as represented and have not
been increased subsequent to the date as of which documents have been
provided.
(iv) Tax Qualification. Each Employee Benefit Plan intended to be
qualified under Section 401(a) of the Code has been determined to be so
qualified by the Internal Revenue Service and, to the Knowledge of FJMDPC,
nothing has occurred since the date of the last such determination which
resulted or is likely to result in the revocation of such determination.
(v) Transactions. FJMDPC has not engaged in any transaction with
respect to the Employee Benefit Plans which would subject it to a material
tax, penalty or liability for prohibited transactions under ERISA or the
Code nor have any of its directors, officers or employees to the extent
they or any of them are fiduciaries with respect to such plans, breached
any of their responsibilities or obligations imposed upon fiduciaries
under Title I of ERISA which would result in any material claim being made
under or by or on behalf of any such plans by any party with standing to
make such claim.
(vi) Other Plans. FJMDPC presently does not maintain any employee
benefit plans or any other foreign pension, welfare or retirement benefit
plans other than those listed on Section 3(p) of the Disclosure Schedule.
(vii) Documents. FJMDPC has delivered or caused to be delivered to
SCN true and complete copies of (i) all Employee Benefit Plans as in
effect, together with all amendments thereto which will become effective
at a later date, as well as the latest Internal Revenue Service
determination letter obtained with respect to any such Employee Benefit
Plan qualified under Section 401 or 501 of the Code, and (ii) the most
recently filed Form 5500 for each Employee Benefit Plan required to file
such form.
(q) Third-Party Relations. FJMDPC has not received any notice that any
material patient, supplier, employer or associated physician intends to cease
doing business with FJMDPC.
(r) Compliance with Applicable Laws. Except as set forth in Section 3(r)
of the Disclosure Schedule, to FJMDPC's Knowledge, FJMDPC has operated in
compliance with all federal, state, county and municipal laws, constitutions,
ordinances, statutes, rules, regulations and orders applicable thereto
("Applicable Laws"). No
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item disclosed in Section 3(r) of the Disclosure Schedule has a material effect
on the operations of FJMDPC. To FJMDPC's Knowledge, neither FJMDPC nor any
physician associated with or employed by FJMDPC has received payment or any
remuneration whatsoever to induce or encourage the referral of patients or the
purchase of goods and/or services as prohibited under 42 U.S.C. ss. 1320a-7b(b),
or otherwise perpetrated any Medicare or Medicaid fraud or abuse nor has any
fraud or abuse been alleged within the last five (5) years by any government
agency.
(s) Employee Compensation. FJMDPC has paid or discharged or will pay or
discharge or assume all liabilities for compensation and benefits to which all
physician employees are entitled through the Closing Date, including but not
limited to all salaries, wages, bonuses, incentive compensation, payroll taxes,
hospitalization and medical expenses, deferred compensation, and vacation and
sick pay, as well as any severance pay becoming due as a result of the
termination of certain of FJMDPC's physician employees.
(t) Environmental Matters.
(i) Except as set forth in Section 3(t) of the Disclosure Schedule,
FJMDPC is in material compliance with all applicable Environmental Laws.
(ii) FJMDPC has not authorized or conducted nor does FJMDPC have
Knowledge of the disposal or release, or other handling of any hazardous
substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas, biohazardous
or biomedical material, or other material defined, regulated controlled or
potentially subject to any remediation requirement under any Environmental
Law (collectively "Hazardous Materials"), on, in, under or affecting any
property owned or leased by FJMDPC.
(iii) FJMDPC has, and is in compliance with, all licenses, permits,
registrations, and government authorizations necessary to operate under
all applicable Environmental Laws. Section 3(t) of the Disclosure Schedule
lists all such licenses, permits, registrations and government
authorizations required by any Environmental Law.
(iv) Except as disclosed in Section 3(t) of the Disclosure Schedule,
FJMDPC has not received any written or oral notice from any governmental
agency or entity or any other Person and there is no pending or threatened
claim, litigation or any administrative agency proceeding that: (a)
alleges a violation of any Environmental Law(s) by FJMDPC or, with respect
to the Practice Assets or any property owned or leased by FJMDPC (b)
alleges that FJMDPC is a liable party or potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. ss. 9601, et seq., or any analogous state law, (c) has
resulted or could result in the attachment of an environmental lien on any
of the Practice Assets or property owned or leased by FJMDPC, or (d)
alleges that FJMDPC is liable for any contamination of the environment,
contamination of any property owned or leased by FJMDPC, damage to natural
resources, property damage, or personal injury based on its activities or
the activities of any predecessor or third parties involving Hazardous
Materials, whether arising under the Environmental Laws, common law
principles, or other legal standards.
(u) Healthcare Compliance. FJMDPC is participating in or otherwise
authorized to receive reimbursement from Medicare and Medicaid and is a party to
other third-party payor agreements if any, discussed in Section 3(i) of the
Disclosure Schedule. 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, and no condition
exists or 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. FJMDPC is in
compliance in all material respects with the
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requirements of all such third-party payors applicable thereto. FJMDPC, its
stockholders, and its physician employees do not have any financial relationship
(whether investment interest, compensation interest, or otherwise) with any
entity to which any of the foregoing refer patients, except for such financial
relationships that qualify for exceptions to state and federal laws restricting
physician referrals to entities in which they have a financial interest.
(v) Fraud and Abuse. To FJMDPC's Knowledge, FJMDPC, JAGGEARS and persons
and entities providing professional services for FJMDPC have not engaged in any
activities which are prohibited under 42 U.S.C. ss. 1320a-7b, or the regulations
promulgated thereunder pursuant to such statutes, or related state or local
statutes or regulations, or which are prohibited by rules of professional
conduct, including 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 its own behalf or on behalf of
another, with intent to fraudulently secure such benefit or payment; and (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.
(w) Practice Compliance. FJMDPC is duly licensed as a medical practice and
is lawfully operated in accordance with the requirements of all Applicable Laws
and has all necessary authorizations for the use and operation of a medical
practice, all of which are in full force and effect. There are no outstanding
notices of deficiencies relating to FJMDPC issued by any governmental authority
or third-party payor requiring conformity or compliance with any applicable law
or condition for participation with such governmental authority or third-party
payor, and after reasonable and independent inquiry and due diligence and
investigation, FJMDPC 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 of Business.
(x) Rates and Reimbursement Policies. The jurisdiction in which FJMDPC is
located does not currently impose any restrictions or limitations on rates which
may be charged to private pay patients receiving services provided by FJMDPC.
FJMDPC does not have any rate appeal currently pending before any governmental
authority or any administrator of any third-party payor program. FJMDPC has no
Knowledge of any Applicable Law which affects rates or reimbursement procedures
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 FJMDPC is located, which could
have a material adverse effect on FJMDPC or may result in the imposition of
additional Medicaid, Medicare, charity, free care, welfare, or other discounted
or government assisted patients at FJMDPC or require FJMDPC to obtain any
necessary authorization which FJMDPC does not currently possess.
(y) Accounts Receivable. All accounts receivable, unbilled invoices and
other debts due or recorded in the respective records and books of account of
FJMDPC, as being due to FJMDPC, as at the Closing Date have arisen in the
Ordinary Course of Business; and none of such accounts receivable or other debts
is or will at the Closing Date be subject to any counterclaim or set-off except
to the extent of any such provision or reserve. There has been no material
adverse change since December 31, 1995 in the amount of accounts receivable or
other debts due FJMDPC, the allowances with respect thereto, or accounts payable
of FJMDPC from that reflected in the Balance Sheet previously delivered by
FJMDPC to SCN.
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(z) Guaranties. FJMDPC is not a guarantor and otherwise is not liable for
any liability or obligation (including indebtedness) of any other Person.
(aa) Powers of Attorney. There are no outstanding powers of attorney
executed by FJMDPC, except as may be contained in financing documents or
security agreements listed in Section 3(i) of the Disclosure Schedule.
(bb) Tangible Assets. FJMDPC owns or leases all land, buildings,
machinery, equipment, and other tangible assets necessary for the conduct of its
business as presently conducted. To FJMDPC's Knowledge, each tangible asset has
been maintained in accordance with normal industry practice, is in good
operating condition and repair (subject to normal wear and tear).
(cc) SCN Share Ownership; Investment Intent.
(i) Neither FJMDPC nor JAGGEARS owns, beneficially or otherwise, any
SCN Shares.
(ii) SCN Shares issuable in the Merger are being acquired by
JAGGEARS for investment and not with a view to the distribution thereof, and
JAGGEARS acknowledges and understands that the certificate(s) representing such
SCN Shares will bear a legend in substantially the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
ANY STATE SECURITIES ACT AND CANNOT BE SOLD, TRANSFERRED, OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER SUCH ACTS OR UNLESS
EXEMPTIONS FROM REGISTRATION ARE AVAILABLE.
THE COMPANY WILL FURNISH THE HOLDER HEREOF INFORMATION REGARDING THE
DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES, AND LIMITATION
APPLICABLE TO EACH CLASS AND THE VARIATIONS AND RIGHTS, PREFERENCES,
AND LIMITATIONS DETERMINED FOR EACH SERIES OF STOCK ISSUED BY THE
COMPANY (AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE
VARIATIONS FOR FUTURE SERIES) UPON REQUEST IN WRITING AND WITHOUT
CHARGE.
(iii) JAGGEARS represents and warrants as follows:
(A) JAGGEARS is an "accredited investor" as defined under Rule
501 of Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act").
(B) JAGGEARS has received and reviewed a copy of SCN's Private
Placement Memorandum which contains certain information regarding
SCN and its business. JAGGEARS confirms that SCN has made available
to him or to his representatives the opportunity to ask questions of
SCN officers and directors and to acquire such information about the
SCN Shares and the business and financial condition of SCN as
JAGGEARS has requested, which additional information has been
received.
(C) In deciding to acquire SCN Shares pursuant to this
Agreement, JAGGEARS has consulted with his legal, financial, and tax
advisers with respect to the Merger and the nature of the investment
together with additional information concerning SCN set forth in the
SCN
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Private Placement Memorandum and any additional information provided
under subsection (B) above.
(D) JAGGEARS has adequate means of providing for his current
needs and personal contingencies and has no need for liquidity in
his investment in SCN. JAGGEARS, either alone or with his
representatives, has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and
risks of an investment in SCN.
(dd) Full Disclosure. No representation or warranty made by FJMDPC 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.
4. Representations and Warranties of SCN. SCN represents and warrants to
FJMDPC that the statements contained in this Section 4 are correct and complete
as of the date of this Agreement and will be correct and complete as of the
Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 4.
(a) Organization. SCN is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of its incorporation.
(b) Capitalization. As of the date of this Agreement, the entire
authorized capital stock of the SCN consists of 50,000,000 SCN Shares, of which
11,045,015 SCN Shares are issued and outstanding and zero SCN Shares are held in
treasury and 2,000,000 shares of preferred stock, no par value, of which none
are issued and outstanding. All of the SCN Shares to be issued in the Merger
have been duly authorized and, upon consummation of the Merger, will be validly
issued, fully paid, and nonassessable.
(c) Authorization of Transaction. SCN has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement, to issue the SCN Shares and otherwise to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of SCN, enforceable in accordance with its terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, professional regulatory organization or court to which SCN
is subject, or may become subject as a result of the transaction contemplated by
this Agreement, or any provision of the charter or bylaws of SCN or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which SCN is a party or by which it is bound
or to which any of its assets is subject. Other than state and federal filings
required by the Securities Act and similar state statutes, SCN does not need to
give any notice to, make any filing with, or obtain any authorization, consent,
or approval of any government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement.
(e) Brokers' Fees. SCN does not have any liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which SCN could become liable or
obligated.
(f) Private Placement Memorandum. The Private Placement Memorandum does
not contain any untrue statement of material fact or omit to state a material
fact necessary to make the statements therein not misleading.
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5. Covenants. The Parties agree as follows with respect to the period from
and after the execution of this Agreement.
(a) General. Each of the Parties will use its and his best efforts to take
all action and to do all things necessary in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction of the closing conditions set forth in Section 6 below) to be
satisfied by him or it. This paragraph shall not be construed to obligate any of
its parties to waive any condition precedent to his or its obligations to
perform hereunder.
(b) Notices and Consents. FJMDPC will give any notices to third parties,
and will use its best efforts to obtain any third party consents, that SCN
reasonably may request in connection with the matters referred to in Section
3(i) above.
(c) Regulatory Matters and Approvals. Each of the parties to this
Agreement will give any notices to, make any filings with, and use its
reasonable best efforts to obtain any authorizations, consents, and approvals of
governments and governmental agencies in connection with the transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing:
(i) General Corporation Law. SCN will call a special meeting of its
Board of Directors as soon as practicable in order that the Board of
Directors may consider and vote upon the adoption of this Agreement and
the approval of the Merger in accordance with the Delaware General
Corporation Law.
(ii) Tax Reporting. The Merger is intended to qualify as a
reorganization under Code Section 368(a)(1)(A). Each of the parties agrees
to report this transaction for income tax purposes in accordance with the
foregoing.
(d) Operation of Business. From the date of this Agreement through the
Closing Date, FJMDPC will not engage in any practice, take any action, or enter
into any transaction outside the Ordinary Course of Business. Without limiting
the generality of the foregoing:
(i) FJMDPC will not authorize or effect any change in its charter or
bylaws;
(ii) FJMDPC will not grant any options, warrants, or other rights to
purchase or obtain any of its capital stock or issue, sell, or otherwise
dispose of any of its capital stock (except upon the conversion or
exercise of options, warrants, and other rights currently outstanding);
(iii) FJMDPC will not declare, set aside, or pay any dividend or
distribution with respect to its capital stock (whether in cash or in
kind), or redeem, repurchase, or otherwise acquire any of its capital
stock in either case outside the Ordinary Course of Business without the
consent of SCN, which consent shall not be unreasonably withheld;
(iv) FJMDPC will not issue any note, bond, or other debt security or
create, incur, assume, or guarantee any indebtedness for borrowed money or
capitalized lease obligation outside the Ordinary Course of Business;
(v) FJMDPC will not impose any Security Interest upon any of its
assets outside the Ordinary Course of Business;
(vi) FJMDPC will not make any capital investment in, make any loan
to, or acquire the securities or assets of any other Person outside the
Ordinary Course of Business;
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(vii) FJMDPC will not make any change in employment terms for any of
its directors, officers, and employees outside the Ordinary Course of
Business; and
(viii) FJMDPC will not commit to any of the foregoing.
(e) Full Access. Upon three (3) days prior notice, FJMDPC will permit
representatives of SCN to have full access to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to FJMDPC during normal business hours. SCN will treat and hold as
such any confidential information it receives from FJMDPC in the course of the
reviews contemplated by this Section 5(e), will not use any of the confidential
information except in connection with this Agreement, and, if this Agreement is
terminated for any reason whatsoever, agrees to return to FJMDPC all tangible
embodiments (and all copies) thereof which are in its possession.
(f) Notice of Developments. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of any of its own
representations and warranties in Section 3 and Section 4 above. No disclosure
by any Party pursuant to this Section 5(f), however, shall be deemed to amend or
supplement the Disclosure Schedule or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant.
(g) Exclusivity. Until the earlier of (i) March 31, 1997, or (ii) the
Effective Time, FJMDPC will not solicit, initiate, or encourage the submission
of any proposal or offer from any Person relating to the acquisition of all or
substantially all of the capital stock or assets of FJMDPC (including any
acquisition structured as a merger, consolidation, or share exchange). FJMDPC
shall notify SCN immediately if any Person makes any proposal, offer, inquiry,
or contact with respect to any of the foregoing.
(h) Collection of Accounts Receivable. JAGGEARS agrees to cooperate with
SCN in the collection of accounts receivable owned by FJMDPC as of the Effective
Time acquired pursuant to this Agreement. SCN, at its option, shall have the
right to require the collection of said accounts receivable through a lockbox or
bank account sweep arrangement. In connection therewith, JAGGEARS agrees to
execute the necessary documents and follow the necessary procedures as described
in the Service Agreement, which is attached hereto as Exhibit 7(a)(iv) to
accommodate the collection of the accounts receivable in such manner.
(i) Payment of Expenses. On or before the Effective Time, FJMDPC shall
have paid or discharged any and all liabilities or charges for costs or fees
owed as a result of the transaction contemplated by this Agreement.
(j) Completion of Schedules. The parties hereto acknowledge that this
Agreement is being executed and delivered before the Disclosure Schedule has
been completed and attached hereto. SCN therefore agrees that FJMDPC and
JAGGEARS may complete the Disclosure Schedule and that said Disclosure Schedule
may be attached hereto after the execution and delivery of this Agreement;
provided, however, that the Disclosure Schedule shall be in form, substance and
content acceptable to SCN in its sole discretion and shall be completed and
delivered to SCN by FJMDPC and JAGGEARS on or prior to December 31, 1996. SCN
shall have the right to terminate this Agreement at any time on or prior to
March 31, 1996, in its sole discretion, based upon its review of the Disclosure
Schedule furnished by FJMDPC and JAGGEARS and the documents, events, facts or
other circumstances referred to therein. In the event that this Agreement is
terminated pursuant to this Section 5(j), neither party shall be obligated to
the other, except as set forth in Section 8(b).
(k) Corporate Authorization. By execution of this Agreement, JAGGEARS
agrees to vote his FJMDPC Shares in favor of the Merger and to complete all
other acts necessary to Close under this Agreement.
- 14 -
<PAGE>
(l) Malpractice Insurance. On or before the Effective Time, all physicians
and employees of FJMDPC must be covered by medical malpractice insurance and, if
required by SCN, medical malpractice tail insurance to cover prior occurrences
shall be procured by FJMDPC.
(m) Distribution of Excluded Assets. Prior to the Effective Time, FJMDPC
shall have distributed to JAGGEARS all of the assets listed on Exhibit 5(m),
which constitute the entirety of the assets owned by FJMDPC not being acquired
by SCN (the "Excluded Assets"). Additionally, with respect to Employee Benefit
Plans, on or before the Effective Time, all Plans shall be transferred to a new
entity controlled by JAGGEARS, and the instrument of transfer shall provide that
the new entity assumes all of the liabilities of the Plan, including, but not
limited to, any current or future funding liabilities.
(n) Establishment of Accruals. Prior to the Effective Time, FJMDPC shall
have established an adequate accrual reserve for payment of the taxes accrued
with respect to the taxable periods or portion thereof ended as of the Effective
Time of the Merger contemplated herein.
(o) Satisfaction of Indebtedness. Prior to the Effective Time, FJMDPC
shall have caused the payoff of all liabilities owed to third-parties and all
indebtedness owed to banks or other financial institutions or lenders or shall
have caused the assumption thereof by a new entity organized by JAGGEARS. FJMDPC
shall not be required to pay off accounts payable of FJMDPC, not more than
thirty (30) days old, and arising in the ordinary Course of Business, capital
leases or purchase money obligations secured by assets of FJMDPC.
(p) Accrued Vacation and Sick Time. Prior to the Effective Time, FJMDPC
will satisfy and discharge any and all liabilities to any employee of FJMDPC for
accrued vacation time in excess of one week and accrued sick time in excess of
one week.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of SCN. The obligation of SCN to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
(i) FJMDPC shall have procured all of the third party consents
specified in Section 5(b) above;
(ii) the representations and warranties set forth in Section 3 above
shall be true and correct in all material respects at and as of the
Closing Date;
(iii) FJMDPC shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iv) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Corporation to own the
former assets or to operate the former business of the FJMDPC;
(v) SCN shall have received the resignations, effective as of the
Closing, of each director and officer of FJMDPC other than those whom SCN
shall have specified in writing at least five (5) business days prior to
the Closing;
- 15 -
<PAGE>
(vi) all actions to be taken by FJMDPC in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be satisfactory in form and
substance to SCN;
(vii) the issuance of the SCN Shares to FJMDPC or JAGGEARS will not
violate federal securities laws or the securities laws of any state of the
United States;
(viii) SCN and FJMDPC shall have all licenses and permits necessary
to operate their respective businesses;
(ix) FJMDPC and JAGGEARS shall have taken all steps necessary to
enable the Merger of FJMDPC with and into SCN, including, if necessary,
the conversion of FJMDPC from a Georgia Professional Corporation to a
Georgia Business Corporation;
(x) SCN shall have completed and be satisfied with its due diligence
review; and
(xi) SCN's Board of Directors shall have approved the Merger in
their sole and absolute discretion.
SCN may waive any condition specified in this Section 6(a) if it executes a
writing so stating at or prior to the Closing.
(b) Conditions to Obligation of FJMDPC. The obligation of FJMDPC to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) This Agreement and the Merger shall have received approval of
the SCN Board of Directors;
(ii) the representations and warranties set forth in Section 4 above
shall be true and correct in all material respects at and as of the
Closing Date;
(iii) SCN shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing; and
(iv) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Corporation to own the
former assets of FJMDPC.
FJMDPC may waive any condition specified in this Section 6(b) if it
executes a writing so stating at or prior to the Closing.
7. Items to be Delivered at or Prior to Closing.
(a) By JAGGEARS or FJMDPC. JAGGEARS or FJMDPC, as applicable, shall
execute and deliver to SCN, prior to or at the Closing:
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<PAGE>
(i) Certified resolutions of FJMDPC authorizing the execution of all
documents and the consummation of all transactions contemplated hereby;
(ii) The Georgia Articles of Merger which shall be in substantially
the form attached hereto as Exhibit 2(c)(i);
(iii) Stock Certificates representing ownership of all shares of
FJMDPC, duly endorsed to SCN;
(iv) A Certificate duly executed by the President of FJMDPC and
JAGGEARS stating as of the Closing Date, all representations and
warranties are true, all covenants and agreements contained in the
Agreement to be performed by FJMDPC and JAGGEARS have been performed or
complied with and all conditions to closing have been complied with;
(v) An opinion from FJMDPC's counsel in substantially the form
attached hereto as Exhibit 7(a)(v);
(vi) A Specialty Care Network, Inc. Stockholder's Agreement;
(vii) A Service Agremeent in the form attached hereto as Exhibit
7(b)(vi); and
(viii) Such other instruments as may be reasonably requested by SCN
in order to effect to or carry out the intent of this Agreement.
(b) By SCN. SCN shall deliver to FJMDPC at or prior to the Closing:
(i) Stock Certificates representing the SCN Shares being issued to
JAGGEARS pursuant to Section 2(d)(v);
(ii) The Delaware Articles of Merger in substantially the form
attached hereto Exhibit 2(c);
(iii) An opinion from SCN's counsel in substantially the form
attached hereto as Exhibit 7(b)(iii);
(iv) A Certificate, duly executed by the President of SCN, stating
as of the Closing Date, all representations and warranties of SCN are
true, all covenants and agreements contained in the Agreement to be
performed by SCN have been performed or complied with and all conditions
to Closing have been satisfied;
(v) A Specialty Care Network, Inc. Stockholder's Agreement;
(vi) A Service Agreement in the form attached hereto as Exhibit
7(a)(iv);
(vii) A Service Agreement in the form attached hereto as Exhibit
7(b)(vi); and
(viii) Such other instruments as may be reasonably requested by
JAGGEARS in order to effect to or carry out the intent of this Agreement.
8. Termination.
(a) Termination of Agreement. Either of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after stockholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Effective Time;
(ii) SCN may terminate this Agreement by giving written notice to
FJMDPC at any time prior to the Effective Time (A) in the event FJMDPC has
breached any representation, warranty, or covenant contained in this
Agreement in any material respect, SCN has notified FJMDPC of the breach,
and the breach has continued without cure for a period of 30 days after
the notice of breach, (B) if the Closing shall not have occurred on or
before March 31, 1997 by reason of the failure of any condition precedent
under Section 6(a) hereof (unless the failure results primarily from SCN
breaching any representation, warranty, or covenant contained in this
Agreement) or (C) in accordance with Section 5(j); or
(iii) FJMDPC may terminate this Agreement by giving written notice
to SCN at any time prior to the Effective Time (A) in the event SCN has
breached any representation, warranty, or covenant contained in this
Agreement in any material respect, FJMDPC has notified SCN of the breach,
and the breach has continued without cure for a period of 30 days after
the notice of breach or (B) if the Closing shall not have occurred on or
before March 31, 1997 by reason of the failure of any condition precedent
under Section 6(b) hereof (unless the failure results primarily from
FJMDPC breaching any representation, warranty, or covenant contained in
this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement pursuant
to Section 8(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any party to any other Party (except for any
liability of any Party then in breach). Notwithstanding the foregoing, in the
event the transaction contemplated by this Agreement does not close and such
failure is not the fault of SCN, then FJMDPC agrees to reimburse SCN for
seventy-five percent of SCN's out of pocket expenses, including but not limited
to professional fees, related to the proposed transaction; provided, however,
FJMDPC's obligation to reimburse SCN shall not exceed fifty-six thousand two
hundred fifty dollars ($56,250).
17
<PAGE>
9. Indemnification.
(a) Indemnification by JAGGEARS. JAGGEARS agrees to and shall defend,
indemnify and hold harmless SCN, its successors and assigns, officers and
directors against any and all losses, liabilities, expenses (including, but
without limitation, reasonable attorneys fees) and damages resulting from or
arising out of the breach, untruth or inaccuracy of any representation, warranty
or covenant of FJMDPC or JAGGEARS set forth in this Agreement. JAGGEARS shall
not be liable to SCN for any claims against JAGGEARS under this Section 9(a)
unless and until the aggregate of all claims against JAGGEARS exceeds the sum of
$25,000.00, whereupon SCN shall be entitled to recover the full amount of all
claims, including the initial $25,000.00. Notwithstanding the foregoing
provisions, the obligations of JAGGEARS to indemnify SCN shall not exceed the
fair market value (as determined under the Stockholders' Agreement) of the SCN
Shares delivered to JAGGEARS at the time of Closing.
(b) Notice to JAGGEARS; Opportunity to Defend. SCN agrees to give prompt
notice to JAGGEARS of the assertion of any claim, or the commencement of any
suit, action or proceeding, in respect of which indemnity may be sought under
Section 9(a). JAGGEARS may participate in and at his election, or at the request
of SCN, assumes the defense of any such suit, action or proceeding at JAGGEARS's
expense. JAGGEARS shall not be liable under Section 9(a) for any settlement
effected without his consent of any claim, litigation or proceeding in respect
of which indemnity may be sought under Section 9(a) which consent shall not be
unreasonably withheld.
(c) General Indemnification by SCN. SCN agrees to and shall defend,
indemnify and hold harmless JAGGEARS, his heirs and assigns against any and all
losses, liabilities, expenses (including, but without limitation, reasonable
attorneys fees) and damages resulting from the breach, untruth or inaccuracy of
any representation, warranty or covenant of SCN set forth in this Agreement. SCN
shall not be liable to JAGGEARS for any claims against SCN under this Section
9(c) unless and until the aggregate of all claims against SCN exceeds the sum of
$25,000.00, whereupon JAGGEARS shall be entitled to recover the full amount of
all claims, including the initial $25,000.00.
(d) Notice to SCN; Opportunity to Defend. JAGGEARS agrees to give prompt
notice to SCN of the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which indemnity may be sought under Section
9(c). SCN may participate in and at its election, or at the request of JAGGEARS,
assumes the defense of any such suit, action or proceeding at SCN's expense. SCN
shall not be liable under Section 9(c) for any settlement effected without its
consent of any claim, litigation or proceeding in respect of which indemnity may
be sought hereunder, which consent shall not be unreasonably withheld.
(e) Survival. The representations and warranties of JAGGEARS, FJMDPC and
SCN contained in this Agreement and the indemnifications contained herein shall
survive the Closing. No claim for indemnification with respect to any alleged
misrepresentation or breach of warranty may be made after two (2) years
following the Closing Date. Any matter to which indemnification pertains and
with respect to which a claim has been asserted or threatened following the
Closing Date shall continue to be subject to the indemnification under this
Agreement until finally terminated, settled, resolved or adjudicated; and all
terms, conditions and stipulations of this Agreement shall likewise continue to
apply.
10. Miscellaneous.
(a) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the parties and their respective
successors and permitted assigns.
18
<PAGE>
(b) Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the parties and supersedes any
prior understandings, agreements, or representations by or between the parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(c) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties named herein and their respective successors
and permitted assigns. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party.
(d) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(e) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to FJMDPC: Copy to:
Floyd Jaggears, M.D. _____________________________
1637 Mill Pond Road _____________________________
Thomasville, Georgia 31792 _____________________________
Facsimile: ______________ _____________________________
Facsimile: __________________
If to SCN: Copy to:
Kerry R. Hicks, President
Specialty Care Network, Inc. David T. Popwell, Esq.
44 Union Boulevard, Suite 600 Donelson, Bearman & Caldwell
Lakewood, Colorado 80228 165 Madison Ave, Suite 2100
Facsimile: (303) 716-1298 Memphis, Tennessee 38103
Facsimile: (901) 577-2303
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Delaware.
(h) Amendments and Waivers. The parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time with the prior
authorization of their respective boards of directors; provided, however, that
any amendment effected subsequent to stockholder approval will be subject to the
restrictions contained in the Delaware General Corporation Law and the Georgia
General Corporation Law. No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and signed by both of the parties.
No waiver by any party of any default, misrepresentation, or breach of warranty
or covenant hereunder, whether intentional or not, shall be deemed to extend to
any prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
19
<PAGE>
(i) Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(j) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(k) Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation.
(l) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
* * * * *
- 20 -
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
SPECIALTY CARE NETWORK, INC.
By:_________________________________
Title:______________________________
FLOYD JAGGEARS, M.D., P.C.
By:_________________________________
FLOYD JAGGEARS, M.D., President
_________________________________
FLOYD JAGGEARS, M.D., Stockholder
- 21 -
<PAGE>
EXHIBIT 5(m)
Excluded Assets
"Excluded Assets" shall mean (i) employment or noncompete agreements between
FJMDPC and JAGGEARS and those licensed medical individuals under contract with
FJMDPC to provide professional services to patients of FJMDPC and claims arising
thereunder; (ii) all patient medical records and patient lists; (iii) all
insurance policies of FJMDPC and claims arising thereunder and all prepaid
expenses on malpractice insurance premiums; (iv) the inventories, cash and
Accounts Receivable disposed of, cancelled, expended or collected, as the case
may be, by FJMDPC after the date hereof and prior to the Closing in the Ordinary
Course of Business and consistent with past practice; (v) personal property of
individual physicians which is not included on the financial statements of
FJMDPC; (vi) FJMDPC's Employee Benefit Plans and all liabilities related
thereto; (vii) FJMDPC's cash (other than any cash reserved for the payment of
any accrued liabilities) on hand as of the Closing Date, (viii) FJMDPC's third
party provider agreements; (ix) all drugs owned by FJMDPC; and (x) all notes to
FJMDPC from JAGGEARS.
5(m)-1
<PAGE>
EXHIBIT 7(a)(iv)
Service Agreement
7(a)(iv)-1
<PAGE>
EXHIBIT 7(a)(vi)
FJMDPC Opinion Letter
See Attached.
7(a)(vi)-1
<PAGE>
EXHIBIT 7(b)(iii)
SCN Opinion Letter
See Attached.
7(b)(iii)-1
MERGER AGREEMENT
BY AND AMONG
SPECIALTY CARE NETWORK, INC.,
MEDICAL REHABILITATION SPECIALISTS, P.A.
AND
KIRK J. MAURO, M.D.
_______________, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions........................................................1
2. Basic Transaction..................................................3
(a) The Merger..................................................3
(b) The Closing.................................................3
(c) Actions at the Closing......................................3
(d) Effect of Merger............................................3
3. Representations and Warranties of MRS and MAURO....................4
(a) Organization, Qualification, and Corporate Power............4
(b) Capitalization..............................................4
(c) Authorization of Transaction................................4
(d) Noncontravention............................................4
(e) Subsidiaries and Investments................................5
(f) Financial Statement.........................................5
(g) Undisclosed Liabilities.....................................5
(h) Brokers' Fees...............................................5
(i) Material Contracts..........................................5
(j) Insurance; Malpractice......................................6
(k) No Changes Prior to Closing Date............................6
(l) Title; Condition............................................7
(m) Litigation..................................................7
(n) Permits and Licenses........................................7
(o) Tax Matters.................................................7
(p) Employee Benefit Plans......................................7
(q) Third-Party Relations.......................................8
(r) Compliance with Applicable Laws.............................8
(s) Employee Compensation.......................................9
(t) Environmental Matters.......................................9
(u) Healthcare Compliance.......................................9
(v) Fraud and Abuse............................................10
(w) Practice Compliance........................................10
(x) Rates and Reimbursement Policies...........................10
(y) Accounts Receivable........................................10
(z) Guaranties.................................................10
(aa) Powers of Attorney........................................11
(bb) Tangible Assets...........................................11
(cc) SCN Share Ownership; Investment Intent....................11
(dd) Full Disclosure...........................................12
4. Representations and Warranties of SCN.............................12
(a) Organization...............................................12
(b) Capitalization.............................................12
(c) Authorization of Transaction...............................12
(d) Noncontravention...........................................12
(e) Brokers' Fees..............................................12
i
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Page
----
(f) Private Placement Memorandum...............................12
5. Covenants.........................................................12
(a) General....................................................13
(b) Notices and Consents.......................................13
(c) Regulatory Matters and Approvals...........................13
(d) Operation of Business......................................13
(e) Full Access................................................14
(f) Notice of Developments.....................................14
(g) Exclusivity................................................14
(h) Collection of Accounts Receivable..........................14
(i) Payment of Expenses........................................14
(j) Completion of Schedules....................................14
(k) Corporate Authorization....................................14
(l) Malpractice Insurance......................................14
(m) Distribution of Excluded Assets............................15
(n) Establishment of Accruals..................................15
(o) Satisfaction of Indebtedness...............................15
(p) Accrued Vacation and Sick Time.............................15
6. Conditions to Obligation to Close.................................15
(a) Conditions to Obligation of SCN............................15
(b) Conditions to Obligation of MRS............................16
7. Items to be Delivered at or Prior to Closing......................16
(a) By MAURO or MRS............................................16
(b) By SCN.....................................................17
8. Termination.......................................................17
(a) Termination of Agreement...................................17
(b) Effect of Termination......................................18
9. Indemnification...................................................18
(a) Indemnification by MAURO...................................18
(b) Notice to MAURO; Opportunity to Defend.....................18
(c) General Indemnification by SCN.............................18
(d) Notice to SCN; Opportunity to Defend.......................19
(e) Survival...................................................19
10. Miscellaneous....................................................19
(a) No Third-Party Beneficiaries...............................19
(b) Entire Agreement...........................................19
(c) Succession and Assignment..................................19
(d) Counterparts...............................................19
ii
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Page
----
(e) Headings...................................................19
(f) Notices....................................................19
(g) Governing Law..............................................20
(h) Amendments and Waivers.....................................20
(i) Severability...............................................20
(j) Expenses...................................................20
(k) Construction...............................................20
(l) Incorporation of Exhibits and Schedules....................21
EXHIBIT 5(m) - Excluded Assets..................................5(m) - 1
EXHIBIT 7(a)(iv) - Service Agreement........................7(a)(iv) - 1
EXHIBIT 7(a)(vi) - MRS Opinion Letter........................7(a)(v) - 1
EXHIBIT 7(b)(iii) - SCN Opinion Letter.....................7(b)(iii) - 1
iii
<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT ("Agreement") is entered into this the _______ day
of ____________, 1996, by and among SPECIALTY CARE NETWORK, INC., a Delaware
corporation ("SCN") and MEDICAL REHABILITATION SPECIALISTS, P.A., a Florida
corporation ("MRS") and KIRK J. MAURO, M.D. ("MAURO"). SCN, MRS and MAURO are
referred to collectively herein as the "Parties."
W I T N E S S E T H:
WHEREAS, MRS is a Florida corporation which owns the assets which are used
by and/or result from MAURO's practice of medicine;
WHEREAS, MAURO is a medical doctor practicing medicine in the State of
Florida;
WHEREAS, this Agreement contemplates a tax-free merger of MRS with and
into SCN in a reorganization pursuant to Code Section 368(a)(1)(A);
WHEREAS, MAURO will receive capital stock in SCN in exchange for his
capital stock in MRS;
WHEREAS, the Parties anticipate that the Merger contemplated by this
Agreement will further certain of their business objectives; and
WHEREAS, the Parties desire to set forth in writing the terms and
conditions under which said transaction will be consummated.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the Parties, it is agreed as
follows:
1. Definitions.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Closing Date" has the meaning set forth in Section 2(b) below.
"Closing" has the meaning set forth in Section 2(b) below.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Conversion Ratio" has the meaning set forth in Section 2(d)(v) below.
"Delaware Articles of Merger" shall have the meaning set forth in Section
2(c) below.
"Delaware General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended.
"Disclosure Schedule" has the meaning set forth in Section 3 below.
"Effective Time" has the meaning set forth in Section 2(d)(i) below.
<PAGE>
"Environmental Laws" means all federal, state, and local laws, rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder and other governmental requirements relating to pollution,
control of chemicals, storage and handling of petroleum products, management of
waste (including biohazardous or biomedical waste), discharges of materials into
the environment, health, safety, natural resources, and the environment,
including laws relating to emissions, discharges, releases, or threatened
releases of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes into ambient air, surface water, ground water, or
lands or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes.
"Florida Articles of Merger" shall have the meaning set forth in Section
2(c) below.
"Florida Business Corporation Act" means the Business Corporation Act of
the State of Florida, as amended.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Hazardous Materials" has the meaning set forth in Section 3(t) below.
"IRS" means the Internal Revenue Service.
"Knowledge" means actual knowledge after reasonable investigation.
"Merger" has the meaning set forth in Section 2(a) below.
"MRS Share" means any share of the issued and outstanding stock Common
Stock, of MRS at the date of this Agreement.
"MRS Stockholder" means Kirk J. Mauro, M.D.
"MRS" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice.
"Person" means an individual, a partnership, a limited liability company,
a corporation, an association, a joint stock company, a trust, a joint venture,
an unincorporated organization, or a governmental entity (or any department,
agency, or political subdivision thereof).
"Practice Assets" has the meaning set forth in Section 3(l) below.
"Private Placement Memorandum" means the confidential private placement
memorandum of SCN dated November 27, 1996 relating to the offering of the SCN
Shares under the Securities Act.
"SCN Share" means any share of the Common Stock, $.001 par value per
share, of SCN.
"SCN" has the meaning set forth in the preface above.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
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"Security Interest" means any mortgage, pledge, lien, encumbrance, charge
or other security interest other than (a) mechanic's, materialmen's, and similar
liens, (b) liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Surviving Corporation" has the meaning set forth in Section 2(a) below.
2. Basic Transaction.
(a) The Merger. On and subject to the terms and conditions of this
Agreement, MRS will merge with and into SCN (the "Merger") at the Effective
Time. SCN shall be the corporation surviving the Merger (the "Surviving
Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Baker, Donelson,
Bearman & Caldwell, First Tennessee Building, Memphis, Tennessee 38103,
commencing at 9:00 A.M. local time on the second business day following the day
on which the last of the conditions set forth in Article VI have been fulfilled
or waived, or such other date as the Parties may mutually determine (the
"Closing Date").
(c) Actions at the Closing. At the Closing, (i) MRS will deliver to SCN
the various certificates, instruments, and documents referred to in Section 7(a)
below, (ii) SCN will deliver to MRS the various certificates, instruments, and
documents referred to in Section 7(b) below, (iii) SCN and MRS will file with
the Secretary of State of the State of Delaware both Articles of Merger and a
Plan of Merger in the form required by SCN's legal counsel (the "Delaware
Articles of Merger"), and (iv) SCN and MRS will file with the Department of
State of the State of Florida both Articles of Merger and a Plan of Merger in
the form required by SCN's legal counsel (the "Florida Articles of Merger").
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time (the
"Effective Time") SCN and MRS file the Delaware Articles of Merger with
the Secretary of State of the State of Delaware and file the Florida
Articles of Merger with the Department of State of the State of Florida.
The Merger shall have the effect set forth in the Delaware General
Corporation Law and the Florida Business Corporation Act. The Surviving
Corporation may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on
behalf of either SCN or MRS in order to carry out and effectuate the
transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. The Certificate of Incorporation
of SCN in effect at and as of the Effective Time will remain the
Certificate of Incorporation of the Surviving Corporation without any
modification or amendment in the Merger.
(iii) Bylaws. The Bylaws of SCN in effect at and as of the Effective
Time will remain the Bylaws of the Surviving Corporation without any
modification or amendment in the Merger.
(iv) Directors and Officers. The directors and officers of SCN in
office at and as of the Effective Time will remain the directors and
officers of the Surviving Corporation (retaining their respective
positions and terms of office).
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(v) Conversion of MRS Shares. At and as of the Effective Time, all
of the issued and outstanding MRS Shares shall be converted into the right
to receive a total of 243,833 SCN Shares (the ratio of 243,833 SCN Shares
divided by the total number of MRS Shares outstanding is referred to
herein as the "Conversion Ratio"). The Conversion Ratio shall be subject
to equitable adjustment in the event of any stock split, stock dividend,
reverse stock split, or other change in the number of MRS Shares or SCN
Shares outstanding. For all purposes, each SCN Share is agreed to have a
value of $9.00 per share.
(vi) SCN Shares. Each SCN Share issued and outstanding at and as of
the Effective Time will remain issued and outstanding.
3. Representations and Warranties of MRS and MAURO. MRS and MAURO, jointly
and severally, represent and warrant to SCN that the statements contained in
this Section 3 are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Section 3), except as set forth in the disclosure schedule (the
"Disclosure Schedule"). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Section
3 and will be completed pursuant to Section 5(j).
(a) Organization, Qualification, and Corporate Power. MRS is a corporation
duly incorporated, validly existing, and in good standing under the laws of the
State of Florida. MRS is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction in which the character or location
of the properties owned or the business conducted by MRS makes such
qualification necessary. MRS has the corporate power and authority to carry on
the business in which it is engaged and to own and use the properties owned and
used by it.
(b) Capitalization. The entire authorized capital stock of MRS is set
forth in Section 3(b) of the Disclosure Schedule. All of the issued and
outstanding MRS Shares have been duly authorized and are validly issued, fully
paid, and nonassessable. MAURO is the sole stockholder of MRS. There are no
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights or other contracts or commitments
that could require MRS to issue, sell or otherwise cause to become outstanding
any of its capital stock. There are no outstanding or authorized stock
appreciation, phantom stock, profit participation, or similar rights with
respect to MRS.
(c) Authorization of Transaction. MRS has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of MRS, enforceable in accordance with its terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, professional regulatory organization or court to which MRS
is subject or any provision of the charter or bylaws of MRS or (ii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which MRS is a party or by which it is bound
or to which any of its assets is subject (or result in the imposition of any
Security Interest upon any of its assets). MRS is not required to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement.
(e) Subsidiaries and Investments. MRS does not own, directly or
indirectly, any capital stock or other equity or ownership or proprietary
interest in any other corporation, partnership, association, limited liability
company, trust, joint venture, or other entity.
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(f) Financial Statement. MRS has furnished SCN with unaudited balance
sheets dated December 31, 1994 and 1995, and unaudited income statements for the
twelve (12) month periods ending December 31, 1995, 1994 and 1993. Such
financial statements, including the notes thereto, except as indicated therein,
were prepared on a basis consistent with past accounting practices of MRS and
fairly present the results of operations for the periods noted therein. The
balance sheets of MRS delivered by MRS to SCN fairly present the financial
condition of MRS at the date thereof, and except as indicated therein, reflect
all claims against and all debts and liabilities of MRS, fixed or contingent, as
of the date thereof.
(g) Undisclosed Liabilities. MRS has no uninsured liability (whether known
or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated, and whether due or to become due),
including any liability for taxes, except for (i) liabilities set forth on the
face of the balance sheet dated as of December 31, 1995 and (ii) liabilities
which have arisen after December 31, 1995 in the Ordinary Course of Business
(none of which results from, arises out of, relates to, is in the nature of, or
was caused by any breach of contract, breach of warranty, tort, infringement, or
violation of law).
(h) Brokers' Fees. MRS does not have any liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement.
(i) Material Contracts. Section 3(i) of the Disclosure Schedule lists the
following contracts and other material agreements to which MRS is a party:
(i) any agreement (or group of related agreements) for the lease of
real or personal property to or from any Person;
(ii) any agreement (or group of related agreements) for the purchase
or sale of supplies, products, or other personal property or for the
furnishing or receipt of services;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which MRS
has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation pursuant to which it
has imposed a Security Interest in respect of any of its assets, tangible
or intangible;
(v) any agreement concerning confidentiality or noncompetition;
(vi) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of MRS's current or former directors,
officers, and employees;
(vii) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $25,000 or providing severance benefits;
(viii) any agreement pursuant to which MRS has advanced or loaned
any amount to any of its directors, officers, and employees;
(ix) any agreement pursuant to which the consequences of a default
or termination could have a material adverse effect on the business,
financial condition, operations, results of operations, or future
prospects of MRS; or
(x) any other agreement (or group of related agreements) outside the
ordinary course of MRS's business or operations the performance of which
involves consideration in excess of $15,000.
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MRS has delivered or given SCN access to a correct and complete copy of each
written agreement listed in Section 3(i) of the Disclosure Schedule (as amended
through the Closing Date) and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 3(i) of the Disclosure
Schedule. With respect to each such agreement: (A) the agreement is legal,
valid, binding, enforceable, and in full force and effect; (B) except as set
forth in Section 3(i) of the Disclosure Schedule, no notice of this Agreement or
consent of any third party is required in order to execute and deliver this
Agreement or to consummate the transaction contemplated hereby, and, after
assignment to SCN at Closing, the agreement will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms; (C) to
MRS's Knowledge, no party is in breach or default, and no event has occurred
which with notice or lapse of time would constitute a breach or default, or
permit termination, modification, or acceleration, under the agreement; and (D)
no party has repudiated any provision of the agreement.
(j) Insurance; Malpractice. Section 3(j) of the Disclosure Schedule
contains a list and brief description of all policies or binders of fire,
liability, product liability, workers compensation, health and other forms of
insurance policies or binders currently in force insuring against risks which
will remain in full force and effect at least through the Closing Date. Section
3(j) of the Disclosure Schedule contains a description of all current
malpractice liability insurance policies of MAURO, MRS and MRS's professional
employees and all predecessor policies in effect since February 1, 1990. Except
as set forth on Section 3(j) of the Disclosure Schedule (a) neither MRS, MAURO,
nor its professional employees have, in the last seven (7) years, filed a
written application for any insurance coverage relating to MRS's business or
property which has been denied by an insurance agency or carrier and (b) MRS,
MRS's professional employees and MAURO have been continuously insured for
professional malpractice claims during the same period. Section 3(j) of the
Disclosure Schedule also sets forth a list of all claims for any insured loss in
excess of Five Thousand Dollars ($5,000.00) per occurrence filed by MRS, MRS's
professional employees or MAURO during the three (3) year period immediately
preceding the date hereof, including workers compensation, general liability,
environmental liability and professional malpractice liability claims. None of
MRS, MRS's professional employees nor MAURO is in material default with respect
to any provision contained in any such policy and none of them has failed to
give any notice or present any claim under any such policy in due and timely
fashion.
(k) No Changes Prior to Closing Date. Except as set forth in the
Disclosure Schedule during the period from December 31, 1995 through the date
hereof, MRS has not (i) incurred any liability or obligation of any nature
(whether known or unknown, asserted or unasserted, absolute or contingent,
accrued or unaccrued, liquidated or unliquidated and whether due or to become
due), except in the Ordinary Course of Business, (ii) written off as
uncollectible any notes or accounts receivable, except write-offs in the
Ordinary Course of Business charged to applicable reserves, none of which
individually or in the aggregate is material to MRS, (iii) conducted its
business in such a manner so as to materially increase its accounts payable or
so as to materially decrease its accounts receivable, (iv) granted any increase
in the rate of wages, salaries, bonuses, or other remunerations of any employee,
except in the Ordinary Course of Business, (v) canceled or waived any claims or
rights of substantial value, (vi) made any change in any method of accounting,
(vii) otherwise conducted its business or entered into any transaction, except
in the usual and ordinary manner and in the Ordinary Course of Business, (viii)
agreed, whether or not in writing, to do any of the foregoing, or (ix) disposed
of its assets other than in the Ordinary Course of Business.
(l) Title; Condition. Section 3(l) of the Disclosure Schedule contains a
complete, true and correct list of those assets which are material to the
business or operations of MRS (the "Practice Assets"). MRS has good and
marketable title to, or leasehold interests in, all of the Practice Assets.
Except as disclosed on Section 3(l) of the Disclosure Schedule, none of the
Practice Assets is subject to a contract or other agreement of sale or subject
to security interests, mortgages, encumbrances, liens (including income,
personal property and other tax liens) or charges of any kind or character. Upon
completion of the merger, SCN shall own or lease the Practice Assets free and
clear of all liens and encumbrances, except as disclosed in Section 3(l) of the
Disclosure Schedule or except as otherwise disclosed elsewhere in this
Agreement.
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(m) Litigation. Except as set forth in Section 3(m) of the Disclosure
Schedule, there is no suit, action, proceeding at law or in equity, arbitration,
administrative proceeding or other proceeding or investigation by any
governmental entity pending, or, to the Knowledge of MRS, threatened against, or
affecting MRS or any of the Practice Assets, or any physician or other health
care professional engaged or employed by MRS, and to the best of MRS and MAURO's
Knowledge there is no basis for any of the foregoing. None of the actions,
suits, proceedings, hearings, and investigations set forth in Section 3(m) of
the Disclosure Schedule could result in any material adverse change in the
operations, results of operations, or future prospects of the business assets to
be operated by SCN after the Closing.
(n) Permits and Licenses. MRS and all physicians and other health care
professionals engaged or employed by MRS have all permits and licenses required
by all applicable laws; have made all regulatory filings necessary for the
conduct of MRS's business; and are not in violation of any of said permitting or
licensing requirements.
(o) Tax Matters. Except as set forth in Section 3(o) of the Disclosure
Schedule, MRS has filed or caused to be filed all federal, state and local tax
returns which are required to have been filed by MRS, including all income,
excise, franchise, and payroll tax returns, and MRS has paid or established an
adequate accrual reserve for all taxes accrued through the Effective Time of the
Merger and has otherwise complied with all federal, state, local and other tax
laws applicable to it.
(p) Employee Benefit Plans.
(i) List of Plans. Section 3(p) of the Disclosure Schedule contains
an accurate and complete list of all employee benefit plans ("Employee
Benefit Plans") within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), whether or
not any Employee Benefit Plans are otherwise exempt from the provisions of
ERISA, established, maintained or contributed to by MRS (including all
employers (whether or not incorporated) which by reason of common control
are treated together with MRS and/or MAURO as a single employer within the
meaning of Section 414 of the Code) since September 2, 1974.
(ii) Status of Plans. MRS has never maintained and does not now
maintain or contribute to any Employee Benefit Plan subject to ERISA which
is not in substantial compliance with ERISA, or which has incurred any
accumulated funding deficiency within the meaning of Section 412 or 418B
of the Code, or which has applied for or obtained a waiver from the
Internal Revenue Service of any minimum funding requirement under Section
412 of the Code or which is subject to Title IV of ERISA. MRS has not
incurred any liability to the Pension Benefit Guaranty Corporation
("PBGC") in connection with any Employee Benefit Plan covering any
employees of MRS or ceased operations at any facility or withdrawn from
any such Plan in a manner which could subject it to liability under
Section 4062(f), 4063 or 4064 of ERISA, and knows of no facts or
circumstances which might give rise to any liability of MRS to the PBGC
under Title IV of ERISA which could reasonably be anticipated to result in
any claims being made against the MRS by the PBGC. MRS has not incurred
any withdrawal liability (including any contingent or secondary withdrawal
liability) within the meaning of Sections 4201 and 4202 of ERISA, to any
Employee Benefit Plan which is a Multiemployer Plan (as defined in Section
4001 of ERISA), and no event has occurred, and there exists no condition
or set of circumstances, which represent a material risk of the occurrence
of any withdrawal from or the partition, termination, reorganization or
insolvency of any Multiemployer Plan which would result in any liability
of MRS.
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(iii) Contributions. Full payment has been made of all amounts which
MRS is required, under applicable law or under any Employee Benefit Plan
or any agreement relating to any Employee Benefit Plan to which MRS is a
party, to have paid as contributions thereto as of the last day of the
most recent plan year of such Employee Benefit Plan ended prior to the
date hereof. MRS has made adequate provision for reserves to meet
contributions that have not been made because they are not yet due under
the terms of any Employee Benefit Plan or related agreements. Benefits
under all Employee Benefit Plans are as represented and have not been
increased subsequent to the date as of which documents have been provided.
(iv) Tax Qualification. Each Employee Benefit Plan intended to be
qualified under Section 401(a) of the Code has been determined to be so
qualified by the Internal Revenue Service and, to the Knowledge of MRS,
nothing has occurred since the date of the last such determination which
resulted or is likely to result in the revocation of such determination.
(v) Transactions. MRS has not engaged in any transaction with
respect to the Employee Benefit Plans which would subject it to a material
tax, penalty or liability for prohibited transactions under ERISA or the
Code nor have any of its directors, officers or employees to the extent
they or any of them are fiduciaries with respect to such plans, breached
any of their responsibilities or obligations imposed upon fiduciaries
under Title I of ERISA which would result in any material claim being made
under or by or on behalf of any such plans by any party with standing to
make such claim.
(vi) Other Plans. MRS presently does not maintain any employee
benefit plans or any other foreign pension, welfare or retirement benefit
plans other than those listed on Section 3(p) of the Disclosure Schedule.
(vii) Documents. MRS has delivered or caused to be delivered to SCN
true and complete copies of (i) all Employee Benefit Plans as in effect,
together with all amendments thereto which will become effective at a
later date, as well as the latest Internal Revenue Service determination
letter obtained with respect to any such Employee Benefit Plan qualified
under Section 401 or 501 of the Code, and (ii) the most recently filed
Form 5500 for each Employee Benefit Plan required to file such form.
(q) Third-Party Relations. MRS has not received any notice that any
material patient, supplier, employer or associated physician intends to cease
doing business with MRS.
(r) Compliance with Applicable Laws. Except as set forth in Section 3(r)
of the Disclosure Schedule, to MRS's Knowledge, MRS has operated in compliance
with all federal, state, county and municipal laws, constitutions, ordinances,
statutes, rules, regulations and orders applicable thereto ("Applicable Laws").
No item disclosed in Section 3(r) of the Disclosure Schedule has a material
effect on the operations of MRS. To MRS's Knowledge, neither MRS nor any
physician associated with or employed by MRS has received payment or any
remuneration whatsoever to induce or encourage the referral of patients or the
purchase of goods and/or services as prohibited under 42 U.S.C. ss. 1320a-7b(b),
or otherwise perpetrated any Medicare or Medicaid fraud or abuse nor has any
fraud or abuse been alleged within the last five (5) years by any government
agency.
(s) Employee Compensation. MRS has paid or discharged or will pay or
discharge or assume all liabilities for compensation and benefits to which all
physician employees are entitled through the Closing Date, including but not
limited to all salaries, wages, bonuses, incentive compensation, payroll taxes,
hospitalization and medical expenses, deferred compensation, and vacation and
sick pay, as well as any severance pay becoming due as a result of the
termination of certain of MRS's physician employees.
(t) Environmental Matters.
(i) Except as set forth in Section 3(t) of the Disclosure Schedule,
MRS is in material compliance with all applicable Environmental Laws.
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(ii) MRS has not authorized or conducted nor does MRS have Knowledge
of the disposal or release, or other handling of any hazardous substance,
hazardous waste, hazardous material, hazardous constituent, toxic
substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas, biohazardous
or biomedical material, or other material defined, regulated controlled or
potentially subject to any remediation requirement under any Environmental
Law (collectively "Hazardous Materials"), on, in, under or affecting any
property owned or leased by MRS.
(iii) MRS has, and is in compliance with, all licenses, permits,
registrations, and government authorizations necessary to operate under
all applicable Environmental Laws. Section 3(t) of the Disclosure Schedule
lists all such licenses, permits, registrations and government
authorizations required by any Environmental Law.
(iv) Except as disclosed in Section 3(t) of the Disclosure Schedule,
MRS has not received any written or oral notice from any governmental
agency or entity or any other Person and there is no pending or threatened
claim, litigation or any administrative agency proceeding that: (a)
alleges a violation of any Environmental Law(s) by MRS or, with respect to
the Practice Assets or any property owned or leased by MRS (b) alleges
that MRS is a liable party or potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. ss. 9601, et seq., or any analogous state law, (c) has resulted or
could result in the attachment of an environmental lien on any of the
Practice Assets or property owned or leased by MRS, or (d) alleges that
MRS is liable for any contamination of the environment, contamination of
any property owned or leased by MRS, damage to natural resources, property
damage, or personal injury based on its activities or the activities of
any predecessor or third parties involving Hazardous Materials, whether
arising under the Environmental Laws, common law principles, or other
legal standards.
(u) Healthcare Compliance. MRS is participating in or otherwise authorized
to receive reimbursement from Medicare and Medicaid and is a party to other
third-party payor agreements if any, discussed in Section 3(i) of the Disclosure
Schedule. 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, and no condition exists or
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. MRS is in compliance in
all material respects with the requirements of all such third-party payors
applicable thereto. MRS, its stockholders, and its physician employees do not
have any financial relationship (whether investment interest, compensation
interest, or otherwise) with any entity to which any of the foregoing refer
patients, except for such financial relationships that qualify for exceptions to
state and federal laws restricting physician referrals to entities in which they
have a financial interest.
(v) Fraud and Abuse. To MRS's Knowledge, MRS, MAURO and persons and
entities providing professional services for MRS have not engaged in any
activities which are prohibited under 42 U.S.C. ss. 1320a-7b, or the regulations
promulgated thereunder pursuant to such statutes, or related state or local
statutes or regulations, or which are prohibited by rules of professional
conduct, including 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 its own behalf or on behalf of
another, with intent to fraudulently secure such benefit or payment; and (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.
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(w) Practice Compliance. MRS is duly licensed as a medical practice and is
lawfully operated in accordance with the requirements of all Applicable Laws and
has all necessary authorizations for the use and operation of a medical
practice, all of which are in full force and effect. There are no outstanding
notices of deficiencies relating to MRS issued by any governmental authority or
third-party payor requiring conformity or compliance with any applicable law or
condition for participation with such governmental authority or third-party
payor, and after reasonable and independent inquiry and due diligence and
investigation, MRS 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 of Business.
(x) Rates and Reimbursement Policies. The jurisdiction in which MRS is
located does not currently impose any restrictions or limitations on rates which
may be charged to private pay patients receiving services provided by MRS. MRS
does not have any rate appeal currently pending before any governmental
authority or any administrator of any third-party payor program. MRS has no
Knowledge of any Applicable Law which affects rates or reimbursement procedures
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 MRS is located, which could have
a material adverse effect on MRS or may result in the imposition of additional
Medicaid, Medicare, charity, free care, welfare, or other discounted or
government assisted patients at MRS or require MRS to obtain any necessary
authorization which MRS does not currently possess.
(y) Accounts Receivable. All accounts receivable, unbilled invoices and
other debts due or recorded in the respective records and books of account of
MRS, as being due to MRS, as at the Closing Date have arisen in the Ordinary
Course of Business; and none of such accounts receivable or other debts is or
will at the Closing Date be subject to any counterclaim or set-off except to the
extent of any such provision or reserve. There has been no material adverse
change since December 31, 1995 in the amount of accounts receivable or other
debts due MRS, the allowances with respect thereto, or accounts payable of MRS
from that reflected in the Balance Sheet previously delivered by MRS to SCN.
(z) Guaranties. MRS is not a guarantor and otherwise is not liable for any
liability or obligation (including indebtedness) of any other Person.
(aa) Powers of Attorney. There are no outstanding powers of attorney
executed by MRS, except as may be contained in financing documents or security
agreements listed in Section 3(i) of the Disclosure Schedule.
(bb) Tangible Assets. MRS owns or leases all land, buildings, machinery,
equipment, and other tangible assets necessary for the conduct of its business
as presently conducted. To MRS's Knowledge, each tangible asset has been
maintained in accordance with normal industry practice, is in good operating
condition and repair (subject to normal wear and tear).
(cc) SCN Share Ownership; Investment Intent.
(i) Neither MRS nor MAURO owns, beneficially or otherwise, any SCN
Shares.
(ii) SCN Shares issuable in the Merger are being acquired by MAURO
for investment and not with a view to the distribution thereof, and MAURO
acknowledges and understands that the certificate(s) representing such SCN
Shares will bear a legend in substantially the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
ANY STATE SECURITIES ACT AND CANNOT BE SOLD, TRANSFERRED, OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER SUCH ACTS OR UNLESS
EXEMPTIONS FROM REGISTRATION ARE AVAILABLE.
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THE COMPANY WILL FURNISH THE HOLDER HEREOF INFORMATION REGARDING THE
DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES, AND LIMITATION
APPLICABLE TO EACH CLASS AND THE VARIATIONS AND RIGHTS, PREFERENCES,
AND LIMITATIONS DETERMINED FOR EACH SERIES OF STOCK ISSUED BY THE
COMPANY (AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE
VARIATIONS FOR FUTURE SERIES) UPON REQUEST IN WRITING AND WITHOUT
CHARGE.
(iii) MAURO represents and warrants as follows:
(A) MAURO is an "accredited investor" as defined under Rule
501 of Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act").
(B) MAURO has received and reviewed a copy of SCN's Private
Placement Memorandum which contains certain information regarding
SCN and its business. MAURO confirms that SCN has made available to
him or to his representatives the opportunity to ask questions of
SCN officers and directors and to acquire such information about the
SCN Shares and the business and financial condition of SCN as MAURO
has requested, which additional information has been received.
(C) In deciding to acquire SCN Shares pursuant to this
Agreement, MAURO has consulted with his legal, financial, and tax
advisers with respect to the Merger and the nature of the investment
together with additional information concerning SCN set forth in the
SCN Private Placement Memorandum and any additional information
provided under subsection (B) above.
(D) MAURO has adequate means of providing for his current
needs and personal contingencies and has no need for liquidity in
his investment in SCN. MAURO, either alone or with his
representatives, has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and
risks of an investment in SCN.
(dd) Full Disclosure. No representation or warranty made by MRS 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.
4. Representations and Warranties of SCN. SCN represents and warrants to
MRS that the statements contained in this Section 4 are correct and complete as
of the date of this Agreement and will be correct and complete as of the Closing
Date (as though made then and as though the Closing Date were substituted for
the date of this Agreement throughout this Section 4.
(a) Organization. SCN is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of its incorporation.
(b) Capitalization. As of the date of this Agreement, the entire
authorized capital stock of the SCN consists of 50,000,000 SCN Shares, of which
11,045,015 SCN Shares are issued and outstanding and zero SCN Shares are held in
treasury and 2,000,000 shares of preferred stock, no par value, of which none
are issued and outstanding. All of the SCN Shares to be issued in the Merger
have been duly authorized and, upon consummation of the Merger, will be validly
issued, fully paid, and nonassessable.
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(c) Authorization of Transaction. SCN has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement, to issue the SCN Shares and otherwise to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of SCN, enforceable in accordance with its terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, professional regulatory organization or court to which SCN
is subject, or may become subject as a result of the transaction contemplated by
this Agreement, or any provision of the charter or bylaws of SCN or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which SCN is a party or by which it is bound
or to which any of its assets is subject. Other than state and federal filings
required by the Securities Act and similar state statutes, SCN does not need to
give any notice to, make any filing with, or obtain any authorization, consent,
or approval of any government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement.
(e) Brokers' Fees. SCN does not have any liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which SCN could become liable or
obligated.
(f) Private Placement Memorandum. The Private Placement Memorandum does
not contain any untrue statement of material fact or omit to state a material
fact necessary to make the statements therein not misleading.
5. Covenants. The Parties agree as follows with respect to the period from
and after the execution of this Agreement.
(a) General. Each of the Parties will use its and his best efforts to take
all action and to do all things necessary in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction of the closing conditions set forth in Section 6 below) to be
satisfied by him or it. This paragraph shall not be construed to obligate any of
its parties to waive any condition precedent to his or its obligations to
perform hereunder.
(b) Notices and Consents. MRS will give any notices to third parties, and
will use its best efforts to obtain any third party consents, that SCN
reasonably may request in connection with the matters referred to in Section
3(i) above.
(c) Regulatory Matters and Approvals. Each of the parties to this
Agreement will give any notices to, make any filings with, and use its
reasonable best efforts to obtain any authorizations, consents, and approvals of
governments and governmental agencies in connection with the transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing:
(i) General Corporation Law. SCN will call a special meeting of its
Board of Directors as soon as practicable in order that the Board of
Directors may consider and vote upon the adoption of this Agreement and
the approval of the Merger in accordance with the Delaware General
Corporation Law.
(ii) Tax Reporting. The Merger is intended to qualify as a
reorganization under Code Section 368(a)(1)(A). Each of the parties agrees
to report this transaction for income tax purposes in accordance with the
foregoing.
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(d) Operation of Business. From the date of this Agreement through the
Closing Date, MRS will not engage in any practice, take any action, or enter
into any transaction outside the Ordinary Course of Business.
Without limiting the generality of the foregoing:
(i) MRS will not authorize or effect any change in its charter or
bylaws;
(ii) MRS will not grant any options, warrants, or other rights to
purchase or obtain any of its capital stock or issue, sell, or otherwise
dispose of any of its capital stock (except upon the conversion or
exercise of options, warrants, and other rights currently outstanding);
(iii) MRS will not declare, set aside, or pay any dividend or
distribution with respect to its capital stock (whether in cash or in
kind), or redeem, repurchase, or otherwise acquire any of its capital
stock in either case outside the Ordinary Course of Business without the
consent of SCN, which consent shall not be unreasonably withheld;
(iv) MRS will not issue any note, bond, or other debt security or
create, incur, assume, or guarantee any indebtedness for borrowed money or
capitalized lease obligation outside the Ordinary Course of Business;
(v) MRS will not impose any Security Interest upon any of its assets
outside the Ordinary Course of Business;
(vi) MRS will not make any capital investment in, make any loan to,
or acquire the securities or assets of any other Person outside the
Ordinary Course of Business;
(vii) MRS will not make any change in employment terms for any of
its directors, officers, and employees outside the Ordinary Course of
Business; and
(viii) MRS will not commit to any of the foregoing.
(e) Full Access. Upon three (3) days prior notice, MRS will permit
representatives of SCN to have full access to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to MRS during normal business hours. SCN will treat and hold as
such any confidential information it receives from MRS in the course of the
reviews contemplated by this Section 5(e), will not use any of the confidential
information except in connection with this Agreement, and, if this Agreement is
terminated for any reason whatsoever, agrees to return to MRS all tangible
embodiments (and all copies) thereof which are in its possession.
(f) Notice of Developments. Each Party will give prompt written notice to
the other of any material adverse development causing a breach of any of its own
representations and warranties in Section 3 and Section 4 above. No disclosure
by any Party pursuant to this Section 5(f), however, shall be deemed to amend or
supplement the Disclosure Schedule or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant.
(g) Exclusivity. Until the earlier of (i) March 31, 1997, or (ii) the
Effective Time, MRS will not solicit, initiate, or encourage the submission of
any proposal or offer from any Person relating to the acquisition of all or
substantially all of the capital stock or assets of MRS (including any
acquisition structured as a merger, consolidation, or share exchange). MRS shall
notify SCN immediately if any Person makes any proposal, offer, inquiry, or
contact with respect to any of the foregoing.
(h) Collection of Accounts Receivable. MAURO agrees to cooperate with SCN
in the collection of accounts receivable owned by MRS as of the Effective Time
acquired pursuant to this Agreement. SCN, at its option, shall have the right to
require the collection of said accounts receivable through a lockbox or bank
account sweep arrangement. In connection therewith, MAURO agrees to execute the
necessary documents and follow the necessary procedures as described in the
Service Agreement attached hereto as Exhibit 7(a)(iv) to accommodate the
collection of the accounts receivable in such manner.
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<PAGE>
(i) Payment of Expenses. On or before the Effective Time, MRS shall have
paid or discharged any and all liabilities or charges for costs or fees owed as
a result of the transaction contemplated by this Agreement.
(j) Completion of Schedules. The parties hereto acknowledge that this
Agreement is being executed and delivered before the Disclosure Schedule has
been completed and attached hereto. SCN therefore agrees that MRS and MAURO may
complete the Disclosure Schedule and that said Disclosure Schedule may be
attached hereto after the execution and delivery of this Agreement; provided,
however, that the Disclosure Schedule shall be in form, substance and content
acceptable to SCN in its sole discretion and shall be completed and delivered to
SCN by MRS and MAURO on or prior to December 31, 1996. SCN shall have the right
to terminate this Agreement at any time on or prior to March 31, 1996, in its
sole discretion, based upon its review of the Disclosure Schedule furnished by
MRS and MAURO and the documents, events, facts or other circumstances referred
to therein. In the event that this Agreement is terminated pursuant to this
Section 5(j), neither party shall be obligated to the other, except as set forth
in Section 8(b).
(k) Corporate Authorization. By execution of this Agreement, MAURO agrees
to vote his MRS Shares in favor of the Merger and to complete all other acts
necessary to Close under this Agreement.
(l) Malpractice Insurance. On or before the Effective Time, all physicians
and employees of MRS must be covered by medical malpractice insurance and, if
required by SCN, medical malpractice tail insurance to cover prior occurrences
shall be procured by MRS.
(m) Distribution of Excluded Assets. Prior to the Effective Time, MRS
shall have distributed to MAURO all of the assets listed on Exhibit 5(m), which
constitute the entirety of the assets owned by MRS not being acquired by SCN
(the "Excluded Assets"). Additionally, with respect to Employee Benefit Plans,
on or before the Effective Time, all Plans shall be transferred to a new entity
controlled by MAURO, and the instrument of transfer shall provide that the new
entity assumes all of the liabilities of the Plan, including, but not limited
to, any current or future funding liabilities.
(n) Establishment of Accruals. Prior to the Effective Time, MRS shall have
established an adequate accrual reserve for payment of the taxes accrued with
respect to the taxable periods or portion thereof ended as of the Effective Time
of the Merger contemplated herein.
(o) Satisfaction of Indebtedness. Prior to the Effective Time, MRS shall
have caused the payoff of all liabilities owed to third-parties and all
indebtedness owed to banks or other financial institutions or lenders or shall
have caused the assumption thereof by a new entity organized by MAURO. MRS shall
not be required to pay off accounts payable of MRS, not more than thirty (30)
days old, and arising in the ordinary Course of Business, capital leases or
purchase money obligations secured by assets of MRS.
(p) Accrued Vacation and Sick Time. Prior to the Effective Time, MRS will
satisfy and discharge any and all liabilities to any employee of MRS for accrued
vacation time in excess of one week and accrued sick time in excess of one week.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of SCN. The obligation of SCN to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
(i) MRS shall have procured all of the third party consents
specified in Section 5(b) above;
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(ii) the representations and warranties set forth in Section 3 above
shall be true and correct in all material respects at and as of the
Closing Date;
(iii) MRS shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iv) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Corporation to own the
former assets or to operate the former business of the MRS;
(v) SCN shall have received the resignations, effective as of the
Closing, of each director and officer of MRS other than those whom SCN
shall have specified in writing at least five (5) business days prior to
the Closing;
(vi) all actions to be taken by MRS in connection with consummation
of the transactions contemplated hereby and all certificates, opinions,
instruments, and other documents required to effect the transactions
contemplated hereby will be satisfactory in form and substance to SCN;
(vii) the issuance of the SCN Shares to MRS or MAURO will not
violate federal securities laws or the securities laws of any state of the
United States;
(viii) SCN and MRS shall have all licenses and permits necessary to
operate their respective businesses;
(ix) MRS and MAURO shall have taken all steps necessary to enable
the Merger of MRS with and into SCN, including, if necessary, the
conversation of MRS from a Florida Professional Corporation to a Florida
Business Corporation;
(x) SCN shall have completed and been satisfied with its due
diligence review; and
(xi) SCN's Board of Directors shall have approved the Merger in
their sole and absolute discretion.
SCN may waive any condition specified in this Section 6(a) if it executes a
writing so stating at or prior to the Closing.
(b) Conditions to Obligation of MRS. The obligation of MRS to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
(i) This Agreement and the Merger shall have received approval of
the SCN Board of Directors;
(ii) the representations and warranties set forth in Section 4 above
shall be true and correct in all material respects at and as of the
Closing Date;
(iii) SCN shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing; and
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(iv) no action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Corporation to own the
former assets of MRS.
MRS may waive any condition specified in this Section 6(b) if it executes
a writing so stating at or prior to the Closing.
7. Items to be Delivered at or Prior to Closing.
(a) By MAURO or MRS. MAURO or MRS, as applicable, shall execute and
deliver to SCN, prior to or at the Closing:
(i) Certified resolutions of MRS authorizing the execution of all
documents and the consummation of all transactions contemplated hereby;
(ii) The Florida Articles of Merger which shall be in the form
required by SCN's legal counsel;
(iii) Stock Certificates representing ownership of all shares of
MRS, duly endorsed to SCN;
(iv) A Service Agreement in the form attached hereto as Exhibit
7(a)(iv);
(v) A Certificate duly executed by the President of MRS and MAURO
stating as of the Closing Date, all representations and warranties are
true, all covenants and agreements contained in the Agreement to be
performed by MRS and MAURO have been performed or complied with and all
conditions to closing have been complied with;
(vi) An opinion from MRS's counsel in substantially the form
attached hereto as Exhibit 7(a)(vi);
(vii) A Specialty Care Network, Inc. Stockholder's Agreement;
(viii) Counterpart signature pages to the Specialty Care Network,
Inc. Stockholder's Agreement; and
(ix) Such other instruments as may be reasonably requested by SCN in
order to effect to or carry out the intent of this Agreement.
(b) By SCN. SCN shall deliver to MRS at or prior to the Closing:
(i) Stock Certificates representing the SCN Shares being issued to
MAURO pursuant to Section 2(d)(v);
(ii) The Delaware Articles of Merger in the form required by SCN's
legal counsel;
(iii) An opinion from SCN's counsel in substantially the form
attached hereto as Exhibit 7(b)(iii);
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(iv) A Certificate, duly executed by the President of SCN, stating
as of the Closing Date, all representations and warranties of SCN are
true, all covenants and agreements contained in the Agreement to be
performed by SCN have been performed or complied with and all conditions
to Closing have been satisfied;
(v) A Specialty Care Network, Inc. Stockholder's Agreement;
(vi) A Service Agreement in the form attached hereto as Exhibit
7(a)(iv).
(vii) Such other instruments as may be reasonably requested by MAURO
in order to effect to or carry out the intent of this Agreement.
8. Termination.
(a) Termination of Agreement. Either of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after stockholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Effective Time;
(ii) SCN may terminate this Agreement by giving written notice to
MRS at any time prior to the Effective Time (A) in the event MRS has
breached any representation, warranty, or covenant contained in this
Agreement in any material respect, SCN has notified MRS of the breach, and
the breach has continued without cure for a period of 30 days after the
notice of breach, (B) if the Closing shall not have occurred on or before
March 31, 1997 by reason of the failure of any condition precedent under
Section 6(a) hereof (unless the failure results primarily from SCN
breaching any representation, warranty, or covenant contained in this
Agreement) or (C) in accordance with Section 5(j); or
(iii) MRS may terminate this Agreement by giving written notice to
SCN at any time prior to the Effective Time (A) in the event SCN has
breached any representation, warranty, or covenant contained in this
Agreement in any material respect, MRS has notified SCN of the breach, and
the breach has continued without cure for a period of 30 days after the
notice of breach or (B) if the Closing shall not have occurred on or
before March 31, 1997 by reason of the failure of any condition precedent
under Section 6(b) hereof (unless the failure results primarily from MRS
breaching any representation, warranty, or covenant contained in this
Agreement).
(b) Effect of Termination. If any Party terminates this Agreement pursuant
to Section 8(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any party to any other Party (except for any
liability of any Party then in breach). Notwithstanding the foregoing, in the
event the transaction contemplated by this Agreement does not close due to the
fault of MRS or the MRS stockholder, then MRS agrees to reimburse SCN for
seventy-five percent of SCN's out of pocket expenses, including but not limited
to professional fees, related to the proposed transaction; provided, however,
MRS's obligation to reimburse SCN shall not exceed fifty-six thousand two
hundred fifty dollars ($56,250).
9. Indemnification.
(a) Indemnification by MAURO. MAURO agrees to and shall defend, indemnify
and hold harmless SCN, its successors and assigns, officers and directors
against any and all losses, liabilities, expenses (including, but without
limitation, reasonable attorneys fees) and damages resulting from or arising out
of the breach, untruth or inaccuracy of any representation, warranty or covenant
of MRS or MAURO set forth in this Agreement. MAURO shall not be liable to SCN
for any claims against MAURO under this Section 9(a) unless and until the
aggregate of all claims against MAURO exceeds the sum of $25,000.00, whereupon
SCN shall be entitled to recover the full amount of all claims, including the
initial $25,000.00. Notwithstanding the foregoing provisions, the obligations of
MAURO to indemnify SCN shall not exceed the fair market value (as determined
under the Stockholders' Agreement) of the SCN Shares delivered to MAURO at the
time of Closing.
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<PAGE>
(b) Notice to MAURO; Opportunity to Defend. SCN agrees to give prompt
notice to MAURO of the assertion of any claim, or the commencement of any suit,
action or proceeding, in respect of which indemnity may be sought under Section
9(a). MAURO may participate in and at his election, or at the request of SCN,
assumes the defense of any such suit, action or proceeding at MAURO's expense.
MAURO shall not be liable under Section 9(a) for any settlement effected without
his consent of any claim, litigation or proceeding in respect of which indemnity
may be sought under Section 9(a) which consent shall not be unreasonably
withheld.
(c) General Indemnification by SCN. SCN agrees to and shall defend,
indemnify and hold harmless MAURO, his heirs and assigns against any and all
losses, liabilities, expenses (including, but without limitation, reasonable
attorneys fees) and damages resulting from the breach, untruth or inaccuracy of
any representation, warranty or covenant of SCN set forth in this Agreement. SCN
shall not be liable to MAURO for any claims against SCN under this Section 9(c)
unless and until the aggregate of all claims against SCN exceeds the sum of
$25,000.00, whereupon MAURO shall be entitled to recover the full amount of all
claims, including the initial $25,000.00.
(d) Notice to SCN; Opportunity to Defend. MAURO agrees to give prompt
notice to SCN of the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which indemnity may be sought under Section
9(c). SCN may participate in and at its election, or at the request of MAURO,
assumes the defense of any such suit, action or proceeding at SCN's expense. SCN
shall not be liable under Section 9(c) for any settlement effected without its
consent of any claim, litigation or proceeding in respect of which indemnity may
be sought hereunder, which consent shall not be unreasonably withheld.
(e) Survival. The representations and warranties of MAURO, MRS and SCN
contained in this Agreement and the indemnifications contained herein shall
survive the Closing. No claim for indemnification with respect to any alleged
misrepresentation or breach of warranty may be made after two (2) years
following the Closing Date. Any matter to which indemnification pertains and
with respect to which a claim has been asserted or threatened following the
Closing Date shall continue to be subject to the indemnification under this
Agreement until finally terminated, settled, resolved or adjudicated; and all
terms, conditions and stipulations of this Agreement shall likewise continue to
apply.
10. Miscellaneous.
(a) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the parties and their respective
successors and permitted assigns.
(b) Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement between the parties and supersedes any
prior understandings, agreements, or representations by or between the parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(c) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties named herein and their respective successors
and permitted assigns. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party.
(d) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
(e) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to MRS: Copy to:
Kirk J. Mauro, M.D. Greg Klink
3050 O'Brien Drive Jones, Gregg, Creehan & Gerace
Tallahassee, Florida 32308 3000 Grant Building
Facsimile: (904) 656-4858 Pittsburgh, Pennsylvania 15219
Facsimile: (412) 261-2652
If to SCN: Copy to:
Kerry R. Hicks, President David T. Popwell, Esq.
Specialty Care Network, Inc. Donelson, Bearman & Caldwell
44 Union Boulevard, Suite 600 165 Madison Ave, Suite 2100
Lakewood, Colorado 80228 Memphis, Tennessee 38103
Facsimile: (303) 716-1298 Facsimile: (901) 577-2303
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Delaware.
(h) Amendments and Waivers. The parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time with the prior
authorization of their respective boards of directors; provided, however, that
any amendment effected subsequent to stockholder approval will be subject to the
restrictions contained in the Delaware General Corporation Law and the Florida
General Corporation Law. No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and signed by both of the parties.
No waiver by any party of any default, misrepresentation, or breach of warranty
or covenant hereunder, whether intentional or not, shall be deemed to extend to
any prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
(i) Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
- 19 -
<PAGE>
(j) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(k) Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation.
(l) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
* * * * *
- 20 -
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
SPECIALTY CARE NETWORK, INC.
By:_____________________________________
Title:__________________________________
MEDICAL REHABILITATION SPECIALISTS, P.A.
By:_____________________________________
KIRK J. MAURO, President
________________________________________
KIRK J. MAURO, M.D., Stockholder
- 21 -
<PAGE>
EXHIBIT 5(m)
Excluded Assets
"Excluded Assets" shall mean (i) employment or noncompete agreements between MRS
and MAURO and those licensed medical individuals under contract with MRS to
provide professional services to patients of MRS and claims arising thereunder;
(ii) all patient medical records and patient lists; (iii) all insurance policies
of MRS and claims arising thereunder and all prepaid expenses on malpractice
insurance premiums; (iv) the inventories, cash and Accounts Receivable disposed
of, cancelled, expended or collected, as the case may be, by MRS after the date
hereof and prior to the Closing in the Ordinary Course of Business and
consistent with past practice; (v) personal property of individual physicians
which is not included on the financial statements of MRS; (vi) MRS's Employee
Benefit Plans and all liabilities related thereto; (vii) MRS's cash (other than
any cash reserved for the payment of any accrued liabilities) on hand as of the
Closing Date, (viii) MRS's third party provider agreements; (ix) all drugs owned
by MRS; and (x) all notes to MRS from MAURO.
5(m)-1
<PAGE>
EXHIBIT 7(a)(iv)
Service Agreement
7(a)(iv)-1
<PAGE>
EXHIBIT 7(a)(vi)
MRS Opinion Letter
See Attached.
7(a)(vi)-1
<PAGE>
EXHIBIT 7(b)(iii)
SCN Opinion Letter
See Attached.
7(b)(iii)-1
TERM SHEET
1. As soon as reasonably practical, there will be a division of
Reconstructive Orthopaedic Associates II, P.C. ("ROAII"). The surviving
entities shall be ROAII and an entity to be formed by Robert E. Booth,
Jr., M.D. and Arthur R. Bartolozzi, M.D. ("BB One").
2. BB One and its physician owners, individually, will enter into a Service
Agreement ("BB One Service Agreement") with Specialty Care Network, Inc.
("SCN"). Except as described below, or otherwise mutually agreed, the BB
One Service Agreement will contain the same terms and conditions as the
existing Service Agreement between Reconstructive Orthopaedic Associates
II, P.C. ("ROAII") and SCN dated November 12, 1996. The BB One Service
Agreement will provide as follows:
(a) BB One's Base Service Fee will equal $XXXXXXX. BB One's percentage
based Service Fee will equal XX% of Practice Net Revenue
("Percentage Service Fee").
(b) In the event that either ROAII's or BB One's (but not both)
Percentage Service Fee does not equal or exceed its respective Base
Service Fee ("Base Fee Deficit") and the other party's Percentage
Service Fee exceeds its Base Service Fee ("Base Fee Surplus"), then
the deficit will be satisfied as follows:
(i) the Base Fee Surplus of the one party will be applied to
offset the amount of any Base Fee Deficit of the other party
("Net Base Fee Deficit") and;
(ii) SCN will forgive one-third of the Net Base Fee Deficit up to
$120,000, the party having the Base Fee Surplus will pay
one-third of the Net Base Fee Deficit up to $120,000, and the
Party having the Base Fee Deficit will pay the remaining
balance of the Net Base Fee Deficit.
(c) In the event that both ROAII and BB One have a Base Fee Deficit,
then the deficit will be satisfied as follows:
(i) SCN will forgive one-third of ROAII's Base Fee Deficit up to
$120,000, BB One will pay to SCN one-third of ROAII's Base Fee
Deficit up to $120,000 and ROAII will pay the remaining
balance of its Base Fee Deficit; and
(ii) BB One will be responsible for paying 100% of its Base Fee
Deficit to SCN.
3. ROAII's existing Service Agreement will be amended as follows:
(a) ROAII's Base Service Fee will equal $XXXXXXX. ROAII's Percentage
Service Fee will equal XX% of Practice Net Revenue.
<PAGE>
(b) In the event either ROAII's or BB One's (but not both) Percentage
Service Fee does not equal or exceed its Base Service Fee and the
other party's Percentage Service Fee exceeds its Base Service Fee,
then the deficit will be satisfied as follows:
(i) the Base Fee Surplus of the one party will be applied to
offset the amount of the other party's Base Fee Deficit;
(ii) SCN will forgive one-third of the Net Base Fee Deficit up to
$120,000, the party having the Base Fee Surplus will pay
one-third of the deficit up to $120,000, and the party having
the Base Fee Deficit will pay the remaining balance of its Net
Base Fee Deficit.
(c) In the event that both ROAII and BB One have a Base Fee Deficit,
then the deficit will be satisfied as follows:
(i) SCN will forgive one-third of ROAII's Base Fee Deficit up to
$120,000, BB One will pay to SCN one-third of ROAII's Base Fee
Deficit up to $120,000 and ROAII will pay the remaining
balance of its Base Fee Deficit; and
(ii) BB One would be responsible for paying 100% of its Base Fee
Deficit.
4. Service Fee Adjustment. Until July 15, 1997, BB One shall have the right,
at its election, to cause an amendment to the BB One Service Agreement,
which shall provide the following:
(a) BB One's Base Service Fee will be increased by $XXXXX ("Incremental
Base Service Fee") to equal $XXXXXX.
(b) BB One's Percentage Service Fee will equal XX% of Practice Net
Revenue.
(c) In the event ROAII has a Base Fee Surplus and BB One has a Base Fee
Deficit, then ROAII's Base Fee Surplus shall off-set BB One's Base
Fee Deficit. BB One shall be responsible for paying to SCN any
remaining Net Base Fee Deficit.
(d) In the event BB One has a Base Fee Surplus and ROAII has a Base Fee
Deficit, then BB One's Base Fee Surplus shall off-set ROAII's Base
Fee Deficit. For purposes of determining BB One's Base Fee Surplus
(solely for purposes of calculating this off-set amount), BB One's
Base Service Fee shall be deemed to equal $XXXXXX. ROAII shall be
responsible for paying to SCN any remaining Net Base Fee Deficit.
(e) In the event that both ROAII and BB One have a Base Fee Deficit,
then the respective parties shall be solely responsible for paying
to SCN the entire amount of its Base Fee Deficit.
<PAGE>
(f) In the event that BB One elects the provisions of this paragraph 4,
then the ROAII Service Agreement shall be amended to reflect the
provisions of this paragraph 4, as the provisions impact ROAII's
obligations.
5. SCN Stock Options.In the event that on or before July 15, 1997, BB One
exercises the election set forth in paragraph 4 above, then SCN will issue
to Robert E. Booth, Jr., M.D. options to purchase common stock of SCN as
follows:
(a) The number of options shall equal (i) the Incremental Base Service
Fee, multiplied by the Applicable Multiple (hereinafter defined),
(ii) divided by the Applicable Strike Price (hereinafter defined).
In the event BB One elects the provisions of paragraph 4 above prior
to the pricing in SCN's initial public offering ("IPO"), then the
Applicable Multiple will equal five (5). In the event BB One elects
the provisions of paragraph 4 above after the pricing in SCN's IPO,
then the Applicable Multiple will equal eight (8). In the event that
BB One elects the provisions of paragraph 4 above prior to the
pricing in SCN's IPO, the Applicable Strike Price shall equal the
IPO price for SCN's shares. In the event that BB One elects the
provisions of paragraph 4 above after the pricing in of SCN's IPO,
then the Applicable Strike Price will equal the closing bid price of
SCN's Common Stock as reported on the Nasdaq on the date BB One
exercises its election, but not less than $10.00.
(b) The Strike Price for the options will equal Applicable Strike Price.
6. Further Agreements. This Term Sheet and the above described terms are
based upon the assumption that Dr. Booth and Dr. Bartolozzi will create BB
One and enter into certain agreements. In the event that Dr. Bartolozzi
does not join with Dr. Booth in forming BB One, then ROAII and SCN will
enter into the above described arrangements with Dr. Booth and an entity
formed by Dr. Booth on terms proportionately consistent with the economic
principles underlying the above described terms. The parties acknowledge
and agree that in the event Dr. Bartolozzi does not join in BB One with
Dr. Booth (or leaves BB One), then until such time as BB One makes its
elections under paragraph 4 above, BB One's Base Service Fee will equal
$XXXXX and the Percentage Service Fee will equal XX% of Practice Net
Revenue. In the event that Dr. Bartolozzi does not join in BB One with Dr.
Booth (or leaves BB One), then upon making the election to have the
provisions of paragraph 4 apply, BB One's Incremental Base Service Fee
will equal $XXXXX and the Percentage Service Fee will equal XX%of Practice
Net Revenue.
7. Binding Nature/Binding Arbitration. The parties acknowledge and agree that
this Term Sheet shall be binding on the parties in accordance with its
terms. The parties further agree that in the event additional issues arise
in the process of completing definitive agreements or amendments to
existing agreements, the parties will negotiate in good faith to resolve
such issues. In the event that the respective parties have not resolved
all issues by February 15, 1997, then the parties agree to submit to
binding arbitration before a single arbitrator for the purpose of
resolving such issues. The arbitration will be conducted in Philadelphia,
Pennsylvania, in accordance with the CPR rules for nonbusiness
arbitration. Any such arbitration shall be concluded no later than May 15,
1997.
<PAGE>
8. Interim Operations. Until such time as BB One is formed and definitive
agreements or amendments to existing arguments have been finalized, the
parties shall be governed by the existing Service Agreement between ROAII,
the Physician Owners and SCN dated November 12, 1996.
Accepted and Agreed:
Reconstructive Orthopaedic Associates, II, P.C.
By: _________________________________________
Richard H. Rothman, M.D., President
Speciality Care Network, Inc.
By: _________________________________________
Patrick M. Jaeckle, Secretary and
Executive Vice-President of Finance and
Development
_________________________________________
Robert E. Booth, Jr., M.D.
_________________________________________
Arthur R. Bartolozzi, M.D.
