SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission file number 0-22019
SPECIALTY CARE NETWORK, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 62-1623449
incorporation or organization) (I.R.S. Employer Identification No.)
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 716-0041
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. __
As of March 20, 1998, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $185,265,605. Such aggregate market value
was computed by reference to the closing sale price of the Common Stock as
reported on the Nasdaq National Market on such date. For purposes of making this
calculation only, the registrant has defined "affiliates" as including all
directors and beneficial owners of more than five percent of the Common Stock of
the Company.
As of March 20, 1998 there were 17,736,393 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's 1998 Annual
Meeting of Stockholders to be filed within 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K -- Part III.
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TABLE OF CONTENTS
PART I
Item 1. Business............................................................ 3
Item 2. Properties..........................................................23
Item 3. Legal Proceedings...................................................23
Item 4. Submission of Matters to a Vote of Security Holders.................23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...............................................26
Item 6. Selected Financial Data.............................................27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................27
Item 7A Quantitative and Qualitative Disclosures About Market Risk..........32
Item 8. Financial Statements and Supplementary Data.........................32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................32
PART III
Item 10. Directors and Executive Officers of the Registrant..................33
Item 11. Executive Compensation..............................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management......33
Item 13. Certain Relationships and Related Transactions......................33
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...........................................34
Index to Financial Statements and Schedules..................................F-1
This Report contains forward-looking statements that address, among other
things, the Company's affiliation and expansion strategy, 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 "Item 1-
Business," "Item 1-Risk Factors," and "Item 7-Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as in the
Report generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including difficulties in affiliating with additional practices, inability to
integrate and manage successfully assets and personnel related to affiliations
with musculoskeletal practices, changes in reimbursement practices of third
party providers, change in mix of patients served by the Affiliated Practices,
insufficient capital resources, competition, changes in the regulatory
environment and other factors discussed below including without limitation those
discussed in "Item 1-Risk Factors" and matters set forth in the Report
generally.
Unless the context indicates otherwise, the terms "Specialty Care Network,"
"SCN" and "Company" refer to Specialty Care Network, Inc. References to
practices affiliated with the Company (the "Affiliated Practices") include
predecessors of those practices.
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PART I
Item 1. Business.
General
Specialty Care Network is a physician practice management company that
focuses on musculoskeletal care, which is the treatment of conditions relating
to bones, joints, muscles and related connective tissues. The Company currently
provides comprehensive management services under exclusive, long-term agreements
to 153 physicians practicing through 21 Affiliated Practices at 47 clinic
locations in 10 states. In addition, the Company manages two outpatient surgery
centers, three physical therapy centers and one occupational medicine operation.
Specialty Care Network seeks to affiliate with premier orthopaedic physician
groups in targeted markets as the first step in developing an integrated
musculoskeletal provider network.
Under the service agreements between the Company and its Affiliated
Practices (the "Service Agreements"), the Company provides management,
administrative and development services to the Affiliated Practices. 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 orthopaedic, physiatry, podiatry, occupational medicine, neurosurgery,
plastic surgery, rheumatology, trauma and adult neurology. In addition, certain
of the Company's Affiliated Practices are now providing ancillary services,
including magnetic resonance imaging, orthotics and radiology.
The Company was incorporated in December 1995 and commenced its physician
practice management services in November 1996.
Industry Overview
Physician Practice Management Industry. The Health Care Financing
Administration ("HCFA") estimated that national health care spending in 1995 was
approximately $988 billion, with approximately $202 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. This spending growth has occurred in an
environment where managed care payors have consolidated and have become more
aggressive in negotiations with providers. 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 gradual transfer of
risk from payors to providers have precipitated 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.
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
American Academy of Orthopaedic Surgeons ("AAOS"). Of this amount, approximately
$7 billion represented fees paid for physician services. The remaining amount
represented charges for hospital stays, prosthetics, supplies and related
diagnostic therapies and other ancillary services.
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. 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. Although the orthopaedic surgeon
represents the primary musculoskeletal provider, musculoskeletal care is also
provided by a variety of medical and surgical specialists, including
neurosurgeons, neurologists, plastic surgeons, physiatrists, rheumatologist,
occupational medicine physicians, podiatrists and primary care physicians, as
well as rehabilitative therapists. The American Medical
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Association estimates that in 1996 there were approximately 22,500
orthopaedic surgeons, 5,700 physiatrists, 3,500 rheumatologist, 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 1996 AAOS survey, the largest percentage of patients is managed care,
including fee-for-service and capitation (26%), followed by private pay (23%),
Medicare (21%) and workers compensation (17%). Almost 84% of orthopaedic
surgeons indicated they received patients from managed care sources. The AAOS
survey indicates that the percentage of total managed care patients has
increased from 12% in 1988 to 26% in 1996. Over the same period, patients from
private pay sources declined from 39% to 23%. The distribution of patients from
other sources remained relatively constant over this period. 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 will increase the need for musculoskeletal
care.
Affiliated Practices
Specialty Care Network seeks to affiliate with premier musculoskeletal
groups in targeted markets throughout the United States. The Company evaluates
potential affiliation candidates based on a variety of factors, including: (i)
physician credentials and reputation; (ii) competitive market position; (iii)
specialty and subspecialty mix of physicians; (iv) historical financial
performance and growth potential; (v) commitment to providing comprehensive
musculoskeletal care and developing an integrated disease management model; and
(vi) recognition of the need for outside managerial, financial and business
expertise to position effectively for managed care and capitation. The Company
believes that it is an attractive affiliation partner to musculoskeletal groups
because of its physician-oriented heritage and governance structure, the depth
and experience of its management team, and its corporate philosophy and service
agreement structure, which emphasize parallel incentives among physicians and
the Company.
Specialty Care Network currently provides comprehensive management services
under exclusive, long-term agreements with 153 physicians practicing through 21
Affiliated Practices at 47 clinic locations in 10 states. Management believes
that ancillary services represent a significant expansion opportunity for a
majority of the Affiliated Practices, and the Company intends to pursue
aggressively the addition of ancillary services where appropriate.
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The table below sets forth certain information regarding the Affiliated
Practices, all of whose physicians are board certified or board eligible:
<TABLE>
<CAPTION>
Musculoskeletal Ancillary
Affiliated Practices Principal Office Physicians Subspecialties Services(1) Offices
- -------------------------------- ------------------ ------------- ------------------ ----------------- -----------
<S> <C> <C> <C> <C> <C>
Reconstructive Orthopaedic
Associates, II, P.C. ("ROA") Philadelphia, PA 9 5 MRI, Orthotics 2
3B Orthopaedics, P.C. ("3B
Orthopaedics") Philadelphia, PA 6 3 -- 3
Princeton Orthopaedic
Associates, II, P.A. ("POA") Princeton, NJ 14 7 Outpatient 3
Surgery,
Rehabilitation
Therapy
Greater Chesapeake Orthopaedic
Associates, LLC ("GCOA") Baltimore, MD 8 5 Orthotics 2
The Orthopaedic & Sports
Medicine Center, II, P.A..,
("OSMC") Annapolis, MD 10 6 -- 3
Riyaz H. Jinnah, M.D., P.A. Baltimore, MD 1 -- -- 1
Mid-Atlantic Orthopaedic
Specialists/Drs. Cirincione,
Milford, Stowell and
Amalfitano, P.C. ("MAOS") Hagerstown, MD 5 1 -- 2
Vero Orthopaedics II, P.A. ("VO") Vero Beach, FL 7 6 -- 1
Ortho-Associates, P.A. d/b/a
Park Place Therapeutic
Center ("PPTC") Plantation, Fl 14 4 MRI, 2
Rehabilitation
Therapy
Medical Rehabilitation
Specialists II, P.A. ("MRS") Tallahassee, FL 2 1 -- 1
Northeast Florida Orthopaedic
Sports Medicine and
Rehabilitation II, P.A.
("NFOSM") Jacksonville, FL 2 2 Rehabilitation 1
Therapy
Orthopaedic Associates of
West Florida, P.A. Clearwater, FL 9 5 Bone Density 2
</TABLE>
- ----------------
(1) Includes ancillary services provided by the Affiliated Practices with
respect to which the Company receives a fee.
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<TABLE>
<CAPTION>
Musculoskeletal Ancillary
Affiliated Practices Principal Office Physicians Subspecialties Services(1) Offices
- -------------------------------- ------------------ ------------- ------------------ ----------------- -----------
<S> <C> <C> <C> <C> <C>
Steven P. Surginer, M.D., P.A., II Marianna, FL 1 -- -- 1
TOC Specialists, P.L. ("TOC") Tallahassee, FL 17 7 Outpatient 4
Surgery,
Rehabilitation
Therapy, Orthotics
Floyd Jaggears, M.D., P.C. Thomasville, GA 1 -- -- 1
Southeastern Neurology
Group II, P.C. ("SNG") Portsmouth, VA 12 2 -- 5
Orthopaedic Surgery Centers,
P.C. II ("OSC") Portsmouth, VA 10 6 -- 6
Associated Orthopaedic &
Sports Medicine, P.A. ("AOSM") Plano, TX 5 1 Outpatient 1
Surgery,
Rehabilitation
Therapy
Orthopaedic Institute of
Ohio ("OIO") Lima, OH 8 3 Outpatient 2
Surgery,
Rehabilitation
Therapy
The Specialists Orthopaedic
Medical Corporation ("SMC") Fairfield, CA 12 6 Outpatient 4
Surgery,
Rehabilitation
Therapy
</TABLE>
- ----------------
(1) Includes ancillary services provided by the Affiliated Practices with
respect to which the Company receives a fee.
Management Information Systems
The Company believes that its management information systems provide
meaningful assistance to the Affiliated Practices. The Company has developed
proprietary financial systems that have been installed at the Company's
headquarters and at each of the Affiliated Practices. The electronic interfaces
between payroll, general ledger, banking, accounts payable and accounts
receivable applications enable the Company to capture, analyze and report
centrally financial data from the various Affiliated Practice locations and
provide analyses of financial data on a fully integrated basis. In addition, the
internally developed purchase order application enables the Company to monitor
daily practice inventory purchases from order to receipt, to centrally control
the disbursement of funds and to identify economies in purchasing.
The Company believes that an important factor in the successful management
of musculoskeletal disease is the creation of a treatment-specific outcomes
database from which treatment modalities can be derived. Therefore, the Company,
in conjunction with affiliated physicians who specialize in specific orthopaedic
subspecialties, is in the process of gathering clinical information designed to
facilitate the development of a proprietary clinical outcomes database to enable
the Affiliated Practices to analyze clinical outcomes at the practitioner and
practice levels on a
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standardized basis. The Company has established standards at the 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. Information is being gathered from patient encounters in
areas such as incidence rates (the number of specified procedural, diagnostic
and medical events during a defined period with respect to a particular 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.
Operations
Management Services. Specialty Care Network assists in strategic planning,
preparation of operating budgets and capital project analysis. The Company
coordinates group purchasing of supplies, inventory and medical and malpractice
insurance for the practices. In addition, the Company assists the Affiliated
Practices in physician recruitment by introducing 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 procedures
and accounts receivable collection by payor type, (ii) accounting, payroll and
legal services and records and (iii) cash management and centralized
disbursements.
These management 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 services.
The Company's capital resources and assistance in preparation of budgets and
capital project analyses are intended to facilitate the development of ancillary
musculoskeletal services, such as outpatient surgery, outpatient imaging, pain
management, rehabilitation therapy and orthotics. Comprehensive administrative
support is designed to facilitate more effective billing and collections and, as
the Company grows, to generate economies of scale in effecting purchases.
Practice Services. Specialty Care Network employs most of the 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 Affiliated Practices, including, among
other things, provision of secretarial, bookkeeping, scheduling and other
routine services. Under the Service Agreements, the Company must provide
practice facilities and equipment to the Affiliated Practices; consequently, the
Company entered into lease agreements for the practice facilities utilized by
the Affiliated Practices, many of which are owned by physician owners of the
Affiliated Practices, and the Company also purchased the equipment utilized by
each of the Affiliated Practices.
Payor Contracting. An increasing portion of the Affiliated Practices' net
revenue is derived from managed care payors. Although rates paid by managed care
payors are generally lower than fee for service rates, managed care payors can
provide access to large patient volumes. Currently, the Company performs
analyses of the Affiliated Practices' markets to develop managed care
contracting strategies and meets with principal payors in these markets to
enhance and establish relationships between the Affiliated Practices and such
payors.
Specialty Care Network seeks to negotiate both fee-for-service and
capitated contracts on behalf of the Affiliated Practices. Under capitated
arrangements, providers deliver health care services to managed care enrollees
and 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 (i.e., professional fee capitation) or for all of the
medical costs required by a patient including professional, institutional and
ancillary services (i.e., 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
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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 financial responsibility for the incidence of medical conditions
requiring procedures specified in the contract.
The Company, on behalf of certain of its Affiliated Practices, has
negotiated "Episode of Care" or package pricing arrangements with several major
health maintenance organizations and workers compensation carriers. These
arrangements cover several surgical procedures, including hip replacement,
spinal fusion, laminectomy, discectomy, anterior cruciate ligament repair,
arthroscopy and foot and ankle procedures.
Governance and Quality Assurance
Specialty Care Network's current governance structure promotes physician
participation in the management of the Company, with six affiliated physicians
currently serving on the Company's ten person Board of Directors. In addition,
the Company is establishing a Physician Advisory Board that is designed to serve
as a liaison to the Company for these practices that are not otherwise
represented on the Board of Directors. Moreover, each Affiliated Practice has a
Joint Policy Board whose membership includes an equal number of representatives
from the Company and the Affiliated Practice. The Joint Policy Boards have
responsibilities that include developing long-term strategic objectives,
developing practice expansion and payor contracting guidelines, promoting
practice efficiencies, identifying and recommending significant capital
expenditures and facilitating communication and information exchanges between
the Company and each of the Affiliated Practices.
Contractual Agreements with Affiliated Practices
The Company has entered into long-term Service Agreements with each of the
Affiliated Practices to provide management and administrative services. The
following is intended to be a general summary of the form of Service Agreement
employed by the Company. The actual terms of the individual Service Agreements
may, and typically do, vary in certain respects from the description below as a
result of negotiations with the individual practices and the requirements of
state and local laws and regulations.
Responsibilities of the Company. Pursuant to the 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 Affiliated Practices,
subject to matters for which the Affiliated Practices maintain responsibility or
which are referred to the Joint Policy Boards of the Affiliated Practices, (ii)
on behalf of the Affiliated Practices bills patients, insurance companies and
other third-party payors and collects, on behalf of the Affiliated Practices,
the fees for professional medical and other services rendered, including goods
and supplies sold by the 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 Affiliated Practices remain the property of the
Affiliated Practices), (v) provides facilities and equipment for the Affiliated
Practices, (vi) prepares, in consultation with the Joint Policy Boards and the
Affiliated Practices, all annual and capital operating budgets for the
Affiliated Practices, (vii) orders and purchases inventory and supplies as
reasonably requested by the Affiliated Practices, (viii) implements, in
consultation with the Joint Policy Boards and the Affiliated Practices, 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 employees providing such services were employed by
the Affiliated Practices prior to affiliation with the Company.
Responsibilities of the Affiliated Practices. Under the Service Agreements,
the Affiliated Practices retain the responsibility for (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
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(iii) complying with certain federal and state laws and regulations applicable
to the practice of medicine. In addition, the Affiliated Practices maintain
exclusive control of all aspects of the practice of medicine and the delivery of
medical services.
Service Fee. Under the Service Agreements, the Company collects fees from
the Affiliated Practices on a monthly basis generally equal to the following:
(i) a percentage (the "Service Fee Percentage") ranging from 20%-50% of the
Adjusted Pre-Tax Income of the Affiliated Practices, which is defined generally
as revenue of the Affiliated Practices related to professional services less
amounts equal to certain clinic expenses of the Affiliated Practices, not
including physician owner compensation or most benefits to physician owners
("Clinic Expenses," as defined more fully in the Service Agreements) and (ii)
amounts equal to Clinic Expenses. Generally, for the first three years following
the affiliation the portion of service fee described under clause (i) is subject
to a fixed dollar minimum (the "Base Service Fee"); which generally was
determined by applying the respective Service Fee Percentage to the Adjusted
Pre-Tax Income for each Affiliated Practice for the 12 months prior to
affiliation. In addition, with respect to its management (and, in certain
instances, ownership) of certain facilities and ancillary services associated
with certain of the Affiliated Practices, the Company receives fees based on a
percentage of net revenue or pre-tax income related to such facilities and
services.
Accounts Receivable. Under the Service Agreements, each Affiliated Practice
agrees to sell and assign to the Company, and the Company agrees to buy, all of
the Affiliated Practice's accounts receivable each month during the existence of
the Service Agreement. The purchase price for such accounts receivable generally
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 Affiliated Practice's
historical collection rate, as determined by the Company. However, the Company
and certain Affiliated Practices are currently making periodic adjustments so
that amounts paid by the Company for the accounts receivable are adjusted
upwards or downwards based on the Company's actual collection experience. While
the Company believes, based on its discussions with the other Affiliated
Practices, that this arrangement is acceptable to them, the Company cannot
assure that this arrangement will be effected in all cases.
Period Covered by Service Agreement. The Service Agreements have initial
terms of forty years, with automatic extensions (unless specified notice is
given) of additional five-year terms.
Termination of Service Agreement. The Service Agreements may be terminated
by either party if the other party (i) files 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 physicians, and the Affiliated
Practice may terminate the agreement if the Company misapplies funds or assets
or violates certain laws. Upon termination of a Service Agreement by the
Affiliated Practice for one of the reasons above, the Affiliated Practice is
required to purchase and assume the assets and liabilities related to the
Affiliated Practice at the fair market value thereof. Upon termination of the
Service Agreement by the Company for one of the reasons set forth above, the
Company has the option to require the Affiliated Practice to purchase and assume
the assets and liabilities related to the Affiliated Practice, in which event
the purchase price for such assets is equal to the unamortized amount of
intangible assets reflected on the books of the Company as of the last day of
the month prior to termination of the Service Agreement plus the then book value
of all remaining assets (including the Affiliated Practice's accounts
receivable) of the Company related to the Affiliated Practice. The Service
Agreement generally may also be terminated by the Affiliated Practice on the
tenth anniversary if all of the owners of the Affiliated Practice elect to do
so. In such event, the Affiliated Practice generally must purchase the practice
assets from the Company for a purchase price calculated in the same manner as
when the Service Agreement is terminated by the Company.
Advance Notice of Termination. Under the Service Agreements, each physician
owner must give the Company twelve months notice of an intent to retire from the
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
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Policy Board and pay an amount based on a formula relating to any loss of
service fee for the first five years of the term. In addition, a physician
leaving a practice during the first five years of the term is required to pay
the Company or return to the Company an amount of cash or stock equal to
one-third of the total consideration received by such physician in connection
with the Company's affiliation with the practice. The agreement generally also
provides that after the fifth year, no more than 20% of the physician owners at
the Affiliated Practice may retire within a one-year period.
Non-Competition Provisions. The Affiliated Practices and the physician
owners of the Affiliated Practices generally agree not to compete with the
Company in providing services similar to those provided by the Company under the
Service Agreements, and the physician owners also generally agree not to compete
with an Affiliated Practice within a specified geographic area. Non-competition
restrictions generally apply to physician owners during their affiliation with
Affiliated Practices and for three years thereafter. In addition, the Service
Agreements generally require the Affiliated Practice to enter into
non-competition agreements with all physicians in the Affiliated Practice.
Non-competition restrictions generally apply to physician employees during their
affiliation with the Affiliated Practice and for two years after any termination
of employment. The Service Agreements generally require the Affiliated Practices
to pursue enforcement of the non-competition agreement with physicians or assign
to the Company the right to pursue enforcement. In addition, the Service
Agreements generally require the Company to obtain the consent of an Affiliated
Practice or the particular Joint Policy Board in order to affiliate with, or
enter into a management service agreement with, other practices or physicians
located within the same geographic area in which the physician owners have
agreed not to compete.
Insurance. The Affiliated Practices are responsible for obtaining
professional liability and worker's compensation insurance for the physicians
and other medical employees of the 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 Affiliated
Practices.
Indemnification. The Service Agreements contain indemnification provisions,
pursuant to which the Company indemnifies the Affiliated Practices for damages
resulting from negligent acts or omissions by the Company or its agents,
employees or stockholders. In addition, the Affiliated Practices indemnify the
Company for any damages resulting from any negligent act or omissions by any
affiliated physicians, agents or employees of the Affiliated Practice, other
than damages resulting from claims arising from the performance or
nonperformance of medical services.
Other Agreements. Effective July 1997, three affiliated physicians
discontinued practicing with ROA. The Company entered into an agreement (the "3B
Agreement") pursuant to which two of the physicians, together with the third
physician, who was not part of the agreement, established an independent
practice, 3B Orthopaedics, which will enter into a new service agreement with
the Company. The Company is currently negotiating a new service agreement with
3B Orthopaedics. The aggregate Base Service Fee for ROA and 3B Orthopaedics
generally will be equal to ROA's current Base Service Fee. Pending the execution
of a new service agreement with 3B Orthopaedics, the three physicians remain
subject to the Service Agreement with ROA. The parties have agreed that in the
event additional issues arise in the process of completing definitive
agreements, and such issues are not resolved, then such issues will be submitted
to binding arbitration.
Third Party Reimbursement
A significant amount of the revenues of the Affiliated Practices are
derived from government and private third party payors. The health care industry
is experiencing a trend toward cost containment as third party payors seek to
impose lower reimbursement and utilization rates and negotiate reduced capitated
payment schedules with service providers. For the year ended December 31, 1997,
the net practice revenue from Medicare constituted approximately 22% of the
aggregate net practice revenue of the Affiliated Practices. The federal
government has implemented a resource-based relative value scale ("RBRVS")
payment methodology under Medicare for physician services and other outpatient
services furnished incident to a physician's service. RBRVS is a fee schedule
that, except for certain geographical and other adjustments, pays similarly
situated physicians 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 Affiliated Practices.
Moreover, the Balanced Budget Act of 1997 (the "1997 Budget Act") contains
provisions that may
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have the effect of reducing Medicare reimbursement for services
historically provided by the Affiliated Practices, including orthopedic surgical
procedures and rehabilitation services such as physical therapy and
comprehensive outpatient rehabilitation services. These or further changes in
the Medicare fee schedule payment methodology could have an adverse effect on
the business of the Company and Affiliated Practices.
Physician reimbursement rates paid by private third party payors, including
those that provide Medicare supplemental insurance coverage, are more often
still based on established charges. However, RBRVS types of payment systems are
increasingly being adopted by certain private third party payors and may become
a predominant payment methodology. Wider spread implementation of such payment
systems may result in reduced payments from private third party payors and could
indirectly reduce revenue to the Company. Although more private third party
payors are adopting RBRVS-type reimbursement or other managed care-type
restrictions on reimbursement, such rates still are generally higher than
Medicare payment rates. However, further reductions in reimbursement levels 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 orthopedic
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. Even absent
more widespread adoptions of RBRVS or managed care-type payment restrictions, a
change in the patient mix of any of the Affiliated Practices that results in a
decrease in patients covered by private third party payors could have a material
adverse effect on the Affiliated Practices and, as a result, on the Company.
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 and the Affiliated Practices 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 or the
Affiliated Practices will not be amended in a manner that could have a material
adverse effect on the Company or the Affiliated Practices.
The federal health care laws apply in any case in which the Company is
submitting a claim on behalf of an Affiliated Practice that is providing an item
or service that is reimbursed under Medicare, Medicaid or most other
federally-funded health care programs. The principal federal laws include those
that prohibit the filing of false or improper claims for federal payment, those
that prohibit unlawful inducements for the referral of business reimbursable
under federally-funded health care programs 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 physician or his immediate family have
certain types of financial relationships.
False and Other Improper Claims. The federal government is authorized to
impose criminal, civil and administrative penalties on any person or entity that
files a false claim for reimbursement from Medicare or Medicaid or other
federally-funded programs. 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, or violate state false claims prohibitions.
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While the criminal statutes are generally reserved for instances involving
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. Severe sanctions under these statutes, including exclusion from
Medicare, Medicaid or other federally-funded programs, have been applied even in
situations that have not resulted in a criminal conviction. Moreover, the
Department of Health and Human Services recently issued new documentation
guidelines applicable to Medicare claims filed by physicians for evaluation and
management services involving examination of "single-organ systems," including
the musculoskeletal system.
The Company believes that its billing activities on behalf of the
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 or the Affiliated
Practices have violated such laws could have a material adverse impact on the
Company.
Federal Anti-kickback Laws. A federal law commonly known as the
"Anti-kickback Law" prohibits the knowing or willful 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 patients covered
under Medicare, Medicaid and most other federally-funded health care programs,
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 those
programs. 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 Law if the government concludes that the opportunity to
invest was offered as an inducement for referrals. The penalties for violations
of this law include civil monetary penalties, criminal sanctions, exclusion from
further participation in federally-funded health care programs (mandatory
exclusion in certain cases), and the ability of the Secretary of Health and
Human Services to refuse to enter into or terminate a provider agreement, and
debarment from participation in other federal programs.
In part to address concerns regarding the implementation of the
Anti-kickback Law, 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 Law. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal services agreements, office and equipment rental
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. In addition, the
Company owns an interest in West Central Ohio Group, Ltd. ("WCOG") which owns
and operates an ambulatory surgery center. The remaining interests are owned by
physicians. These physicians will perform surgery in the ambulatory surgery
center. The government may scrutinize the distributions from WCOG to the
physicians to determine if they are payments for the referral of patients to the
ambulatory surgery center, in which case these payments could fall within the
purview of the Anti-kickback Law. Although the investments in the Company by
physicians and the Service Agreements between the Company and the Affiliated
Practices do not 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 Law was intended to prohibit and is not aware of
any legal challenge or proceeding pending against
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similar physician practice management activities under the Anti-kickback
Law. A determination that the Company has violated the Anti-kickback Law 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
(including physical therapy, diagnostic imaging services, orthotics and
prosthetics), if the physician or an immediate family member 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.
On January 9, 1998, the Health Care Financing Administration (the "HCFA")
issued proposed rules (the "Proposed Regulations") regarding the Stark Law as it
relates to designated health services other than clinical laboratory services.
The Proposed Regulations contemplate that designated health services may be
provided by a physician's practice or by any other corporation, including an
entity that owns the operation providing the designated health services. A
corporation that merely owns the components of a health services operation, such
as the building that houses the facility or the medical equipment used at the
facility, would not be deemed to own the operation. It is not clear, however,
whether and to what extent the provision of management services by the Company
to the Affiliated Practices and the receipt of a service fee based on net
patient revenues would cause the Company to be deemed to own the operation. In
addition, the Proposed Regulations would apply to an entity that does not bill
under its own Medicare number but receives payment for the services from the
billing entity as part of a so-called "under arrangements" agreement (a term of
art under the regulations relating to certain hospital arrangements) or similar
agreements. It is not clear whether the term "similar agreements" would apply to
the Company's arrangements with the Affiliated Practices. If the Company is
deemed to "own the operation" or to be engaged in an arrangement similar to an
"under arrangements" agreement, it would be deemed a provider of the services
addressed by the Proposed Regulations.
Regardless of whether the Proposed Regulations are adopted, because the
Company provides management services related to those designated health services
provided by physicians affiliated with the 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. 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, (ii) the
ownership of stock in the Company by the referring physicians meets certain
investment exceptions under the Stark Law and (iii) there are no other financial
arrangements between the Company and a referring physician which are not covered
by an exception under the Stark Law. The Company believes that the financial
arrangements under the 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. Furthermore, the Proposed Regulations provide that in order to meet the
investment interest exception criteria the investment has to be in securities
which at the time they were obtained could be purchased on the open market. This
regulatory change would prohibit referral relationships between physicians and
an entity in which such physician (or a family member) own stock or options if
such stock or options were acquired prior to the time that the entity was
publicly held. Physicians affiliated with certain practices that affiliated with
the Company prior to its initial public offering received stock and options that
were not publicly traded. If the Company were to be deemed a provider of
designated health services, these physicians would not be covered by the
investment interest exception under the Proposed Regulations. In addition, the
Company owns an interest in an entity which owns a facility which will provide
designated health services as an ambulatory surgery center and the Company may
own similar interests in other entities in the future. A determination that the
Company has violated the Stark Law would have a material adverse effect on the
Company.
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
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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 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 laws of the states in which the 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, the Company
believes that 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 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.
The Florida Board of Medicine recently ruled in a declaratory statement
that payments of 30% of a physician group's net income to a practice management
company in return for a number of services including the physician practice
management company's expanding the practice by increasing patient referrals
through the creation of preferred provider networks, affiliation with other
networks, and negotiation of managed care contracts constituted fee-splitting
and could subject the physicians to disciplinary action. This order only applies
to the physician practice management company and the physicians asking for the
declaratory statement. The Florida Board of Medicine has agreed to stay
implementation of the order pending appeal of the decision by the physician
practice management company to a Florida court. Although the terms and
conditions of the Company's Service Agreements in Florida are distinguishable
from the agreements subject to the declaratory statement, an adverse decision by
the Florida court on this issue could require the Company to modify its Service
Agreements with the Affiliated Practices located in Florida or render such
agreements unenforceable.
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 with respect to
practice management
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companies, 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.
Antitrust Laws. The federal antitrust laws (principally the Sherman Act,
the Clayton Act and the Federal Trade Commission Act) are designed to maintain
market competition. Those laws address both structural issues (market share
through merger, acquisition or otherwise) and conduct issues (contracts or
combinations in restraints of trade). The Federal Trade Commission and the
Department of Justice have addressed competitive issues in the health care
industry through their Statements of Enforcement Policy in Health Care issued in
1996. Those statements address both structural issues and conduct issues, both
of which could apply to various aspects of the business of the Company,
particularly in areas where the Company provides management services to
practices that could be deemed to be in the same market. While the Company
believes that it is in compliance with all such laws, there is no assurance that
in the future its operations will not become the focus of inquiry and potential
challenge. Responding to such challenges could result in substantial costs to
the Company and the Affiliated Practices, and an adverse determination could
have a material adverse effect upon the Company.
Insurance Licensure Laws. All states have established licensure
requirements to regulate the business of insurance and the operation of HMOs.
Some states have also established separate licensure requirements for
provider-sponsored managed care networks (also known as "provider-sponsored
organizations," or "PSOs") and for other managed care entities such as
third-party administrators, utilization review agents, and marketing agents who
solicit memberships or policies in managed care plans. A person who fails to
obtain the appropriate insurance license may be subject to civil and criminal
penalties in certain states. While licensure requirements for insurers, HMOs and
PSOs would not generally apply to companies that provide only management
services to physician providers and that do not otherwise engage in the
financing or delivery of health care services, there is little uniformity in how
the states interpret the scope of their respective laws and regulations.
Therefore, although the Company believes that its operations do not violate
insurance licensure laws for insurers, HMOs and PSOs in the states where it
currently does business, there can be no assurance that regulatory authorities
of such states would not apply these laws to require licensure of the Company as
an insurer, as an HMO, or as a PSO. Compliance with such laws could result in
substantial costs to the Company. In addition, practices affiliated with the
Company may require licensure as PSOs under separate statutory requirements for
PSOs or, if such practices enter into capitated or other risk-assumption
arrangements, under requirements relating to HMOs or insurers. See "Provider
Risk Assumption," below.
Finally, to the extent that the Company's management services for physician
networks involve "administrator," "utilization review," or marketing functions,
as those terms are defined by various states, the Company may need to obtain
separate licensure as a third-party administrator, as a utilization review
agent, or as an HMO or insurance marketing agent. There can be no assurance that
such state laws would not be interpreted in a manner that would deem the Company
to be in violation of these laws unless it obtained such licenses and incurred
additional costs. If the Company were to be deemed to be in noncompliance with
these laws or with insurance licensure laws generally, it would be materially
adversely affected.
In Florida, a new "fiscal services intermediary law," effective July 1,
1997, requires entities performing "fiduciary or fiscal intermediary services"
on behalf of health care professionals who contract with HMOs to register with
the Department of Insurance and to obtain a fidelity bond in the minimum amount
of $10 million. "Fiduciary or fiscal intermediary services" means
"reimbursements received or collected on behalf of health care professionals for
services rendered, patient and provider accounting, financial reporting and
auditing, receipts and collections management, compensation and reimbursement
disbursement services, or other related fiduciary services pursuant to health
care professional contracts with health maintenance organizations." The Company
believes that its management services for physician practices fall within this
definition and intends to take appropriate steps to register or otherwise to
comply with the new provisions.
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Provider Risk Assumption. Even in the absence of a separate licensure or
regulatory scheme for PSOs, many states have taken the position that when
provider networks assume risk, e.g., by accepting capitation payments in return
for providing or arranging a specified set of health care services, they are
engaging in the "business of insurance" and therefore require licensure as an
insurer or an HMO. The degree of consensus among the states on this issue varies
depending on whether the risk being assumed is "direct" risk or "downstream"
risk. As outlined in a policy statement adopted by the National Association of
Insurance Commissioners ("NAIC") in December of 1997, "direct" risk arrangements
involve agreements whereby a PSO agrees directly with individuals, employers or
other unlicensed groups to assume all or part of the risk for health care
expenses or service delivery. Downstream risk arrangements are contractual
arrangements between licensed entities, such as HMOs and insurers, and
subcontracting provider entities (organizations or individuals) under which the
provider entity or person assumes all or part of the licensed entity's risk.
A consensus exists among state insurance regulators that entities which
enter into direct risk arrangements should be required to obtain the appropriate
regulatory license. By contrast, a consensus does not exist with respect to
"downstream" risk arrangements. Although the NAIC has observed that the vast
majority of states do not require licensure of subcontractor provider entities,
many states question whether having a licensed entity, i.e., an HMO or insurer,
involved in a downstream arrangement adequately addresses consumer protection
concerns. Consequently, an increasing number of states are adopting laws to
regulate downstream risk through various mechanisms, including, in some
instances, licensure.
In many states, therefore, practices affiliated with the Company will be
precluded from entering into capitated or episode of care contracts directly
with employers, individuals and other unlicensed groups, or even indirectly as a
subcontractor of a licensed HMO or insurance company, unless they qualify to do
business as HMOs or insurance companies under applicable insurance laws and
regulations. These laws may require capital requirements and adherence to other
safety and soundness requirements. 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 or other risk-assumption
arrangements, or the cost of complying with certain laws that would permit
expansion of risk-based contracting activities, would have a material adverse
effect on the Company.
Managed Care Contracting Laws. An increasing volume of state regulation is
directed to controlling the terms of contracts between managed care payors and
managed care providers. Certain of these laws and regulations can affect the
composition of a managed care network. For example, so-called "any willing
provider" regulations require that insurers, managed care organizations, and
other health plans give all providers membership on their provider panels under
certain circumstances. Other laws and regulations are aimed at protecting health
care consumers, including laws that prohibit managed care plans from restricting
a physician's ability to communicate all available treatment options to a
patient and from providing financial incentives to physicians for limiting
covered services, and laws that require health care providers to "hold harmless"
health care consumers for the cost of any covered services for which the
consumer has already paid the applicable premium or charge. There can be no
assurance that such laws would not be interpreted in a manner adverse to the
Company. A determination that the Company or its Affiliated Practices are not in
compliance with such laws could have a material adverse effect on the Company.
Physician Incentive Plan Rule. On March 27, 1996, the United States
Department of Health and Human Services issued final regulations concerning
physician incentive plans operated by certain prepaid health care organizations.
The regulations prohibit a prepaid health care organization that contracts with
the Medicare or Medicaid programs from operating a physician incentive plan that
directly or indirectly makes specific payments to a physician or physician group
as an inducement to reduce or limit medically necessary services furnished to a
specific enrollee of the organization. Moreover, the regulations require such an
organization to provide adequate stop-loss protection to a physician or
physician group if the organization's system for compensating physicians does
not provide certain limitations on the amount of physician compensation that is
put at risk for referrals made by the physician. These regulations may affect
the operations of the Company and Affiliated Practices, including contractual
arrangements with prepaid health care organizations. There can be no assurance
that these regulations will not have an adverse effect on the business of the
Company and Affiliated Practices.
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Employee Leasing Services. Several states have enacted legislation
prohibiting the provision of "employee leasing services" without a license. The
Company is in the process of evaluating the application of such laws to its
provision of non-physician personnel to physician practices under its Service
Agreements, and intends to seek licensure where appropriate. There can be no
assurance that, if the Company seeks to obtain a license in a particular state,
the Company's application will be approved. Failure to obtain a license to
provide employee leasing services where required may result in civil or criminal
penalties and may affect the Company's ability to provide personnel in
accordance with the terms of the Service Agreements, which could have a material
adverse effect on the Company.
Competition
Specialty Care Network competes with numerous entities that seek 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
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 December 31, 1997, the Company had 841 employees, of whom 44 were
located at the Company's headquarters and 797 were located at the offices of the
Affiliated Practices. The Company believes that its relationship with its
employees is good.
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. Nevertheless, as a result of the relationship
between the Company and the Affiliated Practices, the Company may become subject
to some medical malpractice actions under various theories, including successor
liability. There can be no assurance that claims, suits or complaints relating
to services and products provided by Affiliated Practices will not be asserted
against the Company in the future. The Company's medical professional liability
insurance provides coverage of up to $5 million per incident, with maximum
aggregate coverage of $5 million per year. The Company's general liability
insurance provides coverage of up to $5 million per incident, with maximum
aggregate coverage of $5 million per year. The Company believes that such
insurance will extend to professional liability claims that may be asserted
against employees of the Company that work on site at Affiliated Practice
locations. In addition, pursuant to
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the Service Agreements, the Affiliated Practices are required to maintain
comprehensive professional liability insurance. The availability and cost of
such insurance have 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 the Affiliated Practices or the Company that exceed applicable policy
limits would have a material adverse effect on the Company.
Risk Factors
Limited Operating History. The Company has conducted physician practice
management operations only since November 1996, when it affiliated with five
practices. Several other affiliations occurred during 1997 and additional
affiliations are anticipated as part of the Company's growth strategy. 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, its
affiliated practices. In addition, there can be no assurance that the Company's
establishment of affiliation arrangements will not result in a loss of patients
by any of the Affiliated Practices or other unanticipated adverse consequences.
Moreover, there can be no assurance that the Company's personnel, systems and
infrastructure will be sufficient to permit effective and profitable management
of Affiliated Practices or to implement effectively the Company's strategies.
Risks Associated with Affiliation and Expansion Strategy. A primary element
of the Company's growth 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, either
developing or contracting with facilities that provide ancillary services such
as outpatient surgery, outpatient imaging, pain management, rehabilitation
therapy and orthotics, and contracting with associated providers. Identifying
appropriate physician group practices, individual physicians and ancillary
facilities and proposing, negotiating and implementing economically attractive
affiliations with such practices, physicians and facilities can be a lengthy,
complex and costly process. The failure of the Company to identify and effect
additional affiliations would have a material adverse effect on the Company. In
addition, the Company is a party to a credit facility that places certain
limitations upon the number of affiliations the Company can effect in any year
and the terms of any future affiliations. 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.
The Company's ability to expand is also dependent upon the health care
regulatory environment, which is subject to change. There can be no assurance
that application of current laws or changes in legal requirements will not
adversely affect the Company or its ability to expand. See "Risk Factors --
Extensive Government Regulation" and "Government Regulation and Supervision" in
this Item.
Dependence on Affiliated Practices and Physicians. The Company's operations
are entirely dependent on its continued affiliation through the Service
Agreements with the Affiliated Practices and on the success of the Affiliated
Practices. One of the Affiliated Practices, Reconstructive Orthopaedic
Associates II, P.C. ("ROA"), contributed approximately 22%, of the fees
(excluding fees relating to the reimbursement of clinic expenses and fees
relating to physicians formerly practicing with ROA who formed 3B Orthopaedics,
P.C. ("3B Orthopaedics") on July 1, 1997) paid to the Company by all of the
Affiliated Practices during 1997. Although, in most instances absent a default
by the Company, the termination of a service agreement by an Affiliated Practice
prior to the end of its stated term and particularly during the early years of
the contract would require the Affiliated Practice to make a significant payment
to the Company, the termination of any of the Service Agreements with any of the
Affiliated Practices could have a material adverse effect on the Company. For a
description of the Service Agreements, see "Business -- Contractual Agreements
with Affiliated Practices" in this Item. For a discussion of circumstances under
which a service agreement may be rendered unenforceable, see "Government
Regulation" in this Item.
18
<PAGE>
Some of the Affiliated Practices derive, and other practices with which the
Company may affiliate may derive, a significant portion of their revenue from a
limited number of physicians. There can be no assurance that the Company or the
Affiliated Practices will maintain cooperative relationships with key members of
a particular Affiliated Practice. In addition, there can be no assurance that
key members of an Affiliated Practice will not retire, become disabled or
otherwise become unable or unwilling to continue practicing their profession
with an Affiliated Practice. The loss by an Affiliated Practice of one or more
key members would have a material adverse effect on the revenue of such
Affiliated Practice and possibly on the Company. Neither the Company nor the
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 could have a material adverse effect on the Company.
An Affiliated Practice that accounts for less than two percent of the
Company's total Base Service Fees sent a letter to the Company in March 1998
alleging that the Company has defaulted under several provisions of the Service
Agreement and that it intends to exercise its termination rights under the
agreement if the alleged defaults are not cured within 60 days. The Company
believes it is fulfilling its obligations under the Service Agreement and is
seeking to amicably resolve the matter. Although the Company does not believe
that a termination or restructuring of the Service Agreement would, over the
long term, have a material adverse effect on the Company, any such termination
or restructuring could adversely affect operating results in the period in which
it occurs.
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 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 musculoskeletal 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, through the Medicare program, a
resource-based relative value scale ("RBRVS") payment methodology for physician
services and other outpatient services. RBRVS is a fee schedule that, except for
certain geographical and other adjustments, pays similarly situated physicians
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 Affiliated Practices. Further reductions could
significantly affect the Affiliated Practices, each of which derives a
significant portion of its revenue from Medicare. Moreover, the Balanced Budget
Act of 1997 may result in further reductions in Medicare reimbursement,
particularly for surgical services. For the year ended December 31, 1997, the
net revenue from Medicare constituted approximately 22% of the aggregate net
revenue of the Affiliated Practices. Payment systems similar to RBRVS 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.
Physician reimbursement rates paid by private third-party payors, including
those that provide Medicare supplemental insurance, are most typically based on
established provider charges and, although more private payors are adopting
RBRVS-type reimbursement or other managed care-type restrictions on
reimbursement, such rates still are generally higher than Medicare payment
rates. A change in the payor mix of any of the Affiliated Practices could have a
material adverse effect on the Affiliated Practices and, as a result, on the
Company. See "Government Regulation and Supervision" in this Item.
Extensive Government Regulation. The delivery of health care, including the
relationships among practitioners such as physicians and other clinicians, is
subject to extensive federal and state regulation. Much of this regulation,
particularly in the area of patient referral, is complex and open to different
interpretations. While the Company believes that its operations are conducted in
material compliance with applicable laws, there can be no assurance that a
review of such 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 federal and state laws to which the Company and its Affiliated
Practices are subject cover a broad range of activities. Among other things,
these laws (i) prohibit the filing of false or other improper medical claims,
(ii) prohibit "kickback" and similar activities intended to induce patient
referrals or the ordering of reimbursable items or services,
19
<PAGE>
(iii) prohibit physicians from making referrals to health care providers
with which the physicians have a financial relationship, (iv) prohibit
fee-splitting under certain circumstances and (v) prohibit corporations from
engaging in the practice of medicine. In addition, a variety of laws of general
applicability, including antitrust, insurance, environmental, occupational
safety, employment, medical leave, and civil rights laws, have a restrictive
effect on the operations and activities of the Company and its Affiliated
Practices. Violations of the laws to which the Company and its Affiliated
Practices are subject can result in severe adverse consequences, including civil
or criminal penalties (such as imprisonment and fines), exclusion from
participation in Medicare and Medicaid programs or other federally funded health
care programs, and censure or delicensing of physician-violators. See "Business
- -- Government Regulation and Supervision."
In addition to extensive existing government health care regulation, in the
recent past there have been numerous initiatives on the federal and state levels
for comprehensive or incremental reforms affecting the payment for and
availability of health care services. While it is uncertain what legislative
proposals will be enacted in the future, many of the proposals under
consideration, including those that would reduce Medicare and Medicaid payments
or impose additional prohibitions on ownership by health care providers, could
have a material adverse effect on the Company if they are enacted. See "Risk
Factors -- Risks Associated With Affiliation and Expansion Strategy," "Risk
Factors --Risk of Changes in Payment for Medical Services" and "Government
Regulation and Supervision" in this Item.
Health care also is subject to the application of the federal and state
antitrust laws that address both market concentration and conduct within a
market that may be deemed to restrain trade. Federal antitrust concerns address
market share, which is dependent on frequently contested assessments of the
nature of the product or service market and the scope of the geographic market.
Although the Company believes that it is not in violation with the antitrust
laws, future enforcement interpretations or initiatives could subject it to
investigational oversight and potential challenge, which could have a material
adverse effect on the Company.
Several states have enacted legislation prohibiting the provision of
"employee leasing services" without a license. The Company is in the process of
evaluating the application of such laws to its provision of non-physician
personnel to physician practices under its Service Agreements, and intends to
seek licensure where appropriate. There can be no assurance that, if the Company
seeks to obtain a license in a particular state, the Company's application will
be approved. Failure to obtain a license to provide employee leasing services
where required may result in civil or criminal penalties and may affect the
Company's ability to provide personnel in accordance with the terms of the
Service Agreements, which could have a material adverse effect on the Company.
Dependence on Information Systems. The Company's success is largely
dependent on its ability to implement new information systems and to interface
these systems with the Affiliated Practices' existing practice management,
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. 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 adequate practice management, financial and clinical
information systems would have a material adverse effect on the Company. See
"Risk Factors -- Risks Associated with Managed Care Contracts" and "Operations"
in this Item.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using the "00" as the year 1900
rather than the Year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities.
The Company has initiated an internally-managed Year 2000 program designed
to ensure that there is no adverse effect on the Company's core business
operations and transactions with customers, suppliers and financial
institutions. The Company has determined that it will need to modify or replace
some portions of the practice management systems at its Affiliated Practices so
that the systems will function properly with respect to dates in the year 2000
and beyond. The cost of these Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position. However,
the Company seeks to expand its business through additional affiliations, and
there can be no assurance that systems at practices that affiliate with the
Company in the future will be Year 2000 compliant or, if not Year 2000
compliant, will be converted on a timely basis. The Company also has initiated
discussions with its significant suppliers to determine whether those parties
will be subject to the Year 2000 issue where their systems interface with the
Company's systems or otherwise have an impact on Company operations. The Company
is assessing the extent of which its operations are vulnerable should its
suppliers fail to remediate properly their computer systems.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns with respect to its internal systems and those of its
Affiliated Practices, there can be no guarantee that the systems of other
entities on which the Company's systems and operations rely will be converted on
a timely basis. The failure of such other entities to remediate any Year 2000
issue on a timely basis could have a material adverse effect on the Company.
Need for Additional Funds. The Company's affiliation 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 operations and finances. Such restrictions
may have
20
<PAGE>
an adverse effect on, among other things, the Company's ability to pursue its
affiliation strategy. The Company's bank credit facility places certain
limitations on the number of affiliations the Company can effect in any year and
the terms of the future affiliations. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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 with HMOs, employer groups and
other private third-party payors on behalf of practices affiliated with the
Company. The inability of the Company to enter into satisfactory arrangements
with such payors in the future on behalf of practices affiliated with the
Company could have a material adverse effect on the Company.
In certain instances, the Company has assisted certain of its Affiliated
Practices in negotiating contracts providing a fixed global fee for each episode
of care covering hip replacement, spinal fusion, laminectomy, discectomy,
anterior cruciate ligament repair, arthroscopy and foot and ankle procedures.
Certain Affiliated Practices also have other capitated fee arrangements that
existed prior to affiliation with the Company. The Company has been successful
in negotiating per member per month increases in certain of these existing
capitated arrangements for certain Affiliated Practices. The Company anticipates
that its Affiliated Practices may enter into additional contracts based on
capitated and global fee arrangements in the future. Under an episode of care
contract, the payor pays the surgeon a global fee which encompasses all services
required for that episode of care. To the extent the surgeon, with the Company's
assistance, manages the costs and utilization of the resources required to
provide the care, the surgeon typically earns additional compensation over and
above the normal professional fees. Other types of fee arrangements that may be
entered into include a capitated fee arrangement under which a provider agrees
to provide its specialty services to a defined population of members for a fixed
fee. The fee is normally negotiated on a per member per month basis. Health care
providers under these contracts or arrangements bear the risk, generally subject
to certain loss limits, that the aggregate costs of providing medical services
will exceed the premiums received. To the extent that patients or enrollees
covered by such contracts require more frequent or more extensive care than
anticipated, there could be a material adverse effect on a practice affiliated
with the Company, and, therefore, on the Company. In the worst case, revenue
negotiated under these contracts would be insufficient to cover the costs of the
care provided. Any such reduction or elimination of earnings to the Affiliated
Practices could have a material adverse effect on the Company. See "Payor
Contracting" in this Item.
Several states have adopted regulations prohibiting physicians from
entering into capitated payment or other risk sharing contracts except through
HMOs or insurance companies. In addition, some states have subjected physicians
and physician networks to applicable insurance laws and regulations which
provide for, among other things, minimum capital requirements and other safety
and soundness requirements. The inability of practices affiliated with the
Company to enter into capitated or episode of care arrangements or the costs of
compliance with insurance laws and regulations would have a material adverse
effect on the Company. See "Government Regulation and Supervision - Insurance
Laws" in this Item.
Generally, there is no certainty that the Company and practices
affiliated with the Company 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 practices affiliated with the Company as a result of the
termination of third-party payor contracts or otherwise would have a material
adverse effect on the Company.
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 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
21
<PAGE>
management services to, musculoskeletal medical practices on terms beneficial to
the Company. The Company also believes that changes in government 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 "Competition" in this Item.
Dependence Upon Key Personnel. The Company is dependent upon the ability
and experience of Kerry R. Hicks, its President and Chief Executive Officer, and
its other 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 each of its 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.
Potential Liability and Insurance; Legal Proceedings. The provision of
medical services by physicians entails an inherent risk of exposure to
professional malpractice claims and other similar claims. While the Affiliated
Practices generally maintain malpractice insurance, there can be no assurance
that any claim asserted against any of the Affiliated Practices or any other
practice that may affiliate with the Company in the future will be covered by,
or will not exceed the coverage limits of, applicable insurance. A successful
malpractice claim against any practice affiliated with the Company, even if
covered by insurance, could have a material adverse effect on such 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 professional malpractice and similar claims, and
there can be no assurance that claims, suits or complaints relating to services
delivered by practices affiliated with the Company (including claims with regard
to services rendered by a practice prior to its affiliation with the Company)
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 $5.0 million per incident, with maximum coverage of $5.0
million per year. The Company's general liability insurance provides coverage of
up to $5.0 million per incident, with maximum coverage of $5.0 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. See "Corporate Liability and Insurance,"
in this Item.
Risks Related to Purchase of Receivables. The Service Agreements provide
that the Company will acquire each Affiliated Practice's accounts receivable
each month. The purchase price for such accounts receivable generally 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. The Company generally also bears the
collection risk with respect to outstanding receivables acquired in connection
with an affiliation. 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 "Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Contractual
Agreements with Affiliated Practices" in this Item.
Possible Volatility of Stock Price. The market price of the Company's
Common Stock may fluctuate substantially in response to variations in the
Company's operating and financial results, changes in earnings estimates by
securities analysts, general economic and market conditions, and other factors.
Variations in the Company's operating and financial results may be caused by the
timing of practice affiliations and by the timing and volume of musculoskeletal
procedures, among other things. See Item 5 -- "Market for Registrant's Common
Stock and Related Stockholder Matters."
22
<PAGE>
Item 2. Properties
The Company has a five-year lease for its approximately 12,000 sq. foot
headquarters facility in Lakewood, Colorado, which expires on March 15, 2001.
The Company has entered into leases for the facilities utilized by the
Affiliated Practices for annual lease payments of approximately $5.9 million.
Several of the leases involve properties owned by physician owners of the
Affiliated Practices.
Item 3. Legal Proceedings
Currently, no legal proceedings are pending against the Company. However,
there can be no assurance that 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 Affiliated Practices; nevertheless, the Company believes it
is unlikely that the ultimate resolution of such claims will have a material
adverse effect on the Company.
The Company has been advised that the Department of Health and Human
Services is conducting an inquiry regarding Reconstructive Orthopaedic
Associates, Inc., a practice whose assets were acquired through merger with the
Company, and physicians formerly associated with that practice, including
Richard H. Rothman, M.D., Ph.D., Chairman of the Board of the Company, and
Robert E. Booth, Jr., M.D., a director of the Company. The inquiry appears to be
concerned with the submission of claims for Medicare reimbursement by the
practice prior to the affiliation of ROA with the Company. The Department of
Health and Human Services has not contacted the Company in connection with the
inquiry.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
23
<PAGE>
Executive Officers of the Registrant
The following table sets forth certain information concerning the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Kerry R. Hicks........................... 38 President, Chief Executive Officer
Patrick M. Jaeckle....................... 39 Executive Vice President - Finance/Development,
Secretary and Director
Michael E. West.......................... 38 Senior Vice President - Operations
D. Paul Davis............................ 40 Senior Vice President - Finance
Peter A. Fatianow........................ 34 Vice President - Development
David G. Hicks........................... 39 Vice President - Management Information Systems
Timothy D. O'Hare........................ 45 Vice President - Payor Operations
</TABLE>
KERRY R. HICKS, a founder of the Company, has served as President and Chief
Executive Officer and as a director of the Company since its inception in
December 1995. 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 orthopaedic projects) to 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.
PATRICK M. JAECKLE, a founder of the Company, has served as Executive Vice
President - Finance/Development and as a director of the Company since its
inception in December 1995. 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
Business School, a D.D.S. degree from Baylor College of Dentistry and a B.A.
degree from The University of Texas at Austin.
MICHAEL E. WEST has served as Senior Vice President - Operations since
August 1997. From 1990 to July 1997, Mr. West served as a consultant for Medical
Group Services, LLC, a health care practice management firm. Mr. West received a
B.B.A. in accounting and management from James Madison University. He is a
certified public accountant.
D. PAUL DAVIS has served as Senior Vice President - Finance since June 1997
and served as Vice President of Finance from March 1996 until June 1997. He also
served as the Company's controller from March 1996 until September 1997. 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 and a certified management accountant.
PETER A. FATIANOW has been Vice President - 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
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 - 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
24
<PAGE>
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 has been Vice President - Payor Operations since 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 Preferred Health Network. Mr. O'Hare
received a B.S. degree from Virginia Polytechnic Institute and State University
and a M.H.A. degree from Virginia Commonwealth University.
Kerry R. Hicks and David G. Hicks are brothers.
25
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since February 7, 1997, the Common Stock has been quoted on the Nasdaq
Stock Market under the symbol "SCNI." The following table sets forth the high
and low sales prices for the Common Stock for the quarters indicated as reported
on the Nasdaq Stock Market.
High Low
---- ---
Year Ending December 31, 1997
First Quarter(1)............................... $10 5/8 $ 8
Second Quarter................................. 12 1/2 7 5/8
Third Quarter.................................. 13 3/4 10 7/8
Fourth Quarter................................. 14 10 3/4
(1) Represents trading of the Common Stock from February 7, 1997 through March
31, 1997.
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
Company's credit facility with a bank prohibits the payment of any dividends
without written approval from the bank.
On November 16, 1997, the Company acquired, through a merger and asset
purchases, the assets of certain physician practices, a related surgery center
and physical therapy facilities in Fairfield, California. In connection with the
transactions, the Company issued an aggregate of 226,181 shares of Common Stock
to the physician owners of the practice and the owners of both the surgery
center and physical rehabilitation centers.
The Company effected the foregoing transactions in reliance on the
exemption from registration provided under Sections 4(2) under the Securities
Act of 1933 (the "Act"). The Company believes that the transactions complied
with the requirements of Rule 506 under the Act.
26
<PAGE>
Item 6. Selected Financial Data
Statement of Operations Data
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue:
Service fees $ 45,966,531 $ 4,392,050 $ --
Other 3,689,390 -- --
------------ ------------ ----------
49,655,921 4,392,050 --
Costs and expenses:
Clinic expenses 31,644,618 2,820,743 --
General and administrative expenses 7,861,015 3,770,263 --
------------ ------------ ----------
Total expenses 39,505,633 6,591,006 --
Income (loss) from operations 10,150,288 (2,198,956) --
Other:
Interest income 536,180 11,870 --
Interest expense (942,144) (90,368) --
------------ ------------ ----------
Income (loss) before income taxes 9,744,324 (2,277,454) --
Income tax (expense) benefit (3,873,926) 506,071 --
------------ ------------ ----------
Net income (loss) $ 5,870,398 $ (1,771,383)
============ ============ ==========
Net income (loss) per common share (basic)(1) $ 0.38 $ (0.16) $ --
============ ============ ==========
Weighted average number of common shares
used in computation (basic)(1) 15,559,368 11,422,387 --
============ ============ ==========
Net income (loss) per common share (diluted)(1) $ 0.37 $ (0.14) $ --
============ ============ ==========
Weighted average number of common
share and common share equivalents
used in computation (diluted) 16,071,153 12,454,477 --
============ ============ ==========
<CAPTION>
Balance Sheet Data
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Working capital (deficit) $ 21,924,386 $ 7,637,724 $(27,894)
Total assets 140,301,650 16,013,125 40,684
Total long-term debt 33,885,141 5,142,450 --
</TABLE>
(1) The 1996 net income (loss) per share and weighted average share amounts have
been restated to comply with Statement of Financial Accounting Standards
No. 128, Earnings Per Share.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
General
Specialty Care Network is a physician management company that focuses on
musculoskeletal care, which is the treatment of conditions relating to bones,
joints, muscles and related connective tissues. The Company was incorporated in
1995 but did not conduct any significant operations until November 1996, when it
affiliated with the five practices (the "Initial Affiliated Practices")
following a series of transactions by which the Company acquired substantially
all of the assets and certain liabilities of the predecessors to the Initial
Affiliated Practices (the "Initial Affiliation
27
<PAGE>
Transactions"). Thereafter, the Company affiliated with 16 additional
practices that have an aggregate of 92 physicians. In addition, the Company has
assisted the Affiliated Practices in recruiting orthopaedic and other
musculoskeletal physicians to join the Affiliated Practices. Prior to their
affiliations with the Company, the Affiliated Practices were established
businesses engaged in the provision of musculoskeletal care as separate,
independent entities (other than 3B Orthopaedics, whose physicians were formerly
part of ROA). The Affiliated Practices currently conduct business as separate
entities obtaining services from the Company pursuant to Service Agreements with
the Company.
The Company has entered into Service Agreements with the Affiliated
Practices, pursuant to which the Company, among other things, provides
facilities and management, administrative and development services, and employs
most non-physician personnel, in return for specified service fees. Such fees
are payable monthly and generally consist of the following: (i) service fees
based on a percentage (The "Service Fee Percentage") ranging from 20% to 50% of
the Adjusted Pre-Tax Income of the Affiliated Practices (defined generally as
revenue of the Affiliated Practices related to professional services less
amounts equal to certain clinic expenses of the Affiliated Practices, not
including physician owner compensation or most benefits to physician owners
("Clinic Expenses" as defined more fully in the Service Agreements)) and (ii)
amounts equal to Clinic Expenses. Generally, for the first three years following
affiliation, the portion of the service fee described under clause (i) is
subject to a fixed dollar minimum (the "Base Service Fee"), which generally was
determined by applying the respective Service Fee Percentage to Adjusted Pre-Tax
Income for each Affiliated Practice for the 12 months prior to affiliation. The
annual base service fees for all of the current Affiliated Practices are
approximately $19 million in the aggregate. In addition, with respect to its
management (and, in certain instances, ownership) of certain facilities and
ancillary services associated with certain of the Affiliated Practices, the
Company receives fees based on a percentage of net revenue or pre-tax income
related to such facilities and services.
Net revenue of the Company consists of service fees (including
reimbursement of Clinic Expenses) paid by the Affiliated Practices pursuant to
the Service Agreements. Significant factors that influence revenue of the
Affiliated Practices include patient volume, number of physicians, specialty and
subspecialty mix, payor mix and associated ancillary services. The Company
assists the Affiliated Practices by providing management, capital and other
resources required to develop new ancillary services, by assisting in the
recruitment of additional physicians and by assisting in the procurement of
managed care contracts.
The operating expenses incurred by the Company 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 Affiliated Practices and depreciation and amortization of
assets. The Company will seek to reduce certain operating expenses, as a
percentage of net revenue, through purchase discounts, economies of scale and
standardization of best practices. The negotiated amounts of the Company's
Service Fee Percentages with Affiliated Practices also will affect the Company's
operating expenses, measured as a percentage of net revenue. In addition to the
operating expenses discussed above, the Company incurs personnel and
administrative expenses in connection with its corporate offices, which provide
management, administrative and development services to the Affiliated Practices.
Accounting Treatment
The acquisition of the assets and assumption of certain liabilities of the
predecessors to the Initial Affiliated Practices (the "Predecessor Practices")
were accounted for by the Company at the transferors' historical cost basis. The
Common Stock issued in exchange for those assets was recorded by SCN at the
Predecessor Practices' historical cost. The beginning net assets of
approximately $5.5 million recorded by the Company with respect to the Initial
Affiliation Transactions reflect, in the opinion of management, adjustments
necessary to present these balances in conformity with generally accepted
accounting principles. In accordance with Staff Accounting Bulletin No. 48, the
physician owners of the Predecessor Practices were deemed to function as
promoters in the Initial Affiliation Transactions. Cash consideration given in
those acquisitions has been treated for accounting purposes as a dividend from
SCN to the physician owners who received cash.
28
<PAGE>
The acquisition of assets in 1997 in connection with the Company's
affiliation with the other Affiliated Practices was accounted for by the
purchase method. Future acquisitions will most likely be accounted for by the
purchase method.
Cost of obtaining Service Agreements ("Service Agreement Intangible
Assets") are amortized over the life of the agreements, which are generally
forty years. The Company reviews its long-lived assets quarterly, including
Service Agreements and goodwill, pursuant to the provisions 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. Intangible assets
associated with each Affiliated Practice are reviewed separately because the
operations and cash flows of each Affiliated Practice are independent of each
other. The evaluation of the recoverability of long-lived assets, including
Service Agreement Intangible Assets, is significantly affected by estimates of
future cash flows from each of the Company's Affiliated Practices. If estimates
of future cash flows from operations decrease in the future, the Company may be
required to write down the carrying value of its long-lived assets. Any such
write-down could have a material adverse effect on the Company's results of
operations. Intangible and other long-lived assets are allocated to each
Affiliated Practice based on the specific identification methodology.
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 expense using a fair market 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 items as incorporating the FASB No. 123 grant date
definition into APB No. 25, readdressing the criteria under which broad-based
plans qualify for noncompensatory accounting and defining what constitutes
employees. The resolution of these issues could result in the revision of the
Company's accounting for stock-based compensation arrangements.
Results of Operations
Year Ended December 31, 1997
During 1996, the Company was in its start-up phase and, consequently, the
1996 results are not comparable with the 1997 results.
For 1997, the Company had service fees revenues of approximately $46.0
million, including reimbursement of clinic expenses. Of this amount,
approximately $17.6 million in service fees were derived from practices that
affiliated with the Company during 1997. The Company also generated other
revenues totaling approximately $3.7 million, which consist mainly of business
consulting fees, medical director fees and miscellaneous revenue, of which
approximately $.5 million is derived from ongoing operations and may be deemed
recurring.
During 1997, the Company incurred costs and expenses totaling approximately
$39.5 million, of which approximately $7.9 million are general and
administrative expenses, principally comprised of personnel and administrative
expenses relating to the provision of services to the Affiliated Practices. In
addition, approximately $1.2 million of such expenses constitutes amortization
expense relating to the costs and expenses incurred in the Service Agreement
Intangible Asset.
In 1997, the Company incurred approximately $942,000 of interest expense on
weighted average outstanding debt of approximately $14.7 million. At the end of
1997, outstanding indebtedness on the Company's bank line of credit was
approximately $33 million.
29
<PAGE>
Year Ended December 31, 1996
Prior to November 12, 1996, the Company had not entered into any service
agreements and, consequently, generated no revenue. For the period from
January 1, 1996 through October 31, 1996, the Company incurred a pre-tax loss of
approximately $2.9 million, reflecting management salaries, business start-up
expenses and travel, legal and accounting costs associated with the Initial
Affiliation Transactions. For the period from November 1, 1996 through December
31, 1996, the Company generated net revenue, including reimbursement of clinic
expenses, of approximately $4.4 million and pre-tax income of approximately
$611,000. The income tax benefit reflected in the Company's statement of
operations differs from amounts currently payable because certain revenue and
expenses are reported differently in the statement of operations than they are
for tax filing purposes. For the year ended December 31, 1996, the Company's
effective tax rate was (22.2%). See "Liquidity and Capital Resources" below for
additional information.
The following table presents certain statement of operations data for the
year ended December 31, 1996, for the ten months ended October 31, 1996, during
which the Company did not conduct any significant operations and devoted most of
its efforts toward completing the Initial Affiliation Transactions, and for the
two months ended December 31, 1996, which includes operations following the
affiliation with the Initial Affiliated Practices on November 12, 1996.
<TABLE>
<CAPTION>
Ten Months Two Months Twelve Months
Ended Ended Ended
October 31, 1996 December 31, 1996 December 31, 1996
-------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Revenue:
Service fees $ -- $ 4,392,050 $ 4,392,050
Other -- -- --
----------- ----------- -----------
-- 4,392,050 4,392,050
Costs and expenses:
Clinic expenses -- 2,820,743 2,820,743
General and administrative expenses 2,845,973 924,290 3,770,263
----------- ----------- -----------
2,845,973 3,745,033 6,591,006
Income (loss) from operations (2,845,973) 647,017 (2,198,956)
Other:
Interest income 6,070 5,800 11,870
Interest expense (48,760) (41,608) (90,368)
----------- ----------- -----------
Income (loss) before income taxes ($2,888,663) $ 611,209 $(2,277,454)
=========== =========== ===========
</TABLE>
Liquidity and Capital Resources
During 1996, the Company financed its operations with private placements of
convertible debt and equity and with bank borrowings. 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
under a credit facility with a bank (the "Credit Facility") of approximately
$1.7 million to effect the Initial Affiliation Transactions in November 1996.
In February and March 1997, the Company received net proceeds from its
initial public offering of approximately $22.2 million. Approximately $5.6
million of the proceeds were utilized to repay all outstanding borrowings under
the Credit Facility. The Company utilized $16.4 million of the proceeds of the
offering and approximately $29 million under the Credit Facility in connection
with its affiliation with additional practices subsequent to the Company's
initial public offering.
30
<PAGE>
In November, 1997, the Credit Facility was restated to permit maximum
borrowings of $75 million, subject to certain limitations. The Credit Facility
may be used (i) to fund the cash portion of affiliation transactions and (ii)
for the development of musculoskeletal focused surgery centers and other
ancillary service capabilities. The Company can elect to borrow on the Credit
Facility at a floating rate based on the prime rate plus an adjustable
applicable margin, if any, of up to 0.75% or at a rate based on LIBOR plus an
adjustable applicable margin of 1.00% to 2.25% (in each case, the amount of the
margin is based on the Company's ratio of funded debt to consolidated cash flow
(as defined)). At December 31, 1997, the Company had $33 million outstanding
under the Credit Facility, and the effective rate of interest under the Credit
Facility was approximately 7.6% per annum. The Credit Facility is secured by
substantially all of the assets of the Company and contains several affirmative
and negative covenants, including covenants limiting the Company's ability to
incur additional indebtedness, limiting the Company's ability to and restricting
the terms upon which the Company can affiliate with physician practices in the
future, prohibiting the payment of cash dividends on, and the redemption or
repurchase of, the Company's Common Stock and requiring the maintenance of
certain ratios and stockholders equity. The per annum commitment fee on the
unused portion of the Credit Facility is a maximum of .35% per annum if the
Company's leverage coverage (the ratio of funded debt to consolidated cash flow)
is equal to or greater than 2.50, subject to incremental reduction to a
minimum of .20% per annum if the Company's leverage coverage is less than 1.00.
In connection with The Specialists Orthopaedic Medical Corporation
affiliation transactions, the Company agreed to make a $750,000 loan to
Specialist-SCN LLC, a California limited liability company (the "LLC Company").
The LLC Company was organized on November 7, 1997 pursuant to an operating
agreement by and among the LLC Company, the Company and four physicians. The
Company has a 50% membership interest in the LLC Company. The physicians who own
50% membership interests in the LLC Company have severally guaranteed up to
$375,000 of any loan obligations of the LLC Company to the Company. The LLC
Company intends to purchase land necessary for the development for an orthopedic
hospital which will be operated by the LLC Company.
In connection with the Initial Affiliation Transactions and one other
affiliation transaction, the Company loaned funds to certain physician owners of
the relevant Affiliated Practices. As of December 31, 1997, the Company had
loans outstanding of approximately $915,000 to certain of these physician
owners. The loans bear interest at a floating rate based on prime plus 1.25% and
generally 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 under the
Securities Act of 1933. The loans are secured by a portion of the Common Stock
owned by the physician owners.
Pursuant to the Service Agreements with the Affiliated Practices, the
Company purchases, subject to adjustment, the accounts receivable of the
Affiliated Practices monthly and anticipates that it will have a similar
obligation under service agreements entered into in the future. The purchase
price for such accounts receivable generally 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 experience, as determined
by the Company. However, the Company and certain Affiliated Practices are
currently making periodic adjustments so that amounts paid by the Company for
the accounts receivable are adjusted upwards or downwards based on the Company's
actual collection experience. While the Company believes, based on its
discussions with the other Affiliated Practices, that this arrangement is
acceptable to them, the Company cannot assure that this arrangement will be
effected in all cases. The Company generally bears the collection risk with
respect to outstanding receivables acquired in connection with an affiliation.
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.
In connection with its Affiliation Transactions, the Company recorded
deferred income taxes associated with book and tax temporary differences in
accordance with Statement on Financial Accounting Standards No. 109. These
liabilities are principally attributable to the temporary differences associated
with identifiable intangible assets and the assumption by the Company of certain
cash basis net assets of the Predecessor Practices. At December 31, 1997, the
deferred taxes related to these items were approximately $31.1 million and $3.1
million,
31
<PAGE>
respectively. The deferred taxes associated with identifiable intangible assets
are payable over the amortizable life of the intangible asset while those
related to the cash basis net assets are payable over a four-year period
commencing in the year of affiliation. Based on current levels of operation, it
is anticipated that 1998 cash payments to taxing authorities will exceed income
tax expense reflected on the Company's statement of operations by approximately
$2.2 million. Additional acquisitions of practice assets will most likely
increase the estimate significantly.
Management believes that funds available under the Company's line of credit
and cash flow from operations will be sufficient to fund the Company's
operations at its current level for at least the next twelve months. However,
the Company anticipates that it will require additional funds to finance capital
expenditures relating to expansion of its business. The Company expects that
capital expenditures during 1998 will relate primarily to (i) affiliations with
additional practices, if any, (ii) the development of ancillary facilities,
(iii) expansion and replacement of medical and office equipment for the
Affiliated Practices and (iv) the purchase of equipment for expansion of its
corporate offices. The Company anticipates that, in order to fund expansion of
its business, it may incur from time to time additional short- and long-term
bank indebtedness and may issue equity or debt securities, the availability and
terms of which will depend on market and other conditions. There can be no
assurance that sufficient funds will be available on terms acceptable to the
Company, if at all. If funds are unavailable when needed, the Company may be
compelled to modify its expansion plans.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using the "00" as the year 1900
rather than the Year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities.
The Company has initiated an internally-managed Year 2000 program designed
to ensure that there is no adverse effect on the Company's core business
operations and transactions with customers, suppliers and financial
institutions. The Company has determined that it will need to modify or replace
some portions of the practice management systems at its Affiliated Practices so
that the systems will function properly with respect to dates in the year 2000
and beyond. The cost of these Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position. However,
the Company seeks to expand its business through additional affiliations, and
there can be no assurance that systems at practices that affiliate with the
Company in the future will be Year 2000 compliant or, if not Year 2000
compliant, will be converted on a timely basis. The Company also has initiated
discussions with its significant suppliers to determine whether those parties
will be subject to the Year 2000 issue where their systems interface with the
Company's systems or otherwise have an impact on Company operations. The Company
is assessing the extent of which its operations are vulnerable should its
suppliers fail to remediate properly their computer systems.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns with respect to its internal systems and those of its
Affiliated Practices, there can be no guarantee that the systems of other
entities on which the Company's systems and operations rely will be converted on
a timely basis. The failure of such other entities to remediate any Year 2000
issue on a timely basis could have a material adverse effect on the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
See pages F-1 through F-52 and page S-1 of this document.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
32
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
This information (other than the information relating to executive officers
included in Part I) will be included in the Company's Proxy Statement relating
to its Annual Meeting of Stockholders which will be filed within 120 days after
the close of the Company's fiscal year covered by this report, and is hereby
incorporated by reference to such Proxy Statement.
Item 11. Executive Compensation
This information will be included in the Company's Proxy Statement relating
to its Annual Meeting of Stockholders, which will be filed within 120 days after
the close of the Company's fiscal year covered by this report, and is hereby
incorporated by reference to such Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information will be included in the Company's Proxy Statement relating
to its Annual Meeting of Stockholders, which will be filed within 120 days after
the close of the Company's fiscal year covered by this report, and is hereby
incorporated by reference to such Proxy Statement.
Item 13. Certain Relationships and Related Transactions
This information will be included in the Company's Proxy Statement relating
to its Annual Meeting of Stockholders, which will be filed within 120 days after
the close of the Company's fiscal year covered by this report, and is hereby
incorporated by reference to such Proxy Statement.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedules at page S-1 are filed as part of
this Form 10-K.
2. Financial Statement Schedules.
The following financial statement schedule is filed as part of this Form
10-K:
Schedule II - Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not applicable, or
not required, or the information is shown in the Financial Statements or notes
thereto.
3. Exhibits.
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference.
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-17627))
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1
(File No. 333-17627))
10.1+ 1996 Equity Compensation Plan, as amended on June 5, 1997, as
amended on July 25, 1997 and as amended on September 12, 1997
(incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (File No. 333-36933)
10.2 Second Amended and Restated Revolving Loan and Security
Agreement dated as of November 21, 1997 among Specialty Care
Network, Inc., SCN of Princeton, Inc., NationsBank of Tennessee
N.A., AmSouth Bank, Banque Paribas, Key Corporate Capital Inc.
and NationsBank of Tennessee, N.A., as Agent
10.3+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Kerry R. Hicks (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (File No. 333-17627))
10.4+ Employment Agreement dated as of April 1, 1996 by and between
Specialty Care Network, Inc. and Patrick M. Jaeckle
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 333-17627))
10.5+ Employment Agreement dated as of June 30, 1997 by and between
Specialty Care Network, Inc. and Michael E. West.
10.6+ Employment Agreement dated as of February 22, 1996 by and
between Specialty Care Network, Inc. and Paul Davis
(incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 333-17627)).
10.6.1+ Amendment to Employment Agreement between Specialty Care
Network, Inc. and D. Paul Davis dated December 5, 1997.
10.7+ Employment Agreement dated as of March 1, 1996 by and between
Specialty Care Network, Inc. and Peter A. Fatianow (incorporated
by reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (File No. 333-17627)
34
<PAGE>
10.7.1+ Amendment to Employment Agreement between Specialty Care
Network, Inc. and Peter A. Fatianow dated October 1, 1997.
10.8+ Employment Agreement dated as of March 1, 1996 by and between
Specialty Care Network, Inc. and David Hicks (incorporated by
reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-1 (File No. 333-17627))
10.8.1+ Amendment to Employment Agreement between Specialty Care
Network, Inc. and David Hicks, dated December 2, 1997.
10.9 Merger Agreement dated November 12, 1996 by and among Specialty
Care Network, Inc. and Reconstructive Orthopaedic Associates,
Inc. (incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement on Form S-1 (File No. 333-17627))
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. (incorporated by reference to Exhibit 10.10 of
the Company's Registration Statement on Form S-1 (File No.
333-17627))
10.16 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. (incorporated by reference
to Exhibit 10.26 of the Company's Registration Statement on Form
S-1 (File No. 333-17627)).
21 Subsidiary of the Company (incorporated by reference to Exhibit
21 of the Company's Registration Statement on Form S-1 (File No.
333-17627)).
23 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Restated Financial Data Schedule for the year ended
December 31, 1996.
- --------------------
35
<PAGE>
+ Constitutes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SPECIALTY CARE NETWORK, INC.
Date: March 30, 1998 By /s/ Kerry R. Hicks
--------------------
Kerry R. Hicks
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Richard H. Rothman Chairman of the Board of Directors March 30, 1998
- ---------------------------------------
Richard H. Rothman, M.D., Ph.D.
/s/ Kerry R. Hicks President and Chief Executive Officer March 30, 1998
- --------------------------------------- (Principal Executive Officer)
Kerry R. Hicks
/s/ Patrick M. Jaeckle Executive Vice President - March 30, 1998
- --------------------------------------- Finance/Development (Principal Financial
Patrick M. Jaeckle Officer)
/s/ D. Paul Davis Senior Vice President - Finance (Principal March 30, 1998
- --------------------------------------- Accounting Officer)
D. Paul Davis
/s/ James L. Cain Director March 30, 1998
- ---------------------------------------
James L. Cain, M.D.
/s/ Peter H. Cheesbrough Director March 30, 1998
- ---------------------------------------
Peter H. Cheesbrough
/s/ Richard E. Fleming, Jr. Director March 30, 1998
- ---------------------------------------
Richard E. Fleming, Jr., M.D.
/s/ Thomas C. Haney Director March 30, 1998
- ---------------------------------------
Thomas C. Haney, M.D.
/s/ Leslie S. Matthews Director March 30, 1998
- ---------------------------------------
Leslie S. Matthews, M.D.
/s/ Mats Wahlstrom Director March 30, 1998
- ---------------------------------------
Mats Wahlstrom
</TABLE>
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Specialty Care Network, Inc. and Subsidiary:
Report of Independent Auditors .......................................F-2
Consolidated Balance Sheets ..........................................F-3
Consolidated Statements of Income ....................................F-5
Consolidated Statements of Stockholders' Equity ......................F-6
Consolidated Statements of Cash Flows ................................F-8
Notes to Consolidated Financial Statements ...........................F-10
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.):
Report of Independent Auditors .......................................F-36
Balance Sheets .......................................................F-37
Statements of Operations .............................................F-38
Statements of (Net Capital Deficiency) Stockholders' Equity ..........F-39
Statements of Cash Flows .............................................F-40
Notes to Financial Statements ........................................F-41
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Specialty Care Network, Inc.
We have audited the accompanying consolidated balance sheets of Specialty Care
Network, Inc. and subsidiary (collectively the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for the years ended December 31, 1997 and 1996 and the
period from December 22, 1995 (date of incorporation) through December 31, 1995.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and the schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Specialty Care
Network, Inc. and subsidiary at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1996 and the period from December 22, 1995 (date of incorporation)
through December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
Denver, Colorado
March 20, 1998
F-2
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
---------------------------------
<S> <C> <C>
Assets
Cash $ 3,444,517 $ 1,444,007
Accounts receivable, net 25,957,367 10,418,175
Loans to physician stockholders 914,737 976,419
Prepaid expenses and inventories 796,903 285,218
------------ ------------
Total current assets 31,113,524 13,123,819
Property and equipment, net 5,276,219 1,889,070
Intangible assets, net of accumulated amortization of
$189,485 and $22,130 in 1997 and 1996, respectively 1,137,808 193,906
Prepaid offering costs -- 747,847
Management service agreements, net of accumulated
amortization of $1,210,391 100,732,431 --
Equity investment and other 922,022 --
Other assets 1,119,646 58,483
------------ ------------
Total assets $140,301,650 $ 16,013,125
============ ============
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current portion of capital lease obligations $ 263,007 $ 140,151
Accounts payable 701,087 416,282
Accrued payroll, incentive compensation and related
expenses 1,350,825 1,065,881
Accrued expenses 2,171,130 879,619
Income taxes payable 944,632 1,229,275
Due to affiliated physician practices 2,885,602 1,087,057
Deferred income taxes 872,855 667,830
------------ ------------
Total current liabilities 9,189,138 5,486,095
Line-of-credit 33,000,000 4,177,681
Capital lease obligations, less current portion 885,141 964,769
Deferred income taxes 32,115,476 679,713
------------ ------------
Total liabilities 75,189,755 11,308,258
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 2,000,000
shares authorized, no shares issued or outstanding -- --
Common stock, $0.001 par value, 50,000,000
shares authorized, and 17,703,293 and
11,045,015 shares issued and outstanding in 1997
and 1996, respectively 17,703 11,045
Additional paid-in capital 60,995,177 6,465,205
Retained earnings (accumulated deficit) 4,099,015 (1,771,383)
------------ ------------
Total stockholders' equity 65,111,895 4,704,867
------------ ------------
Total liabilities and stockholders' equity $140,301,650 $ 16,013,125
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Statements of Income
Years ended December 31,
1997 and 1996 and the period
from December 22, 1995 (date of
incorporation)
through December 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Service fees $ 45,966,531 $ 4,392,050 $ --
Other 3,689,390 -- --
------------ ------------ --------
49,655,921 4,392,050 --
------------ ------------ --------
Costs and expenses:
Clinic expenses 31,644,618 2,820,743 --
General and administrative expenses 7,861,015 3,770,263 --
------------ ------------ --------
39,505,633 6,591,006 --
------------ ------------ --------
Income (loss) from operations 10,150,288 (2,198,956) --
Other:
Interest income 536,180 11,870 --
Interest expense (942,144) (90,368) --
------------ ------------ --------
Income (loss) before income taxes 9,744,324 (2,277,454) --
Income tax (expense) benefit (3,873,926) 506,071 --
------------ ------------ ---------
Net income (loss) $ 5,870,398 $ (1,771,383) $ --
============ ============ =========
Net income (loss) per common share
(basic) $ 0.38 $ (0.16) $ --
============ ============ =========
Weighted average number of common
shares used in computation (basic) 15,559,368 11,422,387 --
============ ============ =========
Net income (loss) per common
share (diluted) $ 0.37 $ (0.14) $ --
============ ============ =========
Weighted average number of common
shares and common share
equivalents used in computation
(diluted) 16,071,153 12,454,477 --
============ ============ =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996 and the
period from December 22, 1995 (date of incorporation)
through December 31, 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Retained
$0.001 Par Value $0.001 Par Value Additional Earnings
---------------------- ------------------------ Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
------ ------ ------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 22, 1995 -- $-- -- $ -- $ $ -- $ --
Shares issued in connection
with a private placement
memorandum -- -- 1,690,000 1,690 -- -- 1,690
-- ----- ---------- ---------- ------------ ------------ ------------
Balances at December 31, 1995 -- -- 1,690,000 1,690 -- -- 1,690
Purchase and retirement of
common stock in connection
with a severance agreement -- -- (425,000) (425) -- -- (425)
Shares issued to one of the
affiliated physician
practices -- -- 100,000 100 299,900 -- 300,000
Convertible debt and accrued
interest thereon converted
to common shares -- -- 2,020,900 2,021 2,220,018 -- 2,222,039
Shares issued in connection
with the acquisitions of
net assets of affiliated
physician practices -- -- 7,659,115 7,659 5,483,159 -- 5,490,818
Dividends paid to physician
owners as promoters -- -- -- -- (1,537,872) -- (1,537,872)
Net loss -- -- -- -- -- (1,771,383) (1,771,383)
-- ----- ---------- ---------- ------------ ------------ ------------
Balances at December 31, 1996 -- -- 11,045,015 11,045 6,465,205 (1,771,383) 4,704,867
Shares issued in connection
with an initial public
offering of common stock,
including the underwriters'
overallotment -- -- 3,208,338 3,208 22,188,283 -- 22,191,491
Shares and other equity
instruments issued in
connection with the
acquisitions of net assets
of affiliated physician
practices -- -- 3,222,891 3,223 31,147,368 -- 31,150,591
Exercise of employee stock
options -- -- 227,049 227 265,160 -- 265,387
Tax benefit related to
employee stock options -- -- -- -- 717,140 -- 717,140
</TABLE>
F-6
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Retained
$0.001 Par Value $0.001 Par Value Additional Earnings
---------------------- ------------------------ Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
--------- ------------ ------------ ----------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-cash compensation expense
related to employee stock
options -- $ -- -- $ -- $ 212,021 $ -- $ 212,021
Net income -- -- -- -- -- 5,870,398 5,870,398
========= ============ ============ =========== =============== ================ ==============
Balances at December 31, 1997 -- $ -- 17,703,293 $17,703 $60,995,177 $4,099,015 $65,111,895
========= ============ ============ =========== =============== ================ ==============
</TABLE>
F-7
See accompanying notes.
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996 and the
period from December 22, 1995 (date of incorporation)
through December 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Operating activities
<S> <C> <C> <C>
Net income (loss) $ 5,870,398 $ (1,771,383) $ --
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Non-cash compensation expense related to
employee stock options 212,021 -- --
Depreciation 965,492 136,216 --
Amortization 1,377,746 22,130
Interest on convertible debentures -- 52,039 --
Deferred income tax benefit (1,279,497) (1,735,346) --
Changes in operating assets and liabilities,
net of the effects of the non-cash
acquisitions of net assets of affiliated
physician practices:
Accounts receivable (9,313,152) (2,066,190) --
Prepaid expenses and inventories and
other assets (1,572,849) (204,911) --
Accounts payable (88,566) 49,764 29,584
Accrued payroll, incentive compensation
and related expenses 212,621 982,982 --
Accrued expenses (419,582) 850,035 --
Income taxes payable 432,497 1,229,275 --
Due to affiliated physician practices, net 1,798,545 1,087,057 --
------------ ------------ ------------
Net cash (used in) provided by operating activities (1,804,326) (1,368,332) 29,584
Investing activities
Purchases of property and equipment (1,568,795) (354,595) --
Increases in intangible assets (1,111,257) (186,452) (29,584)
Equity investment and related advances (922,022) -- --
Acquisitions of physician practices, net of cash
acquired (44,452,105) -- --
------------ ------------ ------------
Net cash used in investing activities (48,054,179) (541,047) (29,584)
Financing activities
Proceeds from initial public offering, net of
current period offering costs 22,939,338 -- --
Proceeds from line-of-credit agreement 35,500,000 4,177,681 --
Proceeds from convertible debentures -- 2,170,000 --
Principal repayments on line of credit agreement (6,677,681) -- --
</TABLE>
F-8
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Statement of Cash Flows (continued)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Financing activities (continued)
Principal repayments on capital lease obligations $ (229,711) $ (33,422) $ --
Initial capital contributions -- -- 1,690
Retirement of common stock -- (425) --
Capital contribution from one physician practice -- 300,000 --
Prepaid offering costs -- (747,847) --
Dividends paid to promoters -- (1,537,872) --
Exercise of employee stock options 265,387 -- --
Advances from officers and stockholders -- (9,410) 9,410
Principal payments from loans to physician
stockholders 1,026,419 -- --
Loans to physician stockholders (964,737) (976,419) --
------------- ------------- -------------
Net cash provided by financing activities 51,859,015 3,342,286 11,100
------------- ------------- -------------
Net increase in cash 2,000,510 1,432,907 11,100
Cash at beginning of period 1,444,007 11,100 --
------------- ------------- -------------
Cash at end of period $ 3,444,517 $ 1,444,007 $ 11,100
============= ============= =============
Supplemental cash flow information
Interest paid $ 910,000 $ 38,329 $ --
============= ============= =============
Income taxes paid $ 4,720,926 $ -- $ --
============= ============= =============
Supplemental schedule of noncash investing
and financing activities
Effects of the acquisitions of net assets of
affiliated physician practices:
Assets acquired $ 110,952,707 $ 10,761,466 $ --
Liabilities assumed (2,429,726) (2,187,759) --
Income tax liabilities assumed (32,920,285) (3,082,889) --
Less: Cash paid for acquisitions (44,452,105) -- --
------------- ------------- -------------
$ 31,150,591 $ 5,490,818 $ --
============= ============= =============
Conversion of convertible debentures and accrued
interest thereon into common stock $ -- $ 2,222,039 $ --
============= ============= =============
</TABLE>
F-9
See accompanying notes
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1997
1. Description of Business
Specialty Care Network, Inc. and subsidiary (collectively the "Company") is a
physician practice management company that focuses on musculoskeletal care,
which is the treatment of conditions related to bones, joints, muscles and
related connective tissues. Specialty Care Network, Inc. was incorporated on
December 22, 1995. Commencing on November 12, 1996, the Company began providing
comprehensive management services under long-term management service agreements
with five physician practices in various states. As of March 20, 1998, the
Company is affiliated with 153 physicians in 21 practices located in ten states.
The Company also manages two outpatient surgery centers, three physical therapy
centers and one occupational medicine operation. See Note 10 for further details
of the Company's acquisition activity and the underlying long-term service
arrangements with physician practices.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include Specialty Care Network, Inc. and
its wholly-owned subsidiary, SCN of Princeton, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation. The Company
uses the equity method of accounting to account for investments in entities in
which it exhibits significant influence, but not control, and does not have an
ownership interest in excess of 50%.
Principles of Acquisition Accounting
The accompanying financial statements give effect to the acquisitions of
substantially all of the assets of five physician practices on November 12,
1996, through asset purchases, a share exchange and a merger, at their
historical cost basis in accordance with the accounting treatment prescribed by
Securities and Exchange Commission Staff Accounting Bulletin No. 48, Transfers
of Nonmonetary Assets by Promoters or Shareholders. In connection with all
subsequent affiliations with physician practices, a substantial portion of the
consideration paid to the physician owners of the practice is restricted
securities and cash, and is allocated to the management service agreement (the
"Service Agreements"). Hereinafter, all physician practices that have affiliated
with the Company, including the initial five physician practices, are referred
to collectively as the "Affiliated Practices." The Company also recognizes the
income tax effects of temporary
F-10
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
differences related to all identifiable acquisition intangible assets, including
the Service Agreements. Such Service Agreements are amortized over the term of
the underlying agreements, which is generally forty 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 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.
Revenue Recognition and Accounts Receivable
Service fee revenue is recognized based upon the contractual arrangements of the
underlying long-term Service Agreements between the Company and the Affiliated
Practices. See Note 10 for further discussion of such contractual arrangements,
including certain guaranteed minimum management fees.
Other revenue consists primarily of business consulting fees and other
miscellaneous income.
Accounts receivable represents amounts due from patients and other independent
third parties for medical services provided by the Affiliated Practices and
management fee revenue earned by the Company. Under the Service Agreements, each
Affiliated Practice agrees to sell and assign to the Company, and the Company
agrees to buy, all of the Affiliated Practices' accounts receivable each month
during the existence of the Service Agreement. The purchase price for such
accounts receivable generally equals the gross amounts of the accounts
receivable each month less adjustments for contractual allowances, allowances
for doubtful accounts and other potentially uncollectible amounts based on the
Affiliated Practice's historical collection rate, as determined by the Company.
However, the Company and certain of the Affiliated Practices are currently
making periodic adjustments so that amounts paid by the Company for the accounts
receivable are adjusted upwards or downwards based on the Company's actual
collection experience. The Company generally bears the collection risk with
respect to accounts receivable acquired in connection with an affiliation
transaction.
F-11
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Earnings Per Share
In 1997, Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
Earnings Per Share, was issued. SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous method of reporting earnings per share. All earnings per share amounts
for all periods have been presented, and where appropriate, restated to conform
to SFAS No. 128 requirements.
Financial Instruments
The carrying amounts of financial instruments as reported in the accompanying
balance sheets approximate their fair value primarily due to the short-term
and/or variable-rate nature of such financial instruments.
Property and Equipment
Property and equipment are stated at cost, including assets acquired from the
Affiliated Practices. Equipment held under capital leases is stated at the
present value of minimum lease payments at inception of the related lease. Costs
of repairs and maintenance are expensed as incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of the underlying
assets. Amortization of capital lease assets and leasehold improvements are
computed using the straight-line method over the shorter of the lease term or
the estimated useful lives of the underlying assets. The estimated useful lives
used are as follows:
Computer equipment and software 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements 5 years
F-12
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Intangible Assets
Intangible assets, which are stated at cost, primarily consist of deferred debt
issuance costs of $1,297,709 and $186,452 at December 31, 1997 and 1996,
respectively, that are being amortized on a straight-line basis over a
three-year period.
Pursuant to the provisions 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, the carrying value of long-lived assets, including
management service agreements, is reviewed quarterly to determine if any
impairment indicators are present. If it is determined that such indicators are
present and the review indicates that the assets will not be recoverable, based
on undiscounted estimated cash flows over the remaining amortization and
depreciation period, the carrying value of such assets is reduced to estimated
fair market value. Impairment indicators include, among other conditions, cash
flow deficits; an historic or anticipated decline in revenue or operating
profit; adverse legal, regulatory or reimbursement developments; accumulation of
costs significantly in excess of amounts originally expected to acquire the
asset; or a material decrease in the fair market value of some or all of the
assets.
The Company reviews its long-lived assets separately for each physician practice
because the cash flows and operations of each individual physician practice is
largely independent of each other and of other aspects of the Company's
business. Intangible and other long-lived assets are allocated to each physician
practice based on the specific identification methodology. During the years
ended December 31, 1997 and 1996, no impairment charges were recognized by the
Company.
The evaluation of the recoverability of long-lived assets, including management
service agreements, is significantly affected by estimates of future cash
flows from each of the Company's market areas and individual physician
practices. If estimates of cash flows from operations decrease in the future,
the Company may be required to write down its long-lived assets. Any such
write-down could have a material adverse effect on the Company's results of
operations.
F-13
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for its stock-based employee compensation arrangements
under the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"). In 1995, Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 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. SFAS 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.
Estimated Malpractice Professional Liability Claims
The Company and its affiliated physician practices are insured with respect to
medical malpractice risks on either an occurrence-rate or a claims-made basis.
Management is not aware of any claims against it or its affiliated physician
practices which might have a material impact on the Company's financial position
or results of operations.
Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified in order to conform to the current presentation.
Future Accounting Pronouncements
Reporting Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), Reporting
Comprehensive Income, was issued in June 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(e.g., revenue, expenses, gains, losses, etc.) in a full set of general purpose
financial statements. This new accounting pronouncement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of
F-14
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
the balance sheet. SFAS No. 130 is effective for the Company's year ending
December 31, 1998. Management is currently evaluating the potential impact on
the Company's financial statement presentation; however, the impact is not
expected to be material.
Segment Reporting
Also in June 1997, Statement of Financial Accounting Standards No. 131 ("SFAS
No. 131"), Disclosures about Segments of an Enterprise and Related Information,
was promulgated. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
This new accounting pronouncement requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
SFAS No. 131 is effective for the Company's year ending December 31, 1998.
Management is currently evaluating the potential impact on the Company's
footnote disclosures; however, the impact is not expected to be material.
F-15
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. Accounts Receivable and Management Fee Revenue
Accounts receivable consisted of the following:
December 31
1997 1996
----------- ----------
Gross patient accounts receivable purchased
from the affiliated physician practices $48,922,686 $25,564,645
Less allowance for contractual adjustments
and doubtful accounts 26,225,860 15,719,542
----------- -----------
22,696,826 9,845,103
Management fees, including reimbursement of
clinic expenses 3,260,541 573,072
----------- -----------
$25,957,367 $10,418,175
=========== ===========
Management fee revenue, exclusive of reimbursed clinic expenses, was
approximately $14.3 million and $1.6 million for the years ended December 31,
1997 and 1996, respectively. One of the Affiliated Practices exceeded 20% of the
1997 and 1996 totals.
An integral component of the computation of management fees earned by the
Company is net patient revenue of the Affiliated Practices. The Affiliated
Practices recognize net patient revenue for medical services at established
rates reduced by allowances for doubtful accounts 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 recoverable amounts and are
recognized by the Affiliated Practices in the period the services are rendered.
Any differences between estimated contractual adjustments and actual final
settlements under reimbursement and managed care contracts are reported as
contractual adjustments in the year the final settlements are made. Net patient
revenue is not recognized as revenue in the accompanying financial statements.
The Company's affiliated physician practices derived approximately 21.9% and
22.6% of their net revenue from services provided under the Medicare program for
the years ended December 31, 1997 and 1996, respectively. Laws and regulations
governing the Medicare program are complex and subject to interpretation. The
Company believes that the Affiliated Practices are in compliance, in all
material respects, with all applicable laws and regulations. See Note 11 for
discussion of an
F-16
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. Accounts Receivable and Management Fee Revenue (continued)
ongoing Department of Health and Human Services inquiry regarding the
predecessor of Reconstructive Orthopaedic Associates II, P.C. Such laws and
regulations can be subject to future government review and interpretation.
Violation of such laws could result in significant regulatory action including
fines, penalties and exclusion from the Medicare program. Other than the
Medicare program, no single payor provided more than 10% of aggregate net clinic
revenue or 5% of accounts receivable as of and for the years ended December 31,
1997 or 1996. Accordingly, concentration of credit risk related to patient
accounts receivable is limited by the diversity and number of providers,
patients and payors.
4. Property and Equipment
Property and equipment consist of the following:
December 31
1997 1996
---------- -----------
Furniture and fixtures $5,386,107 $2,639,418
Computer equipment and software 1,983,477 1,110,657
Leasehold improvements and other 1,227,720 381,271
---------- ----------
8,597,304 4,131,346
Accumulated depreciation and amortization 3,321,085 2,242,276
---------- ----------
Net property and equipment $5,276,219 $1,889,070
========== ==========
Included in the above are assets recorded under capital leases which consist of
the following:
December 31
1997 1996
---------- ----------
Furniture and fixtures $ 1,536,411 $1,372,557
Computer equipment 178,693 145,661
----------- ----------
1,715,104 1,518,218
Accumulated amortization 983,603 882,846
----------- ----------
Net assets under capital leases $ 731,501 $ 635,372
=========== ==========
F-17
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Property and Equipment (continued)
At December 31, 1997, the Company had equipment purchase commitments aggregating
approximately $2.8 million. Such equipment will be used primarily to provide
ancillary services at the Affiliated Practices.
5. Debt
Convertible Debentures
In connection with private placements in 1996, the Company raised $2.17 million
of short-term unsecured convertible debt. The proceeds thereof were utilized to
fund the Company's start-up and its organizational phase until certain net
assets of the original five Affiliated Practices were acquired on November 12,
1996.
Contemporaneous with the acquisitions of these physician practices, the holders
of the debentures converted the unpaid principal amounts plus any accrued
interest thereon (calculated at 5.0%), into the Company's common stock at the
conversion ratio of $1.00 ($1,920,332) and $3.00 ($301,707) of debenture
principal and accrued interest for one share of common stock. The following
table summarizes the conversions:
Accrued
Principal Interest Total
--------- ---------- ----------
Stockholders of the Company $ 640,000 $ 18,153 $ 658,153
Physician practices and
related stockholders 1,530,000 33,886 1,563,886
---------- ---------- ----------
$2,170,000 $ 52,039 $2,222,039
========== ========== ==========
Line-of-Credit
On November 1, 1996, the Company entered into a $30 million Revolving Loan and
Security Agreement (the "Credit Facility") with a bank, which provided certain
amounts necessary to effectuate the acquisitions of the five original Affiliated
Practices and related transactions. Through October 31, 1997, the Credit
Facility interest rates ranged from approximately 7.2% to 7.4%, primarily based
on a LIBOR rate plus an applicable margin.
In November 1997, the Credit Facility was restated to permit maximum borrowings
of $75 million, subject to certain limitations. The Credit Facility may be used
(i) to fund the
F-18
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
cash portion of affiliation transactions, and (ii) for the development of
musculoskeletal focused surgery centers. The Company can elect to borrow on the
Credit Facility at a floating rate based on the prime rate plus an adjustable
applicable margin of 0% to 0.75% or at a rate based on LIBOR plus an adjustable
applicable margin of 1.0% to 2.25%. At December 31, 1997, the Company had $33
million outstanding under the Credit Facility at an effective rate of interest
of approximately 7.6% per annum. The Credit Facility is secured by substantially
all of the assets of the Company and contains several affirmative and negative
covenants, including covenants limiting the Company's ability to and restricting
the terms upon which the Company can affiliate with physician practices in the
future, prohibiting the payment of cash dividends on, and the redemption or
repurchase of, the Company's common stock and requiring the maintenance of
certain ratios and stockholders' equity. The per annum commitment fee on the
unused portion of the Credit Facility is 0.25% per annum, subject to reduction
to a minimum of 0.20% per annum if the Company's leverage coverage (a ratio of
funded debt to consolidated cash flow) is less than 1.00.
6. Common Stock
At December 31, 1996, 1,180,000 and 85,000 shares of certain outstanding
nontransferable common stock were held by current employees and former
employees, respectively. Pursuant to the common stock subscription agreements
and a related Stockholders Agreement, executed by the Company and its employees,
all unvested shares became vested as a result of the initial public offering of
the Company's common stock.
During the year ended December 31, 1996, the Company issued an additional
100,000 shares of common stock to one of its affiliated practices at $3.00 per
share.
On February 6, 1997, the Company's initial public offering of its common stock
became effective. In connection therewith, 3,208,338 shares of common stock were
issued at $8.00 per share, including 208,338 common shares issued upon exercise
of the underwriters' overallotment option.
F-19
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Common Stock (continued)
As of December 31, 1997, the Company had the following common shares reserved
for future issuance:
<TABLE>
<S> <C>
Stock Option Plans 3,998,966
Warrants in connection with one of the Affiliated Practice
acquisitions (Note 10) 544,681
Shares which may be released as additional consideration for one of
the Affiliated Practice acquisitions (Note 10) 113,393
---------
Total shares reserved for future issuance 4,657,040
=========
</TABLE>
7. 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 were available
for award to eligible directors, officers, advisors, consultants and key
employees. On January 10, 1997, the Board of Directors voted to terminate the
Plan. The exercise price for incentive stock options awarded during the year
ended December 31, 1996 was not less than the fair market value of each share at
the date of the grant and the options granted thereunder were for a period of
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. Of the 553,500 shares
underlying the option grants approved during the year ended December 31, 1996 at
an exercise price of $1.00 per share, 3,500 shares underlying the grant options
remain outstanding and exercisable at December 31, 1997. The other 550,000
options were forfeited or exercised during 1997.
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 2,000,000 shares of the Company's common stock. The
total number of shares authorized under the Equity Plan increased to 4,000,000
in 1997. Both incentive stock options and non-qualified 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 advisors are
eligible to participate in this plan, which will terminate no later than October
14, 2006. The granting and vesting of options under the Equity Plan are provided
by the Company's Board of Directors or a committee of the Board of Directors
(currently the Compensation Committee).
F-20
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that accounting
pronouncement. The fair value for options awarded during the years ended
December 31, 1997 and 1996 were estimated at the date of grant using an option
pricing model with the following assumptions: risk-free interest rate over the
life of the option of 6.0%; no dividend yield; and expected two to eight year
lives of the options. The estimated fair value for these options was calculated
using the minimum value method in 1996 and may not be indicative of the future
impact since this model does not take into consideration volatility and the
commencement of public trading in the Company's common stock on February 7,
1997. The Black-Scholes model was utilized to calculate the value of the options
issued during 1997. The volatility factor utilized in 1997 was 0.47.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Because compensation
expense associated with an award is recognized over the vesting period, the
impact on pro forma net income as disclosed below may not be representative of
compensation expense in future years.
F-21
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
The Company's pro forma information as is follows:
1997 1996
---- ----
Pro forma net income (loss) $5,354,571 $(1,815,272)
Pro forma net income (loss) per common
share (basic) $ 0.34 $ (0.16)
Pro forma net income (loss) per common
share (diluted) $ 0.33 $ (0.15)
A summary of the Company's stock option activity, and related information for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
Weighted- Weighted-
Average Average
Options Exercise Price Options Exercise Price
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year 1,758,748 $ 5.25 -- $ --
Granted
Exercise price equal to
fair value of common stock 1,073,751 12.07 603,500 1.41
Exercise price greater than
fair value of common stock 160,000 10.00 726,658 8.00
Exercise price less than
fair value of common stock -- -- 428,590 6.00
Exercised (227,049) -- --
Forfeited (400,443) -- --
---------- ---------
Outstanding at End of Year 2,365,007 9.57 1,758,748 5.25
========== =========
Exercisable at End of Year 231,537 $7.38 3,500 $1.00
========== ===== ========= =====
</TABLE>
1997 1996
---- ----
Weighted-Average Fair Value of Options:
Exercise price equal to fair value of
common stock $ 4.62 $ 0.19
Exercise price greater than fair value
of common stock 4.35 0.99
Exercise price less than fair value of
common stock -- 2.75
F-22
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
Exercise prices for options outstanding and the weighted-average remaining
contractual lives of those options at December 31, 1997 are as follow:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$1.00 3,500 8.22 $ 1.00 3,500 $ 1.00
$6.00 475,590 8.93 6.00 59,200 6.00
$8.00 654,166 8.93 8.00 168,837 8.00
$9.00-$9.99 128,500 9.39 9.69 - -
$10.00-$12.99 683,364 9.55 11.31 - -
$13.00-$13.25 419,887 10.00 13.25 - -
---------------- ----------------
$1.00-$13.25 2,365,007 9.33 9.57 231,537 7.38
================ ================
</TABLE>
F-23
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Leases
The Company is obligated under operating and capital lease agreements for
offices and certain equipment. In some circumstances, these lease arrangements
are with entities owned or controlled by physician stockholders who are also
equity holders of the Affiliated Practices. Certain leases are subject to
standard escalation clauses and include renewal options. Future minimum payments
under noncancelable capital and operating leases with lease terms in excess of
one year are summarized as follows for the years ending December 31:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------------------- ------------------
<S> <C> <C>
1998 $ 365,016 $ 6,039,700
1999 323,560 6,027,588
2000 306,917 5,691,266
2001 227,464 5,337,597
2002 194,629 4,299,698
Thereafter -- 25,247,435
-------------------- -----------------
Total minimum lease payments 1,417,586 $52,643,284
==================
Less amount representing interest 269,438
--------------------
Present value of net minimum lease payments 1,148,148
Less current portion 263,007
--------------------
Long-term portion $ 885,141
====================
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 under all operating
leases was approximately $4,800,000 and $400,000, respectively. Approximately
$4,600,000 and $355,000, respectively, of such amounts were charged directly
to the Affiliated Practices as clinic expenses.
9. Income Taxes
The Company is a corporation subject to federal and certain state and local
income taxes. The provision for income taxes is made 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.
F-24
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
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 at December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ---------------
<S> <C> <C>
Deferred tax assets:
Deferred start-up expenditures $ 718,491 $ 796,949
Property and equipment, net 209,244 236,481
Accrued liabilities 386,030 35,497
Stock option compensation 85,698 -
------------------ ---------------
1,399,463 1,068,927
------------------ ---------------
Deferred tax liabilities:
Management service agreements 31,125,220 -
Net cash basis assets assumed
in physician practice affiliations 3,079,428 2,346,434
Prepaid expenses 183,146 70,036
------------------ ---------------
34,387,794 2,416,470
------------------ ---------------
Net deferred tax liability $32,988,331 $1,347,543
================== ===============
</TABLE>
The income tax expense (benefit) for the years ended December 31, 1997 and 1996
is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ---------------
<S> <C> <C>
Current:
Federal $4,074,033 $ 971,192
State 1,079,390 258,083
------------------ ---------------
5,153,423 1,229,275
------------------ ---------------
Deferred:
Federal (991,430) (1,362,954)
State (288,067) (372,392)
------------------ ---------------
(1,279,497) (1,735,346)
------------------ ---------------
Total $3,873,926 $ (506,071)
================== ===============
</TABLE>
F-25
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
The income tax expense (benefit) differs from amounts currently payable because
certain revenue and expenses are reported in the statement of income in periods
that differ from those in which they are subject to taxation. The principal
differences relate to business acquisition and start-up expenditures that are
capitalized for income tax purposes and expensed for financial statement
purposes, and the amortization of certain cash basis net assets included in
taxable income in periods subsequent to the date of affiliation with physician
practices.
A reconciliation between the statutory federal income tax rate of 34% and the
Company's 39.8% and (22.2%) effective tax rates for the years ended December 31,
1997 and 1996, respectively, is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Federal statutory income tax rate 34.0% (34.0)%
State income taxes, net of federal benefit 5.1 (2.8)
Nondeductible business acquisition and other costs 0.7 11.5
Miscellaneous - 3.1
---------------- -----------------
Effective income tax rates 39.8% (22.2)%
================= =================
</TABLE>
10. Physician Practice Net Asset Acquisitions
Effective November 12, 1996, the Company acquired substantially all of the
assets, including accounts receivable and fixed assets, and certain liabilities,
including current trade payables, accrued expenses and certain capital lease
obligations, of five physician 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 net assets.
F-26
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Physician Practice Net Asset Acquisitions (continued)
The following table summarizes certain financial information related to this
transaction for the five original Affiliated Practices:
<TABLE>
<CAPTION>
Common Stock Cash
Consideration Consideration
Paid by the Paid by the
Company Company
--------------------- -------------------
(Shares)
<S> <C> <C>
Reconstructive Orthopaedic Associates, Inc. 3,169,379 $1,537,872
Princeton Orthopaedic Associates, P.A. 1,196,793 -
Tallahassee Orthopedic Clinic, P.A. 1,072,414 -
Greater Chesapeake Orthopaedic Associates, LLC 1,568,922 -
Vero Orthopaedics, P.A. 651,607 (1) -
</TABLE>
(1) Excludes non-qualified stock options to purchase an additional 50,000
shares of the Company's common stock at $6.00 per share, which fully vest
on November 12, 1998.
During 1997, the Company acquired substantially all of the assets and certain
liabilities of additional physician practices through a combination of asset
purchases and mergers as detailed in the table below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Affiliation Affiliated Acquisition Headquarters Number of
Date Practice(1) Type Location Physicians
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 1997 Medical Rehabilitation Merger Tallahassee, Florida 4
Specialists II, P.A.; Riyaz H. Baltimore, Maryland
Jinnah, M.D., P.A.; Floyd Thomasville, Georgia
R. Jaggears, M.D., P.C., II
April 4, 1997 The Orthopaedic and Sports Merger Annapolis, Maryland 10
Medicine Center, II, P.A.
July 1, 1997 Southeastern Neurology Group Asset Portsmouth, Virginia 12
II, P.C. Purchase/
Merger
July 1, 1997 Orthopaedic Surgery Centers, Merger Portsmouth, Virginia 10
P.C. II
July 3, 1997 Associated Orthopaedics & Merger Plano, Texas 5(2)
Sports Medicine, P.A.
</TABLE>
F-27
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Physician Practice Net Asset Acquisitions (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Affiliation Affiliated Acquisition Headquarters Number of
Date Practice(1) Type Location Physicians
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
July 3, 1997 Associated Arthroscopy Asset Plano, Texas 5(2)
Institute, Inc. Purchase
July 3, 1997 Access Medical Supply, Inc. Asset Plano, Texas 5(2)
d/b/a Associated Physical Purchase
Therapy
July 3, 1997 Allied Health Services, P.A. Asset Plano, Texas 5(2)
d/b/a Associated Occupational Purchase
Rehabilitation
July 7, 1997 Ortho-Associates, P.A. d/b/a Asset Plantation, Florida 14
Park Place Therapeutic Center Purchase
July 16, 1997 Mid-Atlantic Orthopaedic Merger Hagerstown, Maryland 5
Specialists\Drs. Cirincione,
Milford, Stowell, and
Amalfitano, P.C.
August 29, 1997 Northeast Florida Orthopaedic, Merger Orange Park, Florida 2
Sports Medicine and
Rehabilitation II, P.A.
August 29, 1997 Steven P. Surgnier, M.D., P.A., Asset Marianna, Florida 1
II Purchase
September 1, 1997 Orthopaedic Associates of West Merger Clearwater, Florida 9
Florida, P.A.
September 10, 1997 Orthopaedic Institute of Ohio, Merger Lima, Ohio 8
Inc.
November 14, 1997 The Specialists Orthopaedic Merger/ Fairfield, California 12(3)
Medical Corporation Asset
Purchase
November 14, 1997 The Specialists Surgery Center Asset Fairfield, California 12(3)
Purchase
</TABLE>
(1) The Affiliated Practices listed are successors to those entities acquired
by the Company through mergers.
(2) Associated Orthopaedics & Sports Medicine, P.A., Associated Arthroscopy
Institute, Inc., Access Medical Supply, Inc. and Allied Health Services,
P.A. are related entities which include five physicians in total.
(3) The Specialists Orthopaedic Medical Corporation and The Specialists Surgery
Center are related entities which include twelve physicians in total.
- --------------------------------------------------------------------------------
F-28
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Physician Practice Net Asset Acquisitions (continued)
Total consideration for the 1997 merger and asset acquisitions was 3,222,891
shares of the Company's common stock and $44,452,105 in cash. As part of the
consideration in three of the mergers, the Company issued an aggregate of 13,322
shares of common stock and paid an aggregate of $189,000 in cash to an
individual who served as a consultant to three of the predecessors to the
Affiliated Practices. This individual subsequently became Senior Vice President
of Operations of the Company in August 1997. Furthermore, the Company granted
one physician associated with Orthopaedic Surgery Centers, P.C. II the right,
until June 30, 1998, to require the Company to re-purchase 74,844 shares of
common stock issued to such physician in the merger at a purchase price equal to
$11.21 per share. Additionally, in connection with the asset purchase of
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center, the Company issued
to the physician owners warrants to purchase, in the aggregate, 544,681 shares
of common stock at an exercise price of $14.69 per share. The Company also has
an escrowed deposit of approximately $900,000 in cash and 113,393 shares which
may be released as additional consideration for one of the Company's physician
practice acquisitions. Although management does not believe the additional
consideration will be paid, the cash amount has been included in other assets as
a restricted deposit.
Effective September 10, 1997, the Company acquired, by purchase from the
physician owners of Orthopedic Institute of Ohio, Inc., one-half of the
outstanding membership interests of West Central Ohio Group, Ltd., an Ohio
limited liability company ("WCOG"). WCOG constructed an orthopaedic institute in
Lima, Ohio (the "Institute"). The Institute began operations in February 1998.
In connection with the acquisition, the Company paid $400,000 in cash for its
investment in WCOG. Included in equity investment and other in the accompanying
financial statements is the $400,000 investment in WCOG and $522,022 in advances
to WCOG. Additionally, the Company has agreed to pay an amount equal to 25% of
WCOG's first $6,000,000 of net income as contingent consideration. The Company's
obligation to pay this contingent consideration will terminate in September
2002.
In connection with The Specialists Orthopaedic Medical Corporation affiliation
transactions, the Company agreed to make a $750,000 loan to Specialist-SCN LLC,
a California limited liability company (the "LLC Company"). The LLC Company was
organized on November 7, 1997 pursuant to an operating agreement by and among
the LLC Company, the Company and four physicians. The Company has a 50%
membership interest in the LLC Company. The physicians who own 50% membership
interests in the
F-29
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Physician Practice Net Asset Acquisitions (continued)
LLC Company have severally guaranteed up to $375,000 of any loan obligations of
the LLC Company to the Company. The LLC Company intends to purchase land for the
development of an orthopedic hospital which will be operated by the LLC Company.
Concurrent with its 1997 and 1996 acquisitions, the Company simultaneously
entered into long-term service agreements with the Affiliated Practices.
Pursuant to the terms of the Service Agreements, the Company, among other
things, provides facilities and management, administrative and development
services, 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%-50% of
the adjusted pre-tax income of the Affiliated Practices (generally defined as
revenue of the 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. Typically, for the first three years following
affiliation, 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 predecessors to the Affiliated Practices for the twelve months
prior to affiliation. The aggregate annual Base Service Fee for all of the
Affiliated Practices is approximately $19 million. In addition, with respect to
its management of certain facilities and ancillary services associated with
certain of the Affiliated Practices, the Company receives fees ranging from
2%-8% of net revenue or pre-tax income.
The Service Agreements have terms of forty years, with automatic extensions
(unless specified notice is given) of additional five-year terms. A 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 a Service Agreement by the Company for one of the reasons
set forth above, the Company generally has the option to require the Affiliated
Practice to purchase and assume the assets and liabilities related to the
Affiliated Practice at the fair
F-30
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Physician Practice Net Asset Acquisitions (continued)
market value thereof. In addition, upon termination of a Service Agreement by
the Company during the first five years of the term, the physician owners of the
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 Service Agreements, each physician owner must give the Company twelve
months notice of an intent to retire from the Affiliated Practice. If a
physician gives such notice during the first five years of the agreement, the
physician must also locate a replacement physician or physicians acceptable to a
Joint Policy Board and pay the Company an amount based on a formula relating to
any loss of service fee for the first five years of the term. Furthermore, the
physician must pay the Company an amount of cash or stock of the Company equal
to one-third of the total consideration received by such physician in connection
with the Company's affiliation with the practice. Typically, the agreement also
provides that after the fifth year no more than 20% of the physician owners at
an Affiliated Practice may retire within a one-year period.
11. Commitments and Contingencies
The Company has entered into 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 to the agreements in the period
that the services are 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 December 31, 1997, the Company was contractually
obligated for the following base pay compensation amounts (summarized by years
ending December 31):
1998 $1,323,167
1999 1,357,000
2000 1,357,000
2001 570,334
2002 75,000
----------------
$4,682,501
================
F-31
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
The Company and Reconstructive Orthopaedic Associates II, P.C. (the successor to
Reconstructive Orthopaedic Associates, Inc.) have been advised that the
Department of Health and Human Services is conducting an inquiry regarding
Reconstructive Orthopaedic Associates, Inc. and physicians formerly associated
with that practice, including two of the Company's directors. The inquiry
appears to be concerned with the submission of claims for Medicare reimbursement
by the practice. The Company has not been contacted by the Department of Health
and Human Services in connection with the inquiry.
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 Affiliated Practices; nevertheless, the Company believes it is unlikely that
the ultimate resolution of such claims will have a material adverse effect on
the Company.
12. Related Party Transactions
In connection with the acquisitions of the five original Affiliated Practices
and one other Affiliated Practice, the Company loaned funds to certain
physician owners of the relevant Affiliated Practices. Advances thereunder,
which aggregated $914,737 and $976,419 at December 31, 1997 and at December 31,
1996, respectively, and bear interest at the prime lending rate plus 1.25%
are collateralized by 83,101 shares of the Company's common stock owned by the
individual physicians. Interest income related to physician advances was
$102,508 and $7,231 for the years ended December 31, 1997 and 1996,
respectively.
F-32
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
Numerator for both basic and diluted earnings per share:
Net income (loss) $ 5,870,398 $ (1,771,383)
=================== ===================
Denominator:
Weighted average shares outstanding 15,559,368 1,450,138
Cheap stock shares:
Conversion of convertible debentures
and interest thereon - 2,020,900
Dividends paid to promoters - 192,234
November 12, 1996 affiliation transactions
assumed to be outstanding since
January 1, 1996 - 7,659,115
Employee stock options 118,761 -
Shares issued to one of the Affiliated
Practices - 100,000
------------------- -------------------
Denominator for basic net income (loss) per
common share--weighted average shares 15,678,129 11,422,387
Effect of dilutive securities:
Employee stock options 393,024 1,032,090
------------------- -------------------
Denominator for diluted net income (loss) per
common share--adjusted weighted average
shares and assumed conversion 16,071,153 12,454,477
=================== ===================
Net income (loss) per common share (basic) $ 0.38 $ (0.16)
=================== ===================
Net income (loss) per common share (diluted) $ 0.37 $ (0.14)
=================== ===================
</TABLE>
For additional disclosures regarding employee stock options, puts and warrants
see Notes 7 and 10.
F-33
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. Earnings Per Share (continued)
Options to purchase 419,887 shares of common stock at $13.25 were outstanding
during 1997 but were not included in the computation of diluted earnings per
common share for 1997 because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive. Options to purchase 44,936 shares of common stock at $11.25 were
outstanding during 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore the effect would be
antidilutive.
Warrants to purchase 544,681 shares of common stock at $14.69 were outstanding
during 1997 but were not included in the computation of diluted earnings per
share because the warrants' exercise price was greater than the average market
price of the common shares and, therefore the effect would be antidilutive.
See Note 10 for discussion of the contingent shares issuable as additional
consideration for one of the Company's practice acquisitions. These shares were
not included in the computation of diluted earnings per share because the
necessary conditions for issuance had not been satisfied.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83
("SAB No. 83") and staff policy, common and common share equivalents issued
prior to the Company's initial public offering for nominal consideration are
presumed to have been issued in contemplation of the public offering, even if
antidilutive, and have been included in the calculations of net income (loss)
per common share as if these common and common equivalent shares were
outstanding for the period immediately preceding the Company's initial public
offering of common stock. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, which modifies certain of the provisions of SAB No.
83, the treasury stock method for measuring the dilutive effect related to
nominal issuances of stock options and warrants is no longer permitted.
Accordingly, the above calculations assume that common shares are outstanding
from the date of the stock option grant to the date of the Company's initial
public offering, if the corresponding option strike price is deemed to be
nominal consideration.
F-34
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
13. Earnings Per Share (continued)
The Company used a portion of the proceeds from the initial public offering of
its common stock to repay borrowings under the Company's Credit Facility. If
shares issued to repay amounts outstanding under the Company's Credit Facility
were outstanding for the years ended December 31, 1997 and 1996, the net income
(loss) per common share would not have changed from the amount reported.
14. Employee Benefit Plan
Effective May 1, 1997, the Company adopted an employee benefit plan covering
substantially all employees of the Company, most affiliated physicians and other
employees of the affiliated physician practices. Participants must have attained
age 21 and completed one year of service with either the Company or one of the
Affiliated Practices in order to participate in the plan. The plan is designed
to qualify under Section 401(k) of the Internal Revenue Code of 1986, as
amended. The plan includes a matching contribution equal to up to 4% of eligible
employee salaries and a discretionary defined contribution (5.5% in 1997).
Expense under this plan, including the 5.5% discretionary contribution,
aggregated approximately $711,000 for 1997, of which approximately $654,000 was
charged directly to the affiliated physician practices as clinic expenses.
F-35
<PAGE>
Report of Independent Auditors
Board of Directors
Reconstructive Orthopaedic Associates II, P.C.
We have audited the accompanying balance sheets of Reconstructive Orthopaedic
Associates II, P.C. (successor to Reconstructive Orthopaedic Associates, Inc.)
as of December 31, 1997 and 1996, and the related statements of operations, (net
capital deficiency) stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 II, P.C. (successor to Reconstructive Orthopaedic Associates, Inc.)
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
Denver, Colorado
February 13, 1998
F-36
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
----------------------------------------
Assets (See Note 2)
Current assets:
<S> <C> <C>
Cash $ 109,362 $ 52,031
Due from Thomas Jefferson University 102,000 303,600
Due from Specialty Care Network, Inc. 424,290 1,314,462
Other accounts receivable 46,594 -
Prepaid expenses 11,993 -
----------------------------------------
Total current assets 694,239 1,670,093
Other assets 4,733 25,714
----------------------------------------
Total assets $ 698,972 $1,695,807
========================================
Liabilities and (net capital deficiency)
stockholders' equity
Current liabilities:
Accounts payable $ 136,256 $ 170,746
Accrued compensation and benefits 212,103 -
Due to Thomas Jefferson University 46,594 39,674
Due to Specialty Care Network, Inc. 623,159 850,498
----------------------------------------
Total current liabilities 1,018,112 1,060,918
Commitments and contingencies
(Net capital deficiency) stockholders' equity:
Class A voting common stock, $1.00 par value,
1,000 shares authorized, 510 shares outstanding 510 510
Class B nonvoting common stock, $1.00 par value,
1,000 shares authorized, 490 shares outstanding 490 490
Additional paid-in capital 199,204 199,204
(Accumulated deficit) retained earnings (492,569) 434,685
Treasury stock (340 Class A common shares and
100 Class B common shares), at cost (26,775) -
----------------------------------------
Total (net capital deficiency) stockholders' equity (319,140) 634,889
----------------------------------------
Total liabilities and (net capital deficiency)
stockholders' equity $ 698,972 $1,695,807
========================================
</TABLE>
See accompanying notes.
F-37
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
--------------------------------------------------------------
(See Note 2)
<S> <C> <C> <C>
Net patient revenue $14,999,469 $16,732,168 $16,906,641
Other revenue 1,117,126 1,006,600 584,145
--------------------------------------------------------------
Total revenue 16,116,595 17,738,768 17,490,786
Operating expenses:
Physician compensation 6,267,170 10,187,408 9,288,516
Salaries and benefits 1,014,916 3,057,694 3,874,636
Supplies, general and
administrative expenses 1,275,145 3,970,963 2,792,588
Depreciation and amortization - 114,339 133,450
Management fee to Specialty
Care Network, Inc. 8,546,776 1,453,874 -
--------------------------------------------------------------
Total operating expenses 17,104,007 18,784,278 16,089,190
--------------------------------------------------------------
(Loss) income from operations (987,412) (1,045,510) 1,401,596
Interest income 60,158 70,497 59,121
Interest expense - (13,333) (555)
--------------------------------------------------------------
Net (loss) income $ (927,254) $ (988,346) $ 1,460,162
==============================================================
</TABLE>
See accompanying notes.
F-38
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Statements of (Net Capital Deficiency) Stockholders' Equity
<TABLE>
<CAPTION>
(Accumulated
Number Additional Deficit)
of Common Paid in Retained Treasury
Shares Stock (1) Capital Earnings Stock Total
----------- ------------- ------------ ---------------- -------------- -------------
(See Note 2)
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 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)
----------- ------------- ------------ ---------------- -------------- -------------
Balances, December 31, 1995 1,000 1,000 - 4,164,651 (25,013) 4,140,638
Net loss - - - (1,423,031) - (1,423,031)
Purchase of treasury stock (660) - - - (141,700) (141,700)
Sale of treasury stock 660 - - - 141,700 141,700
Dividends paid - - - (297,260) - (297,260)
Net assets transferred to
Specialty Care Network, Inc. - - - (2,270,143) - (2,270,143)
----------- ------------- ------------ ---------------- -------------- -------------
Ending capitalization at
November 11, 1996 of
Reconstructive Orthopaedic
Associates, Inc. (predecessor) 1,000 $1,000 $ - $ 174,217 $ (25,013) $ 150,204
=========== ============= ============ ================ ============== =============
Beginning balances at November
12, 1996 of remaining
predecessor assets
transferred to
Reconstructive Orthopaedic
Associates II, P.C.
(successor) - $ - $150,204 $ - $ - $ 150,204
Sale of stock of successor 1,000 1,000 49,000 - - 50,000
Net income - - - 434,685 - 434,685
----------- ------------- ------------ ---------------- -------------- -------------
Balances, December 31, 1996 1,000 1,000 199,204 434,685 - 634,889
Acquisition of 440 common shares
pursuant to a separation - - - - (26,775) (26,775)
agreement
Net loss - - - (927,254) - (927,254)
=========== ============= ============ ================ ============== =============
Balances, December 31, 1997 1,000 $1,000 $199,204 $ (492,569) $ (26,775) $(319,140)
=========== ============= ============ ================ ============== =============
</TABLE>
(1) Includes Class A and Class B common stock for Reconstructive Orthopaedic
Associates II, P.C.
See accompanying notes.
F-39
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
---------------------------------------------------------
(See Note 2)
Operating activities
<S> <C> <C> <C>
Net (loss) income $(927,254) $ (988,346) $1,460,162
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization - 114,339 133,450
Gain on sale of assets - (40,440) -
Changes in assets and liabilities:
Accounts receivable - 2,238,906 (1,664,688)
Inventories - 19,100 6,100
Due from Thomas Jefferson University 201,600 (303,600) 57,716
Due from Specialty Care Network, Inc. 890,172 (1,314,462) -
Other accounts receivable (46,594) - -
Prepaid expenses (11,993) 122,793 124,359
Other assets 20,981 (6,742) (16,695)
Accounts payable (34,490) (8,689) 120,017
Accrued compensation and benefits 212,103 (45,730) (36,071)
Accrued profit sharing contribution - (245,819) 85,421
Other accrued expenses - (2,863) 1,975
Due to Thomas Jefferson University 6,920 39,674 -
Due to Specialty Care Network, Inc. (227,339) 850,498 -
---------------------------------------------------------
Net cash provided by operating activities 84,106 428,619 271,746
Investing activities
Sales of furniture, fixtures and equipment - 92,025 -
Purchases of furniture, fixtures and equipment - (47,733) (240,426)
---------------------------------------------------------
Net cash provided by (used in) investing activities - 44,292 (240,426)
Financing activities
Proceeds from short-term borrowings - - 570,000
Repayment of short-term borrowings - (570,000) (550,000)
Proceeds from long-term debt - 200,000 -
Principal payments on long-term debt - (49,823) -
Purchases of treasury stock (26,775) (141,700) -
Proceeds from sale of treasury stock - 141,700 -
Proceeds from sale of common stock - 50,000 -
Dividends paid - (297,260) (40,000)
---------------------------------------------------------
Net cash used in financing activities (26,775) (667,083) (20,000)
---------------------------------------------------------
Net increase (decrease) in cash 57,331 (194,172) 11,320
Cash at beginning of year 52,031 246,203 234,883
---------------------------------------------------------
Cash at end of year $ 109,362 $ 52,031 $ 246,203
=========================================================
Supplemental schedule of noncash
investing and financing activities
Assets transferred to Specialty Care Network, Inc. $ - $2,548,412 $ -
Liabilities transferred to Specialty Care
Network, Inc. - (278,269) -
---------------------------------------------------------
$ - $2,270,143 $ -
=========================================================
</TABLE>
See accompanying notes.
F-40
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements
December 31, 1997
1. Description of the Business
Reconstructive Orthopaedic Associates II, P.C. (successor to Reconstructive
Orthopaedic Associates, Inc.) is an orthopaedic physician practice which serves
Philadelphia, Pennsylvania and its surrounding communities. Reconstructive
Orthopaedic Associates II, P.C. and Reconstructive Orthopaedic Associates, Inc.
(collectively the Company) is/was a professional corporation incorporated under
the laws of the State of Pennsylvania.
2. Summary of Significant Accounting Policies
Basis of Presentation
As discussed in Note 8, Reconstructive Orthopaedic Associates, Inc. (the
Predecessor Practice) entered into an agreement on November 12, 1996, with
Specialty Care Network, Inc. (SCN) whereby SCN acquired substantially all the
net assets of the Predecessor Practice. Concurrent with the acquisition, the
physician shareholders of the Predecessor Practice, who functioned as promoters
in that transaction, formed Reconstructive Orthopaedic Associates II, P.C. (the
Successor Practice) and entered into a long-term service agreement with SCN
under which SCN provides management and administrative services to the Successor
Practice. That transaction reflects a disposition of certain net practice assets
to SCN with no significant change in the operations or ownership between the
Predecessor and Successor Practices and has accordingly been treated for
financial statement presentation purposes as a continuation of the business.
The accompanying financial statements of the Company as of and for the years
ended December 31, 1997 and 1996 have been prepared on the historical basis of
accounting. SCN's acquisition of the Predecessor Practice's net assets was
accounted for using historical cost in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 48 and related interpretations. The
remaining net assets of the Predecessor Practice at the transaction date were
transferred at historical cost to the Successor Practice.
Additionally, the accompanying financial statements contemplate the effectuation
of the proposed amendments to the affiliation agreement between SCN and the
Company on substantially the same terms and conditions as described in Note 9
herein.
F-41
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Net patient revenue is recorded at established rates as services are rendered,
net of provisions for bad debts 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 final settlements are made.
Under the long-term service agreement with SCN, the Successor Practice agreed to
sell and assign to SCN, and SCN agreed to buy, all of the Successor Practice's
accounts receivable each month during the existence of the service agreement.
The purchase price for such accounts receivable generally equals the gross
amount of the accounts receivable each month, less adjustments for contractual
allowances, allowances for doubtful accounts and other potentially uncollectible
amounts based on historical collection rates, as determined by SCN. However, SCN
and the Successor Practice are currently making periodic adjustments so that
amounts paid by SCN for the accounts receivable are adjusted upwards or
downwards based on SCN's actual collection experience. SCN bears the collection
risk with respect to accounts receivable acquired from the Predecessor Practice
in connection with the initial affiliation transaction.
F-42
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment were stated at cost. Depreciation and
amortization were determined using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives used were as follows:
Computer equipment and automobiles 5 years
Furniture, fixtures and equipment 7 years
Leasehold improvements 15 years
All furniture, fixtures and equipment at November 11, 1996 were transferred to
SCN (see Note 8).
Financial Instruments
The carrying amounts of financial instruments (e.g., accounts receivable,
certain liabilities, etc.) as reported in the accompanying balance sheets
approximate fair value.
Estimated Medical Professional Liability Claims
Effective December 1, 1996, the Company is insured for medical professional
liability claims through a claims-made commercial insurance policy. Prior to
such date the Company maintained an occurrence-based commercial insurance
policy.
Income Taxes
The Company is a Subchapter S corporation under the Internal Revenue Code and
the Commonwealth of Pennsylvania tax statutes 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 federal and
state tax returns.
The estimated aggregate permanent and temporary differences between the tax
bases and reported amounts of the Company's net assets is approximately $365,000
at December 31, 1997.
F-43
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Reclassifications
The accompanying 1996 and 1995 financial statements include certain
reclassifications in order to conform to the current period presentation.
3. Accounts Receivable and Net Patient Revenue
As further discussed in Note 8, the Predecessor Practice entered into an
acquisition transaction with SCN. In conjunction therewith, as part of the
acquisition of substantially all net practice assets, the outstanding net
patient accounts receivable of the Predecessor Practice were transferred to SCN.
Concurrently, the Successor Practice entered into a long-term service agreement
with SCN. Pursuant to the terms of this agreement, SCN purchases from the
Successor Practice, on a monthly basis, the patient revenue charges, net of a
historically-based contractual discount. At December 31, 1997 and 1996, the
Company had a receivable from SCN for December's patient charges of $787,481 and
$1,314,462, respectively, which is net of contractual discounts of $1,418,792
and $2,218,771. Additionally, at December 31, 1997, approximately $363,000
offsets the amounts due from SCN relating to adjustments for previously
purchased 1997 patient revenue charges.
Net patient revenue consists of the following:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------- ------------------- ------------------
<S> <C> <C> <C>
Gross patient revenue $42,293,644 $47,708,533 $39,124,045
Less contractual adjustments and
uncollectibles 27,294,175 30,976,365 22,217,404
------------------- ------------------- ------------------
$14,999,469 $16,732,168 $16,906,641
=================== =================== ==================
</TABLE>
Revenue from the Medicare program accounted for approximately 28%, 28% and 34%,
of the Company's net patient service revenue for the years ended December 31,
1997, 1996 and 1995, respectively. Laws and regulations governing the Medicare
program are complex and subject to interpretation. Management of the Company
believes that it is in compliance with all applicable laws and regulations.
F-44
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
3. Accounts Receivable and Net Patient Revenue (continued)
See Note 7 for discussion of an ongoing Department of Health and Human Services
inquiry regarding the Predecessor Practice. Such laws and regulations can be
subject to future government review and interpretation. Violation of such laws
could result in significant regulatory action, including fines, penalties and
exclusion from the Medicare program. Other than the Medicare program, no single
payor provided more than 10% of net patient revenue for the years ended December
31, 1997, 1996 or 1995.
4. Lines of Credit and Note Payable
In 1995, the Company had a $700,000 line of credit with Mellon Bank. The
outstanding balance of $570,000 was paid in September 1996. Simultaneously, the
line of credit was terminated.
In February 1996, the Company entered into a long-term note payable with Mellon
Bank for $200,000 with principal due in monthly installments of $5,556 plus
interest at a rate of 8.25%. Pursuant to the terms of the acquisition agreement
(see Note 8), SCN assumed the outstanding liability of $150,177 at November 11,
1996.
The Company has an uncollateralized $300,000 line of credit with Mellon Bank
that expires on March 1, 1998. The entire amount was available at December 31,
1997. Managment intends to renew the line of credit on substantially the same
terms and, in connection therewith, negotiations with the bank are ongoing.
Interest expense, as disclosed in the accompanying statements of operations,
reasonably approximates the cash paid for interest during such years.
5. Employee Benefit Plans
The Predecessor Practice had a profit sharing plan that covered substantially
all of its employees. Eligible employees could contribute up to 15% of their
compensation. The Predecessor Practice contributed a discretionary amount that
was allocated proportionally based upon the salaries of the participating
employees. The profit sharing plan expense was $255,750 and $247,894 for the
years ended December 31, 1996 and 1995, respectively. This plan was discontinued
as of the November 12, 1996 acquisition of the
F-45
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
5. Employee Benefit Plans (continued)
net assets of the Predecessor Practice by SCN. The Successor Practice has not
adopted a new profit sharing plan.
Effective May 1, 1997, SCN adopted an employee benefit plan covering
substantially all employees of the Company, including physicians and those who
have attained age 21 and completed one year of service with the Company. The
plan is designed to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended. The plan includes a Company matching contribution equal to up
to 4% of eligible employee salaries and a discretionary defined contribution
(5.5% in 1997). Expense under this plan, including the 5.5% discretionary
contribution, aggregated $113,392 for 1997.
6. Other Revenue
In July 1995, the Company entered into a two year agreement with Thomas
Jefferson University Hospital (the Hospital), a division of Thomas Jefferson
University, whereby the Company provides administrative, supervisory, teaching
and patient care services for the Hospital's Department of Orthopaedic Surgery.
Effective July 1, 1997, the agreement was extended for an additional five year
term. The Hospital provides the Company with compensation for its employees
providing such services in the amount of $607,200 per annum prior to July 1,
1997 and $865,000 per annum subsequent to such date. Approximately $202,000 of
the then outstanding accounts receivable was allocated to the Successor Practice
as part of the November 12, 1996 SCN transaction.
Also in July 1995, the Company entered into a two year agreement with Jefferson
Medical College (the College), a division of Thomas Jefferson University,
whereby the Company provided educational services to the College's medical
students and residents for an annual fee of $400,000.
Effective April 1, 1997, the Company, the Hospital and the College entered into
a five year agreement whereby one of the Company's physicians, as specifically
identified in the underlying agreement, will serve as co-director of the
College's Spinal Cord Injury Center, as well as perform other clinical,
administrative and teaching services associated with the care of acute spinal
cord injury patients. The Hospital will provide the Company with compensation
for the physician providing such services in the amount of $408,000 per annum,
plus an additional amount based on the physician's performance, as
F-46
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
6. Other Revenue (continued)
determined in accordance with criteria established by the College; however, no
such additional amount has been recorded in the accompanying financial
statements as of and for the year ended December 31, 1997.
7. Commitments and Contingencies
The Company leases its office facilities on an annual basis. Rent expense for
the years ended December 31, 1997, 1996 and 1995 totaled $109,506, $308,000 and
$121,139, respectively. Additionally, the Company reimburses SCN for rent
expense incurred by SCN on the Company's behalf. Such amounts for the years
ended December 31, 1997 and 1996 were $504,868 and $62,000, respectively.
The Company is committed to certain renovations to its primary office facility
in the aggregate amount of approximately $60,000. The Company expects that such
costs will be reimbursed by SCN and subsequently charged back to the Company
through depreciation and amortization under the SCN management fee arrangement.
The Company and SCN have been advised that the Department of Health and Human
Services is conducting an inquiry regarding the Predecessor Practice and
physicians formerly associated with that practice, including two of SCN's
directors. The inquiry appears to be concerned with the submission of claims for
Medicare reimbursement by the practice. Management does not believe that the
final resolution of this matter will have an adverse impact on the Company's
results of operations or financial position.
The Company is party to legal proceedings and potential claims arising in the
ordinary course of its business, including malpractice claims in excess of
available insurance coverage. The ultimate legal and financial liability of the
Company with respect to such ongoing litigation cannot be estimated with any
certainty but, in the opinion of management, the Company has adequate legal
defenses, reserves or malpractice insurance coverage with respect to those
matters so that the ultimate resolution will not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
F-47
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
8. Acquisition of Net Assets by Specialty Care Network, Inc.
Effective November 12, 1996, the Predecessor Practice entered into an agreement
with SCN whereby SCN acquired substantially all of the net assets of the
Predecessor Practice. Pursuant to the terms of the agreement the transaction was
structured whereby the physician stockholders of the Predecessor Practice,
functioning as promoters, exchanged the common stock of the Predecessor
Practice, which was dissolved, for 3,169,379 common shares of SCN and $1,537,872
of cash. In addition, as part of this transaction, those physician stockholders
concurrently transferred certain assets of the Predecessor Practice into the
Successor Practice (a newly formed entity) and entered into a long-term service
agreement with SCN to provide ongoing clinical services. That transaction
reflected a disposition of certain net practice assets to SCN with no
significant change in the operations and ownership between the Predecessor and
Successor Practices and has accordingly been treated for financial statement
presentation purposes as a continuation of the business.
Initial Service Agreement
Concurrent with the aforementioned transaction, the Successor Practice entered
into a long-term service agreement (the Initial Service Agreement) with SCN.
However, see Note 9 for discussion of subsequent proposed amendments to the
Initial Service Agreement related to the separation of three physicians from the
Company. Pursuant to the terms of the forty-year service agreement, SCN, among
other things, provides facilities and management, administrative and development
services, in return for a service fee. Such fee is payable monthly and consists
of the following: (i) a service fee based on 33% of the adjusted pre-tax income
of the Company (generally defined as revenue of the Company 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 service fee percentage to the adjusted
pre-tax income of the Predecessor Practice for the twelve months prior to
affiliation. For the years ended December 31, 1997 and 1996, management fee
expenses, exclusive of clinic expense reimbursement, were $3,113,667 and
$680,124, respectively. The amount due to SCN at December 31, 1997 and 1996 is
$710,319 and $850,498, respectively.
F-48
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
8. Acquisition of Net Assets by Specialty Care Network, Inc. (continued)
The Initial Service Agreement has a term of forty years, with an automatic
extension (unless specified notice is given) of an additional five-year term.
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, SCN may terminate the
agreement if the Company's Medicare or Medicaid number is terminated or
suspended as a result of some act or omission of the Company, and the physicians
and the Company may terminate the agreement if SCN misapplies funds or assets or
violates certain laws.
Upon termination of the Initial Service Agreement by SCN for one of the reasons
set forth above, SCN has the option to require the Company to purchase and
assume the assets and liabilities related to the Company at the fair market
value thereof. In addition, upon termination of the Initial Service Agreement by
SCN during the first five years of the term, the physician owners of the Company
are required to pay SCN or return to SCN an amount of cash or stock of SCN equal
to one-third of the total consideration received by such physicians in
connection with SCN's affiliation with the Company.
Under the Initial Service Agreement, each physician owner must give SCN twelve
months notice of an intent to retire from the Company. If a physician gives such
notice during the first five years of the agreement, the physician must also
locate an acceptable replacement physician and pay SCN an amount based on a
formula relating to any loss of service fee for the first five years of the
term. Furthermore, the physician must pay SCN an amount of cash or stock of SCN
equal to one-third of the total consideration received by such physician in
connection with SCN's affiliation with the Company. The agreement also provides
that after the fifth year no more than 20% of the physician owners of the
Company may retire within a one-year period.
Non-competition provisions
The Company and the physician owners of the Company generally agree not to
compete with SCN in providing services similar to those provided by SCN under
the Initial Service Agreement, and the physician owners also generally agree
with SCN not to compete with an affiliated practice of SCN within a specified
geographic area.
F-49
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
8. Acquisition of Net Assets by Specialty Care Network, Inc. (continued)
Non-competition restrictions generally apply to physician owners during their
affiliation with the Company and for three years thereafter. In addition, the
Initial Service Agreement requires the Company to enter into non-competition
agreements with all its physicians. After the fifth year of the term of the
Initial Service Agreement, physician owners of the Company may be released from
the non-competition provisions upon payment of certain amounts to SCN, which may
be paid in the form of SCN's common stock. The Initial Service Agreement
generally requires the Company to pursue enforcement of the non-competition
agreement with physicians or assign to SCN the right to pursue enforcement.
9. Separation Agreement
Pursuant to a Separation Agreement (the Agreement), dated June 9, 1997, between
the stockholders of the Company, the Company and doctors Booth, Bartolozzi and
Balderston (collectively the 3B Group), the three aforementioned physicians
redeemed their 440 shares of stock in the Company for approximately $26,800 and
formed a new Pennsylvania professional corporation in order to practice
medicine. The stock redemption amount approximated the net book value per common
share on June 30, 1997 (i.e., the date of separation).
The net patient revenue attributable to doctors Booth Bartolozzi and Balderston
for the years ended December 31, 1996 and 1995 was approximately $6,907,394 and
$7,440,575, respectively. The similar amount for the six months ended June 30,
1997 was approximately $4,506,477. The Company's individual physician
compensation is generally determined by the net patient revenue generated by the
physician, less an allocation of clinic and corporate expenses.
Pursuant to proposed amendments to the Initial Service Agreement, SCN, the
Company and the 3B Group will amend the original service agreement with the
Company so that the aggregate Base Service Fee for the Company and the 3B Group
will be equal to the Company's original Base Service Fee. Additionally, in the
event that the Base Service Fee of either (but not both) of the practices for
the twelve months ended October 31, 1997 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
F-50
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
9. Separation Agreement (continued)
any deficit remains, (i) SCN 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 one-third of the remaining Base Fee Deficit, up to $120,000 and
(iii) the practice with the Base Fee Deficit will pay to SCN all additional
remaining Base Fee Deficit. If both practices have a Base Fee Deficit, (i) the
3B Group will pay one-third of the Company's Base Fee Deficit, up to $120,000,
(ii) SCN will forgive one-third of the Company's Base Fee Deficit, up to
$120,000, (iii) the Company will pay the remainder of the Base Fee Deficit and
(iv) the 3B Group will pay to SCN the entire amount of its Base Fee Deficit.
During the twelve months ending October 31, 1998, the proposed amendments
indicate that up to two-thirds of the Company's Base Service Fee Deficit may be
forgiven by SCN, up to $240,000.
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.
10. Stockholders' Equity
The Successor Practice maintains two classes of common stock. Class A common
stock and Class B common stock have equal rights and privileges, except that the
holders of the Class B common stock are not entitled to vote upon matters
submitted to a vote of the stockholders, except for those matters required by
law. However, the Shareholders' Agreement, which governs the contractual rights
and privileges of the stockholders, requires the conversion of all Class B
nonvoting common shares into Class A voting common shares upon the occurrence of
certain events. The separation agreement discussed in Note 9 creates
circumstances whereby conversion will occur, but the legal stock conversion has
not yet been effectuated at December 31, 1997. Management believes that the
appropriate common stock conversion will transpire in 1998.
Stockholders are generally prohibited from selling and/or transferring their
common shares without the unanimous written consent of all the other
stockholders. Moreover, the individual stockholders and the Company maintain
rights of first refusal pursuant to any common stock dispositions. The purchase
price for disposition purposes shall at all times be the book value of such
shares as determined by reference to the most recent financial statements.
F-51
<PAGE>
Reconstructive Orthopaedic Associates II, P.C.
(successor to Reconstructive Orthopaedic Associates, Inc.)
Notes to Financial Statements (continued)
10. Stockholders' Equity (continued)
Exclusive of shares held as treasury stock, there are 170 Class A common shares
and 390 Class B common shares held by physician stockholders at December 31,
1997.
11. Year 2000 Issue (Unaudited)
The Company and SCN have developed plans to modify their information
technologies to be ready for the year 2000 and the Company has begun converting
critical data processing systems. The Company currently expects the project to
be substantially complete by mid 1999. An estimate of the year 2000 internal
costs, exclusive of the costs to upgrade and replace systems in the normal
course of business, is not currently available; however, the Company does not
expect this project to have a significant effect on operations. As of December
31, 1997, no significant amounts have yet been expensed thereunder. The Company
will continue to implement systems with strategic value though some projects may
be delayed due to resource constraints.
F-52
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
----------- ----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for contractual
adjustments and doubtful
accounts $15,719,542 $ 100,380 $87,199,182(1) $(84,589,217)(3) $26,225,860
(1,542,354)(4) 9,338,327(2)
Year ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowance for contractual
adjustments and doubtful
accounts $ -- $ -- $11,264,784(1) $(11,085,869)(3) $15,719,542
15,540,627(2)
</TABLE>
(1) Contractual adjustments recognized in the purchase of monthly net accounts
receivable balances for the periods presented.
(2) Acquired in conjunction with acquisition of affiliated physician practices.
(3) Represents actual amounts charged against the allowance for the periods
presented.
(4) Recoveries of amounts previously reserved, included in other revenue in the
consolidated financial statements.
S-1
Exhibit 10.2
SECOND AMENDED AND RESTATED
REVOLVING LOAN AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 21, 1997
AMONG
SPECIALTY CARE NETWORK, INC.,
SCN OF PRINCETON, INC.
AND
NATIONSBANK OF TENNESSEE, N.A.,
AMSOUTH BANK,
BANQUE PARIBAS,
KEY CORPORATE CAPITAL INC.
AND
NATIONSBANK OF TENNESSEE, N.A., AS AGENT
<PAGE>
SPECIALTY CARE NETWORK
SECOND AMENDED AND RESTATED REVOLVING LOAN
AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 21, 1997
TABLE OF CONTENTS
Paragraph Number Page
- ---------------- ----
SECTION I. DEFINITIONS.........................................................1
SECTION II. THE LOANS.........................................................17
2.1 Revolving Loans...................................................17
2.2 Notices, Interest Rates and Payments of Interest..................17
2.3 Letters of Credit.................................................20
2.4 Nonuse Fee........................................................25
2.5 Agent's Fee.......................................................25
2.6 Reduction of Commitment...........................................25
2.7 Alternate Rate of Interest........................................25
2.8 Change in Circumstances...........................................26
2.9 Change in Legality................................................27
2.10 Optional Prepayment - Premiums in Certain Events..................27
2.11 Swingline Loan Subfacility........................................28
2.12 Payment to the Agent..............................................30
SECTION III. CONDITIONS PRECEDENT............................................30
3.1 Documents Required for Amendment and Restatement..................30
3.2 Documents Required for All Subsequent Disbursements...............32
3.3 Information Required for Permitted Acquisition....................32
3.4 Legal Matters.....................................................33
SECTION IV. COLLATERAL SECURITY..............................................33
4.1 Composition of the Collateral.....................................33
4.2 Rights in Property Held by the Banks..............................33
4.3 Rights in Property of the Borrower and Subsidiaries...............33
4.4 Priority of Liens.................................................33
4.5 Financing Statements..............................................34
4.6 Service Agreements................................................34
4.7 Collection of Receivables.........................................34
4.8 Mortgagees' Waivers...............................................35
SECTION V. REPRESENTATIONS AND WARRANTIES....................................35
5.1 Due Organization and Qualification................................35
5.2 No Conflicting Agreement..........................................35
5.3 Capacity..........................................................35
5.4 Binding Obligations...............................................36
<PAGE>
5.5 Pledged Instruments...............................................36
5.6 Litigation........................................................36
5.7 Title.............................................................36
5.8 Financial Statements..............................................36
5.9 No Other Indebtedness.............................................36
5.10 Taxes.............................................................36
5.11 Compliance with Laws; Reimbursement Audits .......................36
5.12 Environmental Compliance..........................................37
5.13 Full Disclosure...................................................37
5.14 Consents..........................................................37
5.15 Existing Borrowings...............................................37
5.16 Material Contracts................................................37
5.17 No Commissions....................................................38
5.18 ERISA.............................................................38
5.19 Survival..........................................................38
SECTION VI. AFFIRMATIVE COVENANTS............................................38
6.1 Use of Proceeds...................................................38
6.2 Financial Statements and Reports..................................38
6.3 Good Condition....................................................39
6.4 Insurance.........................................................40
6.5 Taxes; Copies of Returns..........................................40
6.6 Records and Inspection............................................40
6.7 Maintenance of Existence and Business; Licenses...................40
6.8 Ordinary Course; Pledge of Notes..................................40
6.9 Notice of Litigation..............................................41
6.10 Payment of Indebtedness...........................................41
6.11 Notice to Banks of Default........................................41
6.12 Notice of Name Change or Location.................................41
6.13 Environmental Compliance..........................................41
6.14 Fraud and Abuse...................................................42
6.15 ERISA Compliance..................................................42
6.16 Financial Ratios..................................................42
SECTION VII. NEGATIVE COVENANTS..............................................43
7.1 Merger or Reorganization..........................................43
7.2 Sale of Assets....................................................43
7.3 Encumbrances......................................................43
7.4 Guarantee.........................................................43
7.5 Debts and Other Obligations.......................................43
7.6 Dividends and Distributions.......................................44
7.7 Redemptions and Capital Stock.....................................44
7.8 Prepayments.......................................................44
7.9 Subsidiary........................................................44
7.10 Loans and Advances................................................44
7.11 Investments.......................................................44
7.12 Sale-Leaseback....................................................45
7.13 Acquisitions......................................................45
7.14 Management........................................................46
7.15 Untrue Certificate................................................46
<PAGE>
7.16 Margin Stock......................................................46
7.17 Affiliate Transactions............................................46
SECTION VIII. DEFAULT........................................................47
8.1 Events of Default.................................................47
8.2 Acceleration......................................................48
8.3 Remedies..........................................................49
SECTION IX. THE AGENT.......................................................50
9.1 Authorization.....................................................50
9.2 Standard of Care..................................................50
9.3 No Waiver of Rights...............................................51
9.4 Payments..........................................................51
9.5 Indemnification...................................................51
9.6 Exculpation.......................................................51
9.7 Credit Investigation..............................................52
9.8 Resignation.......................................................52
9.9 Proration of Payments.............................................52
9.10 No Liability For Errors...........................................53
9.11 Offset............................................................53
SECTION X. MISCELLANEOUS.....................................................53
10.1 Construction......................................................53
10.2 Further Assurance.................................................53
10.3 Enforcement and Waiver by the Banks...............................53
10.4 Expenses of the Banks.............................................54
10.5 Notices...........................................................54
10.6 Waiver and Release................................................55
10.7 Indemnification...................................................55
10.8 Participations and Assignments....................................55
10.9 Applicable Laws...................................................58
10.10 Binding Effect, Assignment and Entire Agreement...................58
10.11 Severability......................................................58
10.12 Counterparts......................................................59
10.13 Arbitration.......................................................59
<PAGE>
SCHEDULE OF EXHIBITS
EXHIBIT
- -------
A Form of Notes
A-1 Notice of Borrowing
A-2 Notice of Conversion
A-3 Acquisition Certificate
A-4 Compliance Certificate
B Existing Indebtedness and Liens
C Subordinated Indebtedness
C-1 Form of Subordination Agreement
D Real Property
E Form of Amended and Restated Pledge Agreement
F Form of Amended and Restated Guaranty and Suretyship Agreement
G Form of Opinion Letter
H Corporate Matters
(States of Incorporation and Qualification;
Stock and Membership Ownership)
I Addresses
J Litigation and Claims
K Compliance with Laws
L Material Leases, Contracts and Commitments
M Management
N Assignment and Acceptance
O West Central Ohio Loan Terms
P Specialists-SCN, LLC Loan Terms
<PAGE>
SECOND AMENDED AND RESTATED
REVOLVING LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT is
made as of the 21st day of November, 1997, by and among Specialty Care Network,
Inc. (the "Borrower"); the Guarantors, jointly and severally, as such term is
defined herein; the various banks and lending institutions on the signature
pages hereto together with all the assignees of such banks and lending
institutions (each a "Bank" and collectively the "Banks"); NationsBank of
Tennessee, N.A., as the Swingline bank (in such capacity, together with its
successors in such capacity the "Swingline Bank"); and NationsBank of Tennessee,
N.A. (the "Agent"), individually and as Agent.
W I T N E S S E T H:
WHEREAS, the Borrower, the Guarantors, NationsBank of Tennessee, N.A., and
Agent entered into a certain Revolving Loan and Security Agreement dated as of
November 1, 1996 (the "Original Loan Agreement"); and
WHEREAS, pursuant to an Amended and Restated Revolving Loan and Security
Agreement dated as of July 24, 1997 (the "Amended and Restated Revolving Loan
and Security Agreement"), the Borrower, the Guarantors, NationsBank of
Tennessee, AmSouth Bank, and the Agent amended and restated the Original Loan
Agreement; and
WHEREAS, pursuant to Amendment No. 1 to Amended and Restated Revolving Loan
and Security Agreement dated as of September 19, 1997 ("Amendment No. 1"), the
parties to the Amended and Restated Revolving Loan and Security Agreement
amended it to, among other things, increase the amounts available thereunder
from $35,000,000 to $45,000,000; and
WHEREAS, Borrower has requested that the Banks increase the Commitments by
$30,000,000 to an aggregate of $75,000,000 and create a separate facility for a
Swingline Loan;
WHEREAS, Banks, Borrower, Guarantors and Agent desire to provide more
specifically for their obligations with respect to the revolving credit
facility;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and obligations herein contained, and each intending to be legally bound hereby,
the parties agree to amend and restate the Amended and Restated Revolving Loan
and Security Agreement as amended by Amendment No. 1 in its entirety as follows:
SECTION I. DEFINITIONS
As used herein:
"Accounts", "Chattel Paper", "Contract Rights", "Documents", "Equipment",
"Fixtures", "General Intangibles", "Goods", "Instruments" and "Inventory" shall
have the same respective meanings as are given to those terms in the UCC.
"Accounts Receivable" means all rights to payment for goods sold, leased or
otherwise marketed in the ordinary course of business or for services rendered
in the ordinary course of business, and all sums of money or other proceeds due
or to become due thereon pursuant to transactions with
1
<PAGE>
Persons, except for that portion of the sum of money or other proceeds due
or to become due which relate to sales, use or property taxes levied in
connection with such transactions, recorded on books of account in accordance
with generally accepted accounting principles consistently applied.
"Acquisition" means any transaction, or any series of related transactions,
by which any Person, in the transaction or as of the most recent transactions in
a series of transactions, directly or indirectly acquires any going concern or
all or a substantial part of the assets of any corporation, partnership or other
entity or any division of any such entity, or any such entity or any division of
such an entity becomes a Subsidiary of such Person.
"Acquisition EBITDA" means, with respect to a Practice acquired by the
Borrower or any Subsidiary and covered by a Service Agreement, ninety-five
percent (95%) of the annual Base Service Fee due under the applicable Service
Agreement for the first year thereof, calculated and prorated (if the period of
determination is less than a year) as if the Practice had been acquired
effective as of the beginning of the relevant financial period.
"Adjusted Consolidated Cash Flow" means, for any period of determination,
Consolidated Cash Flow plus Rental Expenses less Capital Expenditures and the
sum of non-expensed loan advances made to physicians.
"Adjusted LIBO Rate" means for the Interest Period for each Eurodollar Loan
comprising part of the same borrowing (including conversions, extensions and
renewals), a per annum interest rate equal to the per annum rate obtained by
dividing (a) the rate of interest determined by the Agent to be the rate for
deposits in U.S. dollars for the applicable Interest Period which appears on the
applicable Telerate Page at approximately 11:00 a.m. London time, two (2)
Business Days prior to the first date of the applicable Interest Period, or if
such rate is not available, the rate per annum at which, in the reasonable
opinion of Agent, U.S. dollars in the amount of the borrowing are being offered
to leading reference banks in the London interbank market for settlement at
approximately 11:00 a.m. London time, two (2) Business Days prior to the first
date of the applicable Interest Period, by (b) a percentage equal to 100% minus
the Eurodollar Reserve Percentage, if any, for such Interest Period.
"Affiliates" means as to any Person (a) any other Person which, directly,
or indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with such Person, or (b) any other Person who is a
director or executive officer (i) of such Person, (ii) of any Subsidiary of such
Person or (iii) of any Person described in clause (a) above. For purposes of
this definition, "control" of a Person shall mean the power, direct or indirect,
(i) to vote or direct the voting of more than five percent (5%) of the
outstanding shares of voting stock of such Person, or (ii) to direct or cause
the direction of the management and policies of such Person whether by contract
or otherwise. In no event shall any of the Banks be deemed to be Affiliates of
the Borrower.
"Agent" means NationsBank of Tennessee, N.A. in its capacity as agent for
the Banks pursuant to Section IX hereof, and not in its individual capacity as a
Bank, and any successor Agent appointed pursuant to Section IX.
"Agreement" means this Second Amended and Restated Revolving Loan and
Security Agreement, as it may be amended, restated, renewed or extended from
time to time.
"Amendment and Restatement Closing Date" means November 21, 1997, or such
later date as the Borrower, Guarantors, Banks and Agent may agree on which all
of the conditions set forth in Paragraph 3.1 have been fulfilled.
2
<PAGE>
"Applicable Margin" means the number of basis points per annum determined
in accordance with the following table for the purpose of calculating the
interest rate for any day for any Revolving Loan or Swingline Loan or the
applicable per annum rate pertaining to a Letter of Credit Fee or the Nonuse
Fee; provided, however, as of the Amendment and Restatement Closing Date through
the approval of the Compliance Certificate accompanying Borrower's fiscal year
end 1997 audited financial statements, the Applicable Margin shall be the higher
of: (a) the actual level prescribed by the table set forth below, or (b) the
level that would prevail if the Borrower's Funded Debt to Consolidated Cash Flow
Ratio were equal to or greater than 2.00 but less than 2.50:
<TABLE>
<CAPTION>
Applicable Applicable
Funded Debt to Margin for Margin for
Consolidated Cash Flow Eurodollar Base Rate Letter of
Ratio Loans Loans Credit Fee Nonuse Fee
----- ----- ----- ---------- ----------
<S> <C> <C> <C> <C>
Equal to or greater than 225 basis points 75 basis points 225 basis points 35 basis points
2.50 per annum per annum per annum per annum
Equal to or greater than 175 basis points 25 basis points 175 basis points 30 basis points
2.00 but less than 2.50 per annum per annum per annum per annum
Equal to or greater than 150 basis points 0% 150 basis points 25 basis points
1.50 but less than 2.00 per annum per annum per annum
Equal to or greater than 125 basis points 0% 125 basis points 25 basis points
1.00 but less than 1.50 per annum per annum per annum
Less than 1.00 100 basis points 0% 100 basis points 20 basis points
per annum per annum per annum
</TABLE>
The Funded Debt to Consolidated Cash Flow ratio shall be confirmed by the
Agent on the basis of the Compliance Certificates delivered pursuant to
Paragraph 6.2(D) and the quarterly financial statements of the Borrower and its
Subsidiaries delivered to the Agent and Banks pursuant to Paragraph 6.2(B) and
year end consolidated financial statements delivered pursuant to Paragraph
6.2(C). The "Effective Period" shall be the period commencing after review and
approval of such Compliance Certificate computations by the Agent (which review
shall be completed within three (3) business days following delivery to the
Agent of the Compliance Certificate and financial statements of Borrower and its
Subsidiaries pursuant to Paragraph 6.2), which certificate and financial
statements indicate that the applicable test set forth above has been satisfied
as of the end of the immediately preceding fiscal quarter. If the Borrower fails
to timely furnish to Agent any financial statements and related Compliance
Certificate as required by this Agreement, then the maximum Applicable Margin
shall apply from the date those financial statements and related Compliance
Certificate were required to be delivered and shall remain in effect until the
Borrower furnishes them to the Agent and the same are reviewed by the Agent.
"Assignment and Acceptance" means an Assignment and Acceptance
substantially in the form of Exhibit N.
"Base Rate" means, for any Interest Period or any other period, the greater
of either (i) the annual interest rate most recently publicly announced by Agent
as its Prime Rate (which may not necessary represent the lowest or best rate
actually charged to any customers) in effect at its principal office in
Nashville, Tennessee, automatically fluctuating upward and downward as specified
in each
3
<PAGE>
announcement without special notice to any Borrower or any other Person, or
(ii) the sum of the Federal Funds Rate plus one-half of one percent per annum.
"Base Rate Loan" means a Loan which bears interest based on the Base Rate.
"Base Service Fee" means that minimum Service Fee to be paid by a Provider
to the Borrower or one of its Subsidiaries under a Service Agreement.
"Business Day" means any day other than a Saturday, a Sunday, a legal
holiday in the States of Tennessee, North Carolina, Ohio, or New York or a day
on which banking institutions in such states are authorized by law or other
governmental action to close except that, in the case of Eurodollar loans, such
day is also a day on which dealings between banks are carried on in U.S. dollar
deposits in the London interbank Eurodollar market.
"Capital Expenditures" means all amounts paid by the Borrower and its
Subsidiaries in connection with the purchase of property, plant, machinery,
equipment or other similar expenditures (including capital leases of any of the
foregoing) which would be required to be capitalized and shown on the
consolidated balance sheet of Borrower and its Subsidiaries in accordance with
generally accepted accounting principles consistently applied.
"Change of Control" means the occurrence, after the date of this Agreement,
of (i) any Person or two or more Persons acting in concert acquiring beneficial
ownership (within the meaning of Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended), directly or
indirectly, of securities of Borrower (or other securities convertible into such
securities) representing 51% or more of the combined voting power of all
securities of Borrower entitled to vote in the election of directors; or (ii)
commencing after the date of this Agreement, individuals who at the beginning of
this Agreement were directors of Borrower ceasing for any reason to constitute a
majority of the Board of Directors of Borrower unless the Persons replacing such
individuals were nominated by the Board of Directors of Borrower; or (iii) any
Person or two or more Persons acting in concert acquiring by contract or
otherwise, or entering into a contract or arrangement which upon consummation
will result in its or their acquisition of, or control over, securities of
Borrower (or other securities convertible into such securities) representing 51%
or more of the combined voting power of all securities of Borrower entitled to
vote in the election of directors.
"Collateral" has the meaning set forth in Paragraph 4.1.
"Collateral Documents" means the documents specified in Paragraphs 3.1 (C)
through (E).
"Commitment" means, for any Bank, such Bank's Commitment to make Revolving
Loans and to participate in Letter of Credit Liabilities to the Borrower
hereunder.
"Commitment Percentage" means each Bank's respective percentage of the
Total Commitments then in effect, or, in the case of any Person who hereafter
becomes a Bank, the percentage and/or amount as reflected on the signature page
of the Assignment and Acceptance executed by such Person; and provided further,
that the Commitment of each Bank and its Commitment Percentage shall be
decreased to reflect any assignments in accordance with Paragraph 10.8 hereof.
4
<PAGE>
"Committed Amount" means, for each Bank, the amount identified as its
Committed Amount opposite such Bank's name on the signature pages hereto as such
amount may be reduced pro rata based on reductions in the Total Commitments made
in accordance with the terms hereof.
"Compliance Certificate" means an Officer's Certificate in the form
attached hereto as Exhibit A-4 demonstrating in such detail as the Agent may
reasonably require the Borrower's calculation of the Applicable Margins and its
compliance with the covenants set forth in Paragraph 6.16 hereof and delivered
to each of the Banks by the Borrower pursuant to Paragraph 6.2(D).
"Consolidated Assets" means, as to the Borrower and its Subsidiaries, all
assets as shown on a consolidated balance sheet of the Borrower and its
Subsidiaries.
"Consolidated Capital" means, as to the Borrower and its Subsidiaries, all
Funded Debt plus Stockholders' Equity.
"Consolidated Cash Flow" means, as to the Borrower and its Subsidiaries,
the aggregate of: (A) Consolidated Earnings Before Interest and Taxes, (B)
amortization of intangible assets; and (C) depreciation; all as shown by the
consolidated statement of operations of the Borrower and its Subsidiaries,
calculated in accordance with generally accepted accounting principles
consistently applied. The Acquisition EBITDA of Practices acquired pursuant to a
Permitted Acquisition shall also be included in Consolidated Cash Flow.
Notwithstanding any other provision hereof, the Consolidated Cash Flow
attributed to Non-Corporate Unperfected Subsidiaries shall not be included in
Consolidated Cash Flow if Non-Corporate Unperfected Subsidiaries would account
for more than ten percent (10%) of total Consolidated Cash Flow.
"Consolidated Earnings Before Interest and Taxes" means, for any period of
determination, the consolidated net earnings (or net loss) of Borrower and its
Subsidiaries exclusive of all write-ups, gains from sales of assets, or other
extraordinary or nonrecurring gains whether of a cash or noncash nature, but
after all expenses and other proper charges other than Interest Expense and
taxes, determined for any period in accordance with generally accepted
accounting principles consistently applied.
"Consolidated Liabilities" means all Indebtedness that, in accordance with
generally accepted accounting principles consistently applied, are classified as
liabilities on a consolidated balance sheet of the Borrower and its
Subsidiaries.
"Consolidated Net Income" means, for any particular fiscal period, the net
earnings (or net loss) of the Borrower and its Subsidiaries on a consolidated
basis, determined in accordance with generally accepted accounting principles
consistently applied, excluding however (A) any gains resulting from the sale or
write-up of assets, and (B) any other extraordinary or non-recurring non-cash
gains or losses.
"Contingent Obligation" means, with respect to any Person, any direct or
indirect liability of such Person with respect to any Funded Debt, lease,
dividend, guaranty, letter of credit (other than a standby letter of credit with
no reasonable likelihood of draw, in the reasonable opinion of the Agent) or
other obligation (the "primary obligation") of another Person (the "primary
obligor"), whether or not contingent, (a) to purchase, repurchase or otherwise
acquire such primary obligations or any property constituting direct or indirect
security therefor, (b) to advance or provide funds (i) for the payment or
discharge of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level
5
<PAGE>
of income or financial condition of the primary obligor, (c) to purchase
property, securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor in respect
thereof to make payment of such primary obligation, or (d) otherwise to assure
or hold harmless the owner of any such primary obligation against loss or
failure or inability to perform in respect thereof. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good faith.
"Debt Service" means for any given period, the sum of the payments made by
the Borrower and its Subsidiaries of (A) Interest Expense, (B) Rental Expense,
and (C) any mandatory repayments of principal on any Consolidated Liabilities,
plus (D) one-seventh (1/7th) of the amount then outstanding under the Revolving
and Swingline Loans.
"Eligible Assignee" means (A) a commercial bank organized under the laws of
the United States, or any State thereof, and having a combined capital and
surplus of at least $300,000,000.00; (B) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $300,000,000.00,
provided that such bank is acting through a branch or agency located in the
United States; (C) any Bank and any Affiliate of a Bank; (D) any Federal Reserve
Bank; and (E) any other Person consented to by the Agent.
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) and the Superfund Amendments and
Reauthorization Act (SARA); the Resource Conservation and Recovery Act (RCRA);
the Emergency Planning and Community Right to Know Act; the Clean Water Act
(Federal Water Pollution Control Act); the Safe Drinking Water Act; the Clean
Air Act; the Surface Mining Control and Reclamation Act; the Coastal Zone
Management Act; the Noise Control Act; the Occupational Safety and Health Act;
the Toxic Substances Control Act (TSCA); the Federal Insecticide, Fungicide and
Rodenticide Act (FIFRA); any so-called "Superfund" or "Superlien" law; or any
other federal, state or local statute, law, ordinance, code, rule, regulation,
order, decree or other requirements of any governmental body regulating,
relating to or imposing liability or standards of conduct concerning any
Hazardous Materials or toxic or dangerous chemical, waste, substance or
material.
"Eurodollar Liabilities" has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"Eurodollar Loan" means any Loan which bears interest based on the Adjusted
LIBO Rate.
"Eurodollar Rate Reserve Percentage" means the reserve percentage
applicable during any Eurodollar Loan Interest Period (or if more than one such
percentage shall be so applicable, the daily average of such percentages for
those days in such Interest Period during which any such percentage shall be so
applicable) under regulations issued from time to time by the Board of Governors
of the Federal Reserve System (or any successor) for determining the maximum
reserve requirement (including, without limitation, any emergency, supplemental
or other marginal reserve requirement) for banks with respect to liabilities or
assets consisting of or including Eurodollar Liabilities having a term equal to
such Interest Period.
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"Event of Default" has the meaning set forth in Paragraph 8.1.
"Federal Funds Rate" means, for any day, the rate per annum (rounded upward
to the nearest 1/100th of 1% per annum, if such average is not such a multiple)
equal to the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers on such date, as published by the Federal Reserve Bank of New York
on the Business Day next succeeding such day, provided that if such day is not a
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Business Day as so published on the next
succeeding Business Day, and (ii) if no such rate is so published, on such next
succeeding Business Day, the Federal Funds Rate for such date shall be the
average rate quoted on such date on such transactions as determined by the
Agent.
"Financial Statements" means the consolidated balance sheets of the
Borrower as of December 31, 1996 and September 30, 1997 and statements of income
and shareholders equity of the Borrower and its Subsidiaries for the years or
months ended on such dates.
"Financing Statements" means any one or more filings made pursuant to the
UCC to perfect the security interests in the Collateral granted to Banks
pursuant to Section IV hereof.
"Fiscal Year" means the fiscal year of the Borrower ending on December 31
of each year.
"Fraud and Abuse Laws" means Section 1128B(b) of the Social Security Act,
42 U.S.C. Section 1320a-7b(b) and Section 1877 of the Social Security Act, 42
U.S.C. Section 1877, as from time to time amended; any successor statute(s)
thereto; all rules and regulations promulgated thereunder; and any other Laws
(including any state Laws) relating to the ownership of medical facilities by
providers of medical services or the referral of patients to medical facilities
owned by providers of medical services.
"Funded Debt" means at any date, with respect to the Borrower and its
Subsidiaries, all of the following obligations (without duplication) of Borrower
and its Subsidiaries as of such date: (i) all obligations for borrowed money,
(ii) all obligations evidenced by bonds, debentures, notes or other similar
instruments, (iii) all obligations to pay the deferred purchase price of
property, except trade accounts payable arising in the ordinary course of
business, (iv) all obligations as lessee under capitalized leases, (v) all
obligations to purchase securities or other property which arise out of or in
connection with the sale of the same or substantially similar securities or
property, (vi) any Contingent Obligation, (vii) all non-contingent obligations
to reimburse any bank or other person in respect of amounts paid under a letter
of credit or similar instrument, (viii) all debt of others secured by a lien on
any asset of Borrower and its Subsidiaries, whether or not such debt is assumed,
and (ix) all debt of others guaranteed by Borrower and/or its Subsidiaries.
"Funded Debt to Consolidated Cash Flow Ratio" means, as of any fiscal
quarter-end of Borrower and its Subsidiaries, their Funded Debt at the end of
such fiscal quarter divided by Consolidated Cash Flow for the four (4) quarter
period ending on such fiscal quarter-end.
"Government Authority" means any governmental or quasi-governmental entity,
court or tribunal including, without limitation, any department, commission,
board, bureau, agency, administration, service or other instrumentality of any
foreign or domestic governmental entity.
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"Guarantor" individually means any one of the following corporations, each
of which is also a Subsidiary for the purposes of this Agreement, and
"Guarantors" means all such corporations jointly and severally:
(A) SCN of Princeton, Inc., a New Jersey corporation.
"Hazardous Materials" means any hazardous, toxic or dangerous chemical,
substance, waste or material defined as such in any of the Environmental Laws.
"Indebtedness" means, as to the Borrower or any Subsidiary, all items of
indebtedness, obligation or liability, whether matured or unmatured, liquidated
or unliquidated, direct or contingent, joint or several, including without
limitation:
(A) All indebtedness guaranteed, directly or indirectly, in any manner,
or endorsed (other than for collection or deposit in the ordinary course of
business) or discounted with recourse;
(B) All indebtedness in effect guaranteed, directly or indirectly,
through agreements, contingent or otherwise: (1) to purchase such indebtedness;
or (2) to purchase, sell or lease (as lessee or lessor) property, products,
materials or supplies or to purchase or sell services, primarily for the purpose
of enabling the debtor to make payment of such indebtedness or to assure the
owner of the indebtedness against loss; or (3) to supply funds to or in any
other manner invest in the debtor;
(C) All indebtedness secured by (or for which the holder of such
indebtedness has a right, contingent or otherwise, to be secured by) any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance upon property owned or acquired subject thereto, whether or not the
liabilities secured thereby have been assumed; and
(D) All indebtedness incurred as the lessee of facilities, goods or
services under leases that, in accordance with generally accepted accounting
principles consistently applied, should not be reflected on the Borrower's or
any Subsidiary's balance sheet.
"Interest Expense" means, with respect to the Borrower and its Subsidiaries
for any period, the gross interest expenses of the Borrower and its Subsidiaries
for such period determined in accordance with generally accepted accounting
principles consistently applied as shown on its income statement.
"Interest Payment Date" shall mean, as to any Loan, the last day of the
Interest Period applicable to such Loan and, in addition, in the case of a
Eurodollar Loan with an Interest Period of six (6) months' duration, the day
that would have been an Interest Payment Date for such Loan if such Loan had an
Interest Period of three (3) months.
"Interest Period" shall mean: (a) as to any Eurodollar Loan, the period
commencing on the date of such Eurodollar Loan and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the
Borrower may elect, and (b) as to any Base Rate Loan, the period commencing on
the date of such Loan and ending on the first (1st) day of the next calendar
month, and (ii) the applicable Termination Date; provided, however, that (x) if
any Interest Period would end on a day that shall not be a Business Day, such
Interest Period shall be extended to the next succeeding Business Day unless,
with respect to Eurodollar Loans only, such next succeeding Business Day would
fall in the next calendar
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month, in which case such Interest Period shall end on the next preceding
Business Day and (y) no Interest Period with respect to any Loan shall end later
than the Termination Date. Interest shall accrue from and including the first
day of an Interest Period to but excluding the last day of such Interest Period.
"Interest Rate Contracts" means interest rate swap agreements, interest
rate cap agreements, interest rate collar agreements, interest rate insurance
and other agreements or arrangements designed to provide protection against
fluctuations in interest rates.
"Issuing Bank" means NationsBank of Tennessee, N.A. or any successor
thereto, as the issuer of Letters of Credit under Paragraph 2.3, together with
its successors and assigns in each capacity; provided that no successor or
assign may have a letter of credit risk rating less than that accorded to
letters of credit issued by NationsBank or its affiliates.
"Laws" means all ordinances, statutes, rules, regulations, orders,
injunctions, writs or decrees of any government or political subdivision or
agency thereof, or any court or similar entity estab lished by any thereof.
"Letter of Credit" shall have the meaning assigned to such term in
Paragraph 2.3.
"Letter of Credit Documents" means, with respect to any Letter of Credit,
collectively, any application for any Letter of Credit and any other agreements,
instruments, guarantees or other documents (whether general in application or
applicable only to such Letter of Credit) governing or providing for (a) the
rights and obligations of the parties concerned or at risk with respect to such
Letter of Credit or (b) any collateral security for any of such obligations.
"Letter of Credit Interest" means, for each Bank, such Bank's participation
interest (or, in the case of the Issuing Bank, the Issuing Bank's retained
interest) in the Issuing Bank's liability under Letters of Credit and such
Bank's rights and interests in Reimbursement Obligations and fees, interest and
other amounts payable in connection with Letters of Credit and Reimbursement
Obligations.
"Letter of Credit Liability" means, without duplication, at any time and in
respect of any Letter of Credit, the sum of (a) the undrawn face amount of such
Letter of Credit plus (b) the aggregate unpaid principal amount of all
Reimbursement Obligations of the Borrower at such time due and payable in
respect of all drawings made under such Letter of Credit. For purposes of this
Agreement, a Bank (other than the Issuing Bank) shall be deemed to hold a Letter
of Credit Liability in an amount equal to its participation interest in the
related Letter of Credit under Paragraph 2.3, and the Issuing Bank shall be
deemed to hold a Letter of Credit Liability in an amount equal to its retained
interest in the related Letter of Credit after giving effect to the acquisition
by the Banks (other than the Issuing Bank) of their participation interests
under Paragraph 2.3.
"Loan" or "Loans" means Revolving Loans made by the Banks pursuant to
Paragraph 2.1 to fund the cost of Acquisitions, Capital Expenditures, and
Working Capital, as well as Swingline Loans advanced pursuant to Paragraph 2.11.
"Loan Documents" means this Agreement, the Notes, the Letter of Credit
Documents, the Collateral Documents, any guaranty agreements hereafter executed
with respect to the Obligations or any other document executed or delivered by
or on behalf of the Borrower or any Subsidiary evidencing or securing the
Obligations.
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"Majority Banks" means those Banks which are then in compliance with their
obligations hereunder (as determined by Agent) and which have sixty-six and two
thirds percent (66 2/3%) or more of the aggregate unpaid principal amount of the
outstanding Loans and the Letter of Credit Liabilities, or, if no such amounts
are then outstanding, Banks having at least sixty-six and two thirds percent (66
2/3%) of the Commitments; provided, Majority Banks shall always require two (2)
Banks, regardless of whether one (1) Bank alone has more than the requisite
percentage, unless one or more of the other Bank(s) is not in compliance
hereunder as determined by the Agent.
"Material Adverse Change" means a material adverse change in the business
or conditions (financial or otherwise) or in the results of operations of the
Borrower and its Subsidiaries (unless otherwise indicated), taken as a whole as
reasonably determined by the Majority Banks.
"Material Adverse Effect" means, when referring to the taking of an action
or the omission to take an action, that such action, if taken, or omission,
would have a material adverse effect on the business, condition (financial or
otherwise) or results of operations of the Borrower and its Subsidiaries (unless
otherwise indicated), taken as a whole as reasonably determined by the Majority
Banks.
"Non-Corporate Subsidiary" means a Subsidiary that is other than a
corporation.
"Non-Corporate Unperfected Subsidiary" means a Non-Corporate Subsidiary,
Borrower's interest in which is not subject to a perfected security interest to
secure the Obligations.
"Note" means a promissory note substantially in the form of Exhibit A
attached hereto, duly executed and delivered to the Agent by Borrower and
payable to the order of each of the Banks in the amount of its Commitment,
including any amendment, modification, renewal, extension, or replacement
thereof, and "Notes" means the Notes payable to each of the Banks collectively.
"Notice of Borrowing" has the meaning set forth in Paragraph 2.2(A).
"Notice of Conversion" has the meaning set forth in Paragraph 2.2(B).
"Obligations" means the obligation of the Borrower:
(A) To pay the principal of and interest on the Notes in accordance with
the terms thereof and to satisfy all of its other liabilities to the Agent, the
Banks, NationsBank, N.A., and NationsBanc Montgomery Securities, Inc.,
hereunder, whether now existing or hereafter incurred, matured or unmatured,
direct or contingent, joint or several, including any extensions, modifications,
and renewals thereof and substitutions therefor;
(B) To pay all Letter of Credit Liabilities, including any Reimbursement
Obligations and any other amounts owed by Borrower under any Letter of Credit
Documents;
(C) To repay to the Banks all amounts advanced by the Banks hereunder on
behalf of the Borrower, including, but without limitation, amounts now or
hereafter owed under Interest Rate Contracts to one or more Banks, advances for
overdrafts, principal or interest payments to prior secured parties, mortgagees,
or lienors, or for taxes, levies, insurance, rent, repairs to or maintenance or
storage of any of the Collateral; and
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(D) To reimburse the Agent, the Banks, NationsBank, N.A., and
NationsBanc Montgomery Securities, Inc. on demand, for their reasonable
out-of-pocket expenses and costs, including the reasonable fees and expenses of
the Agent's counsel in connection with the preparation, amendment, modification,
or enforcement of this Agreement and the documents required hereunder
(including, without limitation, any proceeding brought or threatened to enforce
payment of any of the obligations referred to in the foregoing paragraphs (A),
(B) and (C), or any suits or claims against any Bank whatsoever as a result of
such Bank's execution of this Agreement and making of its Loan); provided, the
expenses and attorneys' fees of all Banks shall be reimbursed in connection with
the enforcement of this Agreement and the other Loan Documents.
"Permitted Acquisition" means any business, enterprise or operation of
any Person unrelated to or unaffiliated with the Borrower which is the subject
of an Acquisition permitted under Paragraph 7.13.
"Permitted Acquisition Indebtedness" means purchase money indebtedness
incurred by the Borrower or any Subsidiary in connection with the purchase of a
Permitted Acquisition approved by the Banks pursuant to Paragraphs 3.3 and 7.13
that:
(A) Is in a principal amount not more than sixty percent (60%) of the
Permitted Acquisition Price;
(B) Is unsecured;
(C) Has a maturity of not less than three (3) years; and
(D) Is not cross-defaulted with and is not more restrictive in its terms
and conditions than the Obligations secured hereby, in the judgment of the
Banks.
In addition, it shall include such other purchase money indebtedness as
has otherwise been approved by the Banks pursuant to Paragraph 3.3 or not
prohibited by Paragraph 7.5(8).
"Permitted Acquisition Price" means the aggregate purchase price of any
Permitted Acquisition, including notes, assumed debt, amounts allocated to
non-compete agreements and the minimum amounts reasonably expected to be paid
under any earn-out agreements.
"Permitted Investments" means all expenditures made and all liabilities
incurred (contingent or otherwise) by any Borrower or any Subsidiary for:
(A) obligations issued or guaranteed as to principal and interest by the
United States of America and having a maturity of not more than twelve (12)
months from the date of purchase;
(B) certificates of deposit, issued by banks organized under the laws of
the United States of America or any State thereof and foreign subsidiaries of
such banks, having a rating of not less than A or its equivalent by Standard &
Poor's Corporation, or its successor;
(C) commercial paper or finance company paper which is rated not less than
prime-one or A-1 or their equivalents by Moody's Investor Services, Inc. or
Standard & Poor's Corporation or their successors;
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(D) repurchase agreements related to an investment of the type described in
Clause (A) above, provided that the counter-party thereto is a government
securities dealer designated by the Federal Reserve Bank of New York as a
"Reporting Dealer" and whose financial statements indicate that it has a capital
of at least $50,000,000.00 and that the investment which is the subject of such
repurchase agreement shall be at all times during the term of the repurchase
agreement in the possession of the Borrower (or the Agent) or the interest of
such Borrower therein shall be appropriately recorded in accordance with the
United States Federal Regulations regarding Book Entry Treasury Securities;
(E) bankers acceptances issued by banks that qualify for the NationsBank of
Tennessee, N.A. Federal Funds List, not to exceed $500,000.00 per issuer and a
maximum maturity of 180 days;
(F) Eurodollar time deposits with banks having a minimum rating by Keefe
Bankwatch of A for domestic banks and I for foreign banks, provided the maximum
deposit with any bank does not exceed $500,000.00, the concentration in any
individual country does not exceed $250,000.00 or 25% of the total amount of all
Permitted Investments, whichever is greater, and the aggregate amount of
Eurodollar time deposits does not exceed $500,000.00 or 75% of the amount of all
Permitted Investments, whichever is greater;
(G) money market funds which invest in money market instruments consistent
with the guidelines herein set forth for other Permitted Investments provided
the same do not exceed 25% of the total amount of all Permitted Investments nor
exceed $500,000.00 in any one money market fund;
(H) state and municipal general obligation bonds rated A or better by
Standard & Poor's Corporation or Moody's Investor Services, Inc., for long term
issues and Moody's MIG-1 for short term issues, provided no security shall have
a maturity in excess of one year, no more than $500,000.00 shall be invested
with any single issuer, and the concentration in any one type of issue (states,
local governments, school districts, municipal power authorities, hospitals,
housing authorities, etc.) shall be limited to 25% of the total amount of all
Permitted Investments or $250,000.00, whichever is greater; and
(I) Permitted Acquisitions.
"Permitted Liens" means:
(A) Liens for taxes, assessments, or similar charges, incurred in the
ordinary course of business that are not yet due and payable;
(B) Pledges or deposits made in the ordinary course of business to
secure payment of workmen's compensation, or to participate in any fund in
connection with workmen's compensation, unemployment insurance, old-age pensions
or other social security programs;
(C) Liens of mechanics, materialmen, warehousemen, carriers, or other
like liens, securing obligations incurred in the ordinary course of business
that are not yet due and payable;
(D) Good faith pledges or deposits made in the ordinary course of
business to secure performance of bids, tenders, contracts (other than for the
repayment of borrowed money) or leases, not in excess of ten percent (10%) of
the aggregate amount due thereunder, or to secure statutory obligations, or
surety, appeal, indemnity, performance or other similar bonds required in the
ordinary course of business;
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(E) Encumbrances consisting of zoning restrictions, easements or other
restrictions on the use of real property, none of which materially impairs the
use of such property by the Borrower or any Subsidiary in the operations of its
business, and none of which is violated in any material respect by existing or
proposed structures or land use;
(F) Liens in favor of the Agent for the benefit of the Banks;
(G) Existing liens set forth or described on Exhibit B, attached hereto
and made a part hereof, and renewals thereof;
(H) Liens of equipment notes and capitalized leases granted to secure
not more than the amount of the purchase price financed thereby; provided, that
in the case of an Acquisition or assumption the Acquisition or assumption is
either permitted by Paragraph 7.13 or not otherwise prohibited herein;
(I) Landlord's liens on Fixtures retained in any lease;
(J) The following, if the validity or amount thereof is being contested
in good faith by appropriate and lawful proceedings, so long as levy and
execution thereon have been stayed and continue to be stayed; if Borrower or any
Subsidiary has posted such security as may be required by Laws or as is
reasonably satisfactory to Banks; and if the following do not, in the aggregate,
materially detract from the value of the properties of the Borrower or any
Subsidiary taken as a whole, or materially impair the use thereof in the
operation of their respective businesses:
(1) Claims or liens for taxes, assessments or charges due and payable
and subject to interest or penalty;
(2) Claims, liens and encumbrances upon, and defects of title to,
real or personal property, including any attachment of personal or real property
or other legal process prior to adjudication of a dispute on the merits;
(3) Claims or liens of mechanics, materialmen, warehousemen,
carriers, or other like liens; and
(4) Adverse judgments on appeal.
"Person" means any individual, corporation, partnership, limited liability
company, association, joint-stock company, estate, trust, unincorporated
organization, joint venture, court or government or political subdivision or
agency thereof.
"Pledged Instruments" means the stock, membership interests, partnership
interests, notes and other interests and documents pledged pursuant to the
Amended and Restated Pledge Agreement described in Paragraph 3.1, as amended
from time to time to reflect the pledge of newly formed Subsidiaries and/or
Acquisitions.
"Pledgor" means the owner(s) of the Pledged Instruments as set forth in the
Pledge Agreement(s).
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"Potential Default" means a condition or event which, after notice or lapse
of time or both, would constitute an Event of Default if that condition or event
were not cured or removed within any applicable grace or cure period.
"Practice" means a musculoskeletal treatment center or a musculoskeletal or
orthopedic medical practice. Whenever in this Agreement "Practice" is used in
describing an Acquisition by the Borrower or any Subsidiary, and if the
reference relates to a medical practice, such reference is to the Acquisition of
the assets used in the operation of the Practice that can lawfully be acquired
by Borrower or any Subsidiary or to the Acquisition of an interest in an entity
that owns, as of the time of purchase, only those assets that can be lawfully
acquired by Borrower or any Subsidiary.
"Prime Rate" means that rate announced by NationsBank of Tennessee, N.A.
from time to time as the NationsBank Prime Rate. No representation is made
herein that the NationsBank Prime Rate is the lowest rate at which any bank will
lend to its customers.
"Pro-Forma Effect" means, in making any calculation to determine compliance
with Subparagraphs 3.3(D) and 7.13(A), that the calculation will be made
assuming that (a) any Permitted Acquisition made during the twelve-month period
ending on the date of determination (the "Reference Period"), and (b) any
Indebtedness associated with (a) incurred during the Reference Period or to be
incurred as of the date of determination, were made or incurred on the first day
of the Reference Period. Any funds to be used by Borrower or any Subsidiary in
consummating a Permitted Acquisition will be assumed to have been used for that
purpose as of the first day of the Reference Period. Acquisition EBITDA for the
Reference Period associated with the Practice acquired or to be acquired in any
Permitted Acquisition will be included in the calculation of Acquisition EBITDA
for Borrower and its Subsidiaries. Any Indebtedness to be incurred by Borrower
or any Subsidiary in connection with the consummation of any Permitted
Acquisition will be assumed to have been incurred on the first day of the
Reference Period. Interest Expense with respect to such Indebtedness assumed to
have been incurred on the first day of the Reference Period which bears interest
at a floating rate shall be calculated at the current rate under the agreement
governing such Indebtedness (including this Agreement if the Indebtedness is
incurred hereunder). Any Interest Expense incurred during the Reference Period
which was or is to be refinanced with proceeds of Indebtedness assumed to have
been incurred as of the first day of the Reference Period will be excluded from
the calculation for which a Pro-Forma Effect is being given.
"Provider" means an orthopedic doctor or other musculoskeletal doctor whose
specialty is complementary to the practice of orthopedics and who performs
professional services respecting a Practice that is either managed by Borrower
or any Subsidiary or the assets of which are owned by Borrower or any
Subsidiary.
"Quarterly Dates" means the first day of each January, April, July, or
October, the first of which shall be the first such day after October 1, 1997.
"Quarterly Period" means (a) the Period from the date of Closing to the
next succeeding Quarterly Date and (b) thereafter, any period from the first day
after a Quarterly Date to the next succeeding Quarterly Date.
"Real Property" means those leases and other interests in real estate
described in Exhibit D hereto.
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"Records" means correspondence, memoranda, tapes, books, discs, paper,
magnetic storage and other documents or information of any type, whether
expressed in ordinary or machine language.
"Reimbursement Obligations" means, at any time, the obligation of the
Borrower then outstanding, or which may thereafter arise in respect of any or
all Letters of Credit then outstanding, to reimburse amounts paid by the Issuing
Bank and the other Banks with respect to their Letter of Credit Interests in
respect of any drawings under a Letter of Credit.
"Rental Expense" means, with respect to the Borrower and its Subsidiaries
for any period, the gross rental expenses that are paid by the Borrower and its
Subsidiaries for such period determined in accordance with generally accepted
accounting principles consistently applied.
"Revolving Loans" means revolving credit loans made pursuant to Paragraphs
2.1 and 2.2.
"Seller" means the former owner of a Practice that is acquired by the
Borrower or any Subsidiary.
"Service Agreement" means one of those service or management agreements now
or hereafter entered into between a Provider or Providers and the Borrower or
any Subsidiary in connection with the management of an orthopedic or
musculoskeletal practice.
"Shareholders' Equity" means, at any time, the sum of the following
accounts set forth in a consolidated balance sheet of the Borrower and its
Subsidiaries, prepared in accordance with generally accepted accounting
principles consistently applied: (A) the par or stated value of all outstanding
capital stock; (B) capital surplus; and (C) retained earnings.
"Specialists-SCN, LLC" means Specialists-SCN, LLC, a California limited
liability company composed of Borrower, Eric E. Bugna, M.D. and John C. Kofoed,
M.D.
"Specialists-SCN Loan" means the loan in the aggregate amount of not more
than Eight Hundred Thousand Dollars ($800,000.00) to be made by Borrower to
Specialists-SCN, LLC pursuant to sub-paragraph 7.10(2) hereof.
"Specialists-SCN Loan Documents" means that Note as well as the Deed of
Trust and other documents, from time to time, evidencing the Specialists-SCN
Loan.
"Subordinated Indebtedness" means all Indebtedness incurred at any time by
the Borrower or any Subsidiary, the repayment of which is subordinated to the
Loans in form and manner satisfactory to the Banks. All existing Subordinated
Indebtedness is so specified in Exhibit C attached hereto, and a form of
subordination agreement acceptable to the Banks for notes, debentures and/or
convertible debentures to be issued to and held by Providers is attached hereto
as Exhibit C-1.
"Subsidiary" means any Person of which fifty percent (50%) or more of the
outstanding voting securities or other equity interests in such Person shall, at
the time of determination, be owned directly, or indirectly through one or more
intermediaries, by the Borrower and "Subsidiaries" means all such Persons
together with each of the Guarantors, if different.
"Swingline Bank" means NationsBank of Tennessee, N.A., together with its
successors.
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"Swingline Commitment" means the commitment of the Swingline
Bank to make the Swingline Loans in the aggregate principal amount at any time
outstanding of up to the Swingline Committed Amount.
"Swingline Committed Amount" has the meaning assigned to such term in
Paragraph 2.11(A).
"Swingline Loan" has the meaning assigned to such term in Paragraph
2.11(A).
"Swingline Note" means the promissory note of the Borrower in favor of the
Swingline Bank in the original principal amount of $2,500,000, as such
promissory note may be amended, modified, restated or replaced from time to
time.
"Termination Date" means November 21, 2000, unless extended in writing by
the Banks in their sole discretion.
"Total Commitments" means the aggregate of the several Commitments of the
Banks in the principal amount of up to Seventy-Five Million Dollars
($75,000,000.00) as set forth in Section II of this Agreement, subject to
reduction by the Borrower pursuant to Paragraph 2.6 below.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of Tennessee, as it may be amended from time to time; provided that if
by reason of mandatory provisions of law, the perfection or the effect of
perfection or non-perfection of a security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than Tennessee, "UCC" means the Uniform Commercial Code as in effect in such
other jurisdiction for purposes of the provisions hereof relating to such
perfection or effect of perfection or non-perfection.
"Unutilized Loan Commitment" means, with respect to any Bank at any time,
such Bank's maximum Commitment at such time less the sum of (i) the aggregate
principal amount of all Revolving Loans made by such Bank that are outstanding
at such time, and (ii) such Bank's Commitment Percentage of all Letter of Credit
Liabilities at such time.
"West Central Ohio Group, Ltd." means West Central Ohio Group, Ltd., an
Ohio limited liability company formed pursuant to the Ohio Limited Liability
Company Act, Ohio Revised Code Chapter 1705 as amended from time to time.
"West Central Ohio Loans" means those loans in the aggregate amount of not
more than $7,000,000.00 to be made by Borrower to West Central Ohio Group, Ltd.
pursuant to Subparagraph 7.10(1) hereof.
"West Central Ohio Loan Documents" means those notes as well as the loan
agreement, security agreement, mortgage, financing statements and other
documents from time to time evidencing and securing the West Central Ohio Loans.
"Working Capital" means those funds used for general corporate purposes in
the ordinary course of business, but excluding the costs of the Acquisition of
any Person, permitted or otherwise, and the costs of Capital Expenditures.
The definitions in this Section I shall apply equally to both the singular
and plural forms of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding
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masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
All references herein to Sections, Paragraphs, Exhibits and Schedules shall be
deemed references to Sections and Paragraphs of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with generally accepted accounting principles
consistently applied, as in effect from time to time; provided, however, if (a)
the Borrower shall object to determining such compliance on such basis at the
time of delivery of such financial statements due to any change in generally
accepted accounting principles or the rules promulgated with respect thereto or
(b) the Agent or the Majority Banks shall so object in writing within 30 days
after delivery of such financial statements, then such calculations shall be
made on a basis consistent with the most recent financial statements delivered
by the Borrower to the Banks as to which no such objection shall have been made.
SECTION II. THE LOANS
2.1 Revolving Loans. (A) Subject to the terms and conditions of and relying
on the representations, warranties and covenants contained in this Agreement,
each Bank severally agrees to make available to the Borrower revolving credit
loans ("Revolving Loans") from time to time until the Termination Date for the
purposes hereinafter set forth; provided, however, none of the Banks shall be
obligated to make any Revolving Loan to the extent that immediately after making
any such Revolving Loan the sum of the outstanding principal balance of all
Revolving Loans, Swingline Loans and Letter of Credit Liabilities would exceed
the then applicable Total Commitments; provided, further, no Bank shall be
obligated to make any Revolving Loan to the extent that immediately after the
making of such Revolving Loan such Bank's pro rata share (based upon its
Commitment then in effect) of Revolving Loans and Letter of Credit Liabilities
shall exceed such Bank's Committed Amount. The failure of any Bank to make its
Committed Percentage of any Revolving Loan shall not in itself relieve any other
Bank of its obligation under this Paragraph 2.1. Prior to the Termination Date,
the Borrower may borrow, repay and reborrow hereunder up to the full amount of
the Total Commitments in accordance with the terms of this Agreement. Revolving
Loans hereunder may consist of Base Rate Loans or Eurodollar Loans (or a
combination thereof) as the Borrower may request, and may be repaid and
reborrowed in accordance with the provisions hereof.
(B) Revolving Loan advances may be used by the Borrower for Permitted
Acquisitions, Capital Expenditures, Reimbursement Obligations, Working Capital,
Provider loans not prohibited by Subparagraph 7.10(2), and the development of
musculoskeletal focused surgery centers. The Banks shall have no obligation to
fund unless Borrower is in compliance with all of the provisions and conditions
of this Agreement.
(C) The aggregate minimum principal amount of each Revolving Loan advanced
hereunder shall be not less than $500,000 (and integral multiples of $100,000 in
excess thereof); provided, Eurodollar Loan advances shall be in the minimum
amount of $2,500,000 and shall be in integral multiples of $500,000 in excess
thereof.
2.2 Notices, Interest Rates and Payments of Interest.
(A) The Borrower shall give the Agent irrevocable notice in the form
attached hereto as Exhibit A-1 (a "Notice of Borrowing") not later than 3:00
p.m. Charlotte, North Carolina time at least three (3) Business Days prior to
the date of any requested disbursement of Eurodollar Loans and one (1) Business
Day prior to any requested disbursement of Base Rate Loans. Each Borrowing
Notice shall be written and may be made by telecopier, telex or cable in
addition to the means set forth for
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giving notice in Paragraph 10.5. Each Borrowing Notice shall specify the
requested date of such requested disbursement; the aggregate amount of such
disbursement; the type of Revolving Loan, i.e., Eurodollar or Base Rate; and if
a Eurodollar Loan, the designated Interest Period. Upon receipt of a Notice of
Borrowing, the Agent shall promptly advise the other Banks of any Borrowing
Notice given pursuant to this Paragraph and each Bank's portion of the requested
Revolving Loan. Subject to the terms and conditions hereof, each Bank will make
its pro rata share of each Revolving Loan advance available to the Agent by
12:00 p.m. (Charlotte, North Carolina time) on the date specified in the Notice
of Borrowing by deposit in U.S. dollars of immediately available funds to
account number 0112996681 at the offices of the Agent in Nashville, Tennessee
(or at such other address as the Agent may designate in writing), and Agent will
credit the proceeds of the Revolving Loans received by Agent from the Banks to
the Borrower's deposit account with Agent. Each such Borrowing Notice shall
obligate the Borrower to accept the Revolving Loan disbursement requested
thereby. No Bank shall be responsible for the failure or delay by any other Bank
in its obligation to make Revolving Loan advances provided, however, that the
failure of any Bank to fund its Commitments hereunder shall not relieve any
other Bank of its Commitments hereunder. Unless the Agent has been notified by
any Bank prior to the making of any such Revolving Loan advance that such Bank
does not intend to make available to the Agent its Commitment Percentage of the
Revolving Loan advance to be made on such date, the Agent may assume that such
Bank has made or will make such amount available to the Agent on the date of
such Revolving Loan advance, and the Agent, in reliance upon such assumption,
may (in its sole discretion without any obligation to do so) make available to
the Borrower a corresponding amount. If such corresponding amount is not in fact
made available to the Borrower, the Agent shall be entitled to recover such
corresponding amount from such Bank. If such Bank does not pay such
corresponding amount forthwith upon the Agent's demand therefor, the Agent will
promptly notify the Borrower and the Borrower shall immediately pay such
corresponding amount to the Agent. The Agent shall also be entitled to recover
from such Bank or the Borrower, as the case may be, interest on such
corresponding amount in respect of each day from the date such corresponding
amount was made available by the Agent to the Borrower to the date such
corresponding amount is recovered by the Agent, at a per annum rate equal to (i)
if paid by such Bank, within two Business Days of making such corresponding
amount available to the Borrowers, the overnight Federal Funds Rate, and
thereafter the Base Rate, and (ii) if paid by the Borrowers, the then applicable
rate calculated in accordance with Paragraph 2.2.
(B) The Borrower shall have the right at any time, on prior irrevocable
written or telex notice to the Agent in the form attached hereto as Exhibit A-2
(a "Notice of Conversion") not later than 2:00 p.m., Charlotte, North Carolina
time, three (3) Business Days prior to the date of any requested conversion, to
convert any Base Rate or Eurodollar Loan into a Loan of another type, or to
continue any Eurodollar Loan for another Interest Period (specifying in each
case the Interest Period to be applicable thereto), subject in each case to the
following:
(1) Each conversion or continuation shall be made prorata among the
Banks in accordance with the respective principal amounts of the Loan converted
or continued;
(2) No Eurodollar Loan shall be converted at any time other than at
the end of the Interest Period applicable thereto;
(3) Each conversion shall be effected by applying the proceeds of the
new Eurodollar and/or Base Rate Loan, as the case may be, to the Loan (or
portion thereof) being converted;
(4) The number of Eurodollar Loans outstanding at one time may not
exceed eight (8); and
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(5) No Interest Period may be selected for any Eurodollar Loan that
would end later than a repayment date occurring on or after the first day of
such Interest Period if the aggregate outstanding amount of Eurodollar Loans
with Interest Periods ending prior to such repayment date plus the aggregate
outstanding amount of all Base Rate Loans is not equal to or greater than the
principal amount(s) of the Loan(s) to be paid on such repayment date.
Each notice pursuant to this subparagraph shall be irrevocable and
shall refer to this Agreement and specify (1) the identity and principal amount
of the particular Revolving Loan that the Borrower request be converted or
continued, (2) if such notice requests conversion, the date of such conversion
(which shall be a Business Day), and (3) if a Revolving Loan is to be converted
to a Eurodollar Loan or a Eurodollar Loan is to be continued, the Interest
Period with respect thereto. In the event that the Borrower shall not give
notice to continue any Eurodollar Loan for a subsequent period, such Eurodollar
Loan (unless repaid) shall automatically be converted into a Base Rate Loan. If
the Borrower shall fail to specify in any Borrowing Notice the type of borrowing
or, in the case of a Eurodollar Loan, the applicable Interest Period, the
Borrower will be deemed to have requested a Base Rate Loan. If Agent reasonably
believes that any failure by Borrower to specify the type of borrowing or the
applicable Interest Period shall have resulted from failure of communications
equipment or clerical error, then prior to funding any such borrowing the Agent
shall use reasonable efforts to obtain confirmation from Borrower of the
contents of such Borrowing Notice; however, in the absence of prompt
confirmation by Borrower which specifies the type of borrowing and/or the
applicable Interest Period, the Borrower will be deemed to have requested a Base
Rate Loan. Notwithstanding anything to the contrary contained above, if an Event
of Default or Potential Default shall have occurred and be continuing, no
Eurodollar Loan may be continued and no Base Rate Loan may be converted into a
Eurodollar Loan.
(C) Interest shall be charged and paid on each Revolving Loan from the date
of the initial advance thereunder until such Loan is paid or converted as
follows:
(1) For a Base Rate Loan, at an annual rate equal to the Base Rate plus
the Applicable Margin for such Loan, said rate to change contemporaneously
with any change in the Base Rate.
(2) For a Eurodollar Loan, at a rate equal to the Adjusted LIBO Rate
plus the Applicable Margin for such Loan.
(3) Interest for both Base Rate Loans and Eurodollar Loans shall be
computed on the basis of a 360-day year counting the actual number of days
elapsed, and shall be due and payable without notice on each Interest Payment
Date.
(D) Notwithstanding anything herein to the contrary, upon the occurrence of
an Event of Default interest on all Loans (including Swingline Loans) shall be
charged at the Default Rate as defined and set forth in the Notes, regardless of
whether the Majority Banks have elected to exercise any other remedies under
Section VIII hereof, including without limitation acceleration of the maturity
of the outstanding principal of the Notes. All such interest shall be paid at
the time of and as a condition precedent to the curing of any such default to
the extent any right to cure is given.
(E) All agreements herein made are expressly limited so that in no event
whatsoever shall the interest and loan charges agreed to be paid to the Banks
for the use of the money advanced or to be advanced pursuant to this Agreement
exceed the maximum amounts collectible under applicable laws in effect from time
to time. If for any reason whatsoever the interest or loan charges paid or
contracted to be paid in respect of the Loans or Letters of Credit shall exceed
the maximum amounts
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collectible under applicable laws in effect from time to time, then, ipso
facto, the obligation to pay such interest and/or loan charges shall be reduced
to the maximum amounts collectible under applicable laws in effect from time to
time, and any amounts collected by the Banks that exceed such maximum amounts
shall be applied to the reduction of the principal balance of the Loans and/or
refunded to Borrower so that at no time shall the interest or loan charges paid
or payable in respect of the Loans exceed the maximum amounts permitted from
time to time by applicable law. This provision shall control every other
provision herein and in any and all other agreements and instruments now
existing or hereafter arising between Borrower and the Banks with respect to the
Loans.
2.3 Letters of Credit. Subject to the terms and conditions of this
Agreement, the Commitments may be utilized, upon the request of the Borrower, in
addition to the Revolving Loans provided for by Paragraph 2.1, for the issuance
by the Issuing Bank of letters of credit (collectively, the "Letters of Credit")
for the account of the Borrower; provided that in no event shall (i) the amount
of Letter of Credit Liabilities exceed Ten Million Dollars ($10,000,000.00),
(ii) the aggregate amount of all Letter of Credit Liabilities, together with the
aggregate principal amount of the Revolving Loans and Swingline Loans, exceed
the aggregate amount of the Total Commitments as in effect from time to time,
and (iii) the expiration date of any Letter of Credit extend beyond the earlier
of the fifth (5th) Business Day preceding the Termination Date and the date
twelve months following the issuance of such Letter of Credit. The following
additional provisions shall apply to Letters of Credit:
(A) The Borrower shall give the Agent at least three Business Days'
irrevocable prior notice (effective upon receipt) specifying the Business Day
(which shall be no later than 30 days preceding the Termination Date) each
Letter of Credit is to be issued and describing in reasonable detail the
proposed terms of such Letter of Credit (including its beneficiary) and the
nature of the transactions or obligations proposed to be supported (including
whether such Letter of Credit is to be a commercial letter of credit or a
standby letter of credit). The Borrower shall be the account party for each
Letter of Credit, including Letters of Credit issuable to a beneficiary having a
claim or potential claim against a Subsidiary of the Borrower.
(B) On each day during the period commencing with the issuance by the
Issuing Bank of any Letter of Credit and until such Letter of Credit shall have
expired or been terminated or, if drawn upon, until the resulting Reimbursement
Obligations have been reimbursed in full by the Borrower (whether by a borrowing
under this agreement or otherwise), the Commitment of each Bank shall be deemed
to be utilized for all purposes of this Agreement in an amount equal to such
Bank's Commitment Percentage of the then Letter of Credit Liabilities associated
with such Letter of Credit. Each Bank (other than the Issuing Bank) agrees that,
upon the issuance of any Letter of Credit it shall automatically acquire a
participation in the Issuing Bank's liability under such Letter of Credit in an
amount equal to such Bank's Commitment Percentage of such liability, and each
Bank (other than the Issuing Bank) thereby shall absolutely, unconditionally and
irrevocably assume, as primary obligor and not as surety, and shall be
unconditionally obligated to the Issuing Bank to pay and discharge when due, its
Commitment Percentage of the Issuing Bank's liability under such Letter of
Credit.
(C) Upon receipt from the beneficiary of any Letter of Credit or any
demand for payment under such Letter of Credit, the Issuing Bank shall promptly
notify the Borrower (through the Agent) of the amount to be paid by the Issuing
Bank as a result of such demand and the date on which payment is to be made by
the Issuing Bank to such beneficiary in respect of such demand. The Borrower
hereby unconditionally agrees to pay and reimburse the Agent for the account of
the Issuing Bank and the other Banks with respect to their Letter of Credit
Interest for the amount of each demand for payment under such Letter of Credit
at or prior to the date on which payment is to be made by the Issuing Bank to
the beneficiary under such Letter of Credit, without presentment, demand,
protest or other formalities
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of any kind. Any amounts not so paid or borrowed as set forth in (D)
below shall bear interest at the rate(s) specified in the Letter of Credit
Documents or, if higher, at the rate(s) specified on the Notes (including the
Default Rate, if applicable).
(D) Forthwith upon its receipt of a notice referred to in clause (C) of
this Paragraph 2.3, the Borrower shall advise the Agent whether or not the
Borrower intends to borrow under Paragraph 2.1 to finance its obligation to
reimburse the Issuing Bank for the amount of the related demand for payment and,
if it does, submit a notice of such borrowing as provided in Paragraph 2.2. In
the event that the Borrower fails to so advise the Agent, and if the Borrower
fails to reimburse the Issuing Bank for a demand for payment under a Letter of
Credit by the date of such payment, the Agent shall give each Bank prompt notice
of the amount of the demand for payment, specifying such Bank's Commitment
Percentage of the amount of the related demand for payment, and the Borrower
shall be deemed in default hereunder for breaching Subparagraph 2.3(C) above.
(E) Each Bank (other than the Issuing Bank) shall pay to the Agent for
the account of the Issuing Bank in Dollars and in immediately available funds,
the amount of such Bank's Commitment Percentage of any payment under a Letter of
Credit upon notice by the Agent to such Bank requesting such payment and
specifying such amount as provided in clause (D) of this Paragraph 2.3. Each
such Bank's obligation to make such payments to the Agent for the account of the
Issuing Bank under this clause (E), and the Issuing Bank's right to receive the
same, shall be absolute and unconditional and shall not be affected by any
circumstance whatsoever, including (i) the failure of any other Bank to make its
payment under this clause (E), the financial condition of the Borrower (or any
other account party), the existence of any Default or (ii) the termination of
the Commitments. Each such payment to the Issuing Bank shall be made without any
offset, abatement, withholding or reduction whatsoever; provided, nothing
contained in the foregoing shall limit the Issuing Bank's liability for its
gross negligence or willful misconduct in improperly honoring a draft drawn
under a Letter of Credit.
(F) Upon the making of each payment by a Bank to the Issuing Bank
pursuant to clause (E) above in respect of any Letter of Credit, such Bank
shall, automatically and without any further action on the part of the Agent,
the Issuing Bank or such Bank, acquire (i) a participation in any amount equal
to such payment in the Reimbursement Obligation owing to the Issuing Bank by the
Borrower under this Agreement and under the Letter of Credit Documents relating
to such Letter of Credit and (ii) a participation in a percentage equal to such
Bank's Commitment Percentage in any interest or other amounts payable by the
Borrower under such Letter of Credit Documents and the other Loan Documents in
respect of such Reimbursement Obligation (other than the commissions, charges,
costs and expenses payable to the Issuing Bank pursuant to clause (G) of this
Paragraph 2.3). Upon receipt by the Issuing Bank from or for the account of the
Borrower of any payment in respect of any Reimbursement Obligation or any such
interest or other amount (including by way of set-off or application of proceeds
of any collateral security) the Issuing Bank shall promptly pay to the Agent for
the account of each Bank who shall have previously assumed a participation in
such payment under clause (ii) above, such Bank's Commitment Percentage of such
payment, each such payment by the Issuing Bank to be made in the same money and
funds in which received by the Issuing Bank. In the event any payment received
by the Issuing Bank and so paid to the Banks is rescinded or must otherwise be
returned by the Issuing Bank, each Bank shall, upon the request of the Issuing
Bank (through the Agent), repay to the Issuing Bank (through the Agent) the
amount of such payment paid to such Bank, with interest at the rate specified in
clause (J) of this Paragraph 2.3.
(G) Borrower shall pay to the Agent for the account of the Issuing Bank
in respect of each Letter of Credit an issuance fee in an amount equal to 0.125%
of the face amount of such Letter of Credit (such fee to be nonrefundable and to
be paid in advance on such date of issuance). In
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addition, Borrower shall pay to the Agent for the account of each Bank a
letter of credit fee (the "Letter of Credit Fee") in respect of each Letter of
Credit on the daily average undrawn face amount of such Letter of Credit for the
period from and including the date of issuance of such Letter of Credit to and
including the date such Letter of Credit is drawn in full, expires or is
terminated (such fee to be non-refundable, to be paid in arrears on each
Quarterly Date and on the Termination Date and to be calculated, for any day,
after giving effect to any payments made under such Letter of Credit on such
day) in an amount equal to 2.25% per annum or, for any Quarterly Period prior to
the first day of which (and in any event no later than 45 days after the end of
the fiscal quarter most recently ended) the Borrower has delivered to the Agent
a Compliance Certificate of the Borrower calculating the Funded Debt to
Consolidated Cash Flow Ratio as at the last day of such fiscal quarter (other
than such portion of such period during which a Default shall be continuing),
the Applicable Margin pertaining thereto. All calculations of Letter of Credit
fees shall be based on a 360 day year counting the actual number of elapsed
days. Notwithstanding the foregoing, following the occurrence of an Event of
Default hereunder and for so long as any such Default remains uncured, the
Letter of Credit Fee otherwise applicable as hereinabove set forth shall be
increased by two percent (2.0%) per annum.
(H) Upon the request of any Bank from time to time, the Issuing Bank
shall deliver any information reasonably requested by such Bank with respect to
each Letter of Credit then outstanding.
(I) The issuance by the Issuing Bank of each Letter of Credit shall be
subject, in addition to the conditions precedent set forth in Paragraph 3.2, to
the conditions precedent that (i) such Letter of Credit shall be in such form,
contain such terms and support such transactions as shall be satisfactory to the
Issuing Bank consistent with its then current practices and procedures with
respect to letters of credit of the same type and (ii) the Borrower shall have
executed and delivered such applications, agreements and other instruments
relating to such Letter of Credit as the Issuing Bank shall have reasonably
requested consistent with its then current practices and procedures with respect
to letters of credit of the same type; provided that in the event of any
conflict between any such application, agreement or other instrument and the
provisions of this Agreement, the provisions of this Agreement shall control.
(J) To the event that any Bank fails to pay any amount required to be
paid pursuant to clause (E) or (F) of this Paragraph 2.3 when due, such Bank
shall pay interest to the Issuing Bank (through the Agent) on such amount from
and including such due date to but excluding the date such payment is made (i)
during the period from and including such due date to but excluding the date
three Business Days thereafter, at a rate per annum equal to the Federal Funds
Rate (as in effect from time to time) and (ii) thereafter, at a rate per annum
equal to the Base Rate plus 2.0%.
(K) The issuance by the Issuing Bank of any modification or supplement
to any Letter of Credit shall be subject to the same conditions applicable under
this Paragraph 2.3 to the issuance of new Letters of Credit, and no such
modification or supplement shall be issued unless either (x) the respective
Letter of Credit as affected by such action would have complied with such
conditions had it originally been issued in such modified or supplemented form
or (y) each Bank shall have consented to such modification or supplement.
(L) The obligations of the Borrower under this Paragraph 2.3 shall be
unconditional and absolute and shall not be affected, modified or impaired, upon
the happening at any time or from time to time of any event, including any of
the following, whether or not with notice to or the consent of the Borrower:
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(1) the compromise, settlement, release, modification, amendment
(whether material or otherwise) or termination of any or all of the obligations,
conditions covenants or agreements of any Person in respect of any of the Loan
Documents;
(2) the occurrence, or the failure by the Agent, any Bank or any
other Person to give notice to the Borrower of the occurrence, of any Event of
Default or any default under any of the other Loan Documents;
(3) the waiver of the payment, performance or observance of any of
the obligations, conditions, covenants or agreements of any Person contained in
any of the Loan Documents;
(4) the extension of the time for performance of any other
obligations, covenants or agreements of any Person under or arising out of any
of the Loan Documents;
(5) the taking or the omission of any of the actions referred to in
any of the Loan Documents;
(6) any failure, omission or delay on the part of the Agent, any
Bank, the Borrower or the beneficiary of any Letter of Credit to enforce, assert
or exercise any right, remedy, power or privilege conferred by this Agreement or
any of the Loan Documents, or any other act or acts on the part of the Agent,
any Bank, the Borrower or the beneficiary of any Letter of Credit;
(7) the voluntary or involuntary liquidation, dissolution, sale or
other disposition of all or substantially all the assets of, the marshalling of
assets and liabilities, receivership, insolvency, bankruptcy, assignment for the
benefit of creditors, reorganization, arrangement, composition with creditors or
readjustment of, or other similar proceedings which affect, the Borrower or any
other party to any of the Loan Documents;
(8) any lack of validity or enforceability of this Agreement, any
Letter of Credit or any other Loan Document, or any allegation of invalidity or
unenforceability or any contest of such validity or enforceability;
(9) the existence of any claim, set-off, defense or other right which
the Borrower may have at any time against the Agent, any Bank or any beneficiary
or any transferee of any Letter of Credit (or any persons or entities for whom
the Bank or any such beneficiary or transferee may be acting), or any other
Person, whether in connection with this Agreement or any of the other Loan
Documents or any of the transactions contemplated by any Loan Document or any
unrelated transaction;
(10) any statement in any certificate or any other document presented
under any Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any such statement being untrue or inaccurate in
any respect whatsoever;
(11) payment by the Issuing Bank under any Letter of Credit against
presentation of a demand or certificate which does not comply with the terms of
such Letter of Credit;
(12) the release or discharge by operation of law of the Borrower
from the performance or observance of any obligation, covenant or agreement
contained in any of the Loan Documents; or
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(13) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
(M) Without affecting the Borrower's liability under Paragraph 10.7, the
Borrower agrees to indemnify each of the Issuing Bank, the Agent and the Banks
and their respective affiliates, directors, officers, employees, attorneys and
agents from, and hold each of them harmless against, any and all losses,
liabilities, damages or expenses incurred by any of them in connection with or
by reason of any actual or threatened investigation, litigation or other
proceeding (including, in respect of the Issuing Bank and the Agent, any such
investigations, litigation or other proceeding between the Issuing Bank or the
Agent and any Bank) relating to (a) the execution and delivery of any Letter of
Credit; (b) the use of the proceeds of any drawing under any Letter of Credit;
or (c) the transfer or substitution of, or payment or failure to pay under, any
Letter of Credit, including the reasonable fees and disbursements of counsel
incurred in connection with any such investigation, litigation or other
proceeding, but excluding damages, losses, liabilities or expenses to the
extent, but only to the extent, incurred by reason of (x) the willful misconduct
or gross negligence of the Issuing Bank in determining whether a document
presented under any Letter of Credit complies with the terms of such Letter of
Credit or (y) in the case of the Issuing Bank, such Bank's failure to pay under
any Letter of Credit after presentation to it of documents strictly complying
with the terms and condition of such Letter of Credit. It shall not be a
condition to any such indemnification that the Issuing Bank, the Agent or any
Bank shall be a party to any such investigations, litigation or other
proceeding. Nothing in this Paragraph 2.3 is intended to limit the Borrower's
payment obligations under this Agreement.
(N) The Borrower assumes all risks of the acts or omissions of any
beneficiary of any Letter of Credit with respect to the use of the Letter of
Credit. None of the Agent, any Bank nor any of their respective affiliates,
officers, directors, employees, attorneys or agents shall be liable or
responsible for: (a) the use which may be made of the Letter of Credit or for
any acts or omissions of any beneficiary of any Letter of Credit in connection
with such Letter of Credit; (b) the validity, sufficiency or genuineness of
documents presented to the Issuing Bank, or of any endorsement on such
documents, even if such documents should in fact prove to be in any or all
respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing
Bank against presentation of documents which do not comply with the terms of any
Letter of Credit, including failure of any documents to bear any reference or
adequate reference to such Letter of Credit; or (d) any other circumstances
whatsoever in making or failure to make payment under any Letter of Credit;
provided that the Borrower shall have a claim against the Issuing Bank to the
extent, but only to the extent, of any direct, as opposed to consequential,
damages suffered by the Borrower which the Borrower proves were caused by (i)
the Issuing Bank's willful misconduct or gross negligence in determining whether
a document presented under any Letter of Credit complies with the terms of such
Letter of Credit or (ii) the Issuing Bank's willful failure to pay under the
Letter of Credit after presentation to it of documents strictly complying with
the terms and conditions of such Letter of Credit. In furtherance and not in
limitation of the foregoing, the Issuing Bank may accept documents that appear
on their face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary.
2.4 Nonuse Fee. The Borrower shall pay to the Agent for the account of each
Bank a nonusage fee (the "Nonuse Fee") on the average daily Unutilized Loan
Commitment of such Bank for the period from and including the Closing to but not
including the earlier of the date such Commitment is terminated and the
Termination Date, at the rate of 0.35% per annum or, for any Quarterly Period
prior to the first day of which (and in any event no later than 45 days after
the end of the fiscal quarter most recently ended) the Borrower has delivered to
the Agent a Compliance Certificate of the Borrower calculating the Funded Debt
to Consolidated Cash Flow Ratio as at the last day of such fiscal quarter (other
than such portion of such period during which an Event of Default shall be
continuing), the
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Applicable Margin pertaining thereto. Nonuse Fees shall be calculated on a
360-day year counting the actual number of elapsed days. Accrued Nonuse Fees
shall be payable in arrears commencing January 1, 1998 and on each Quarterly
Date thereafter and on the earlier of each of the date the relevant Commitments
are terminated and the Termination Date.
2.5 Agent's Fee. The Borrower shall pay to the Agent, for its own account,
and NationsBanc Montgomery Securities, Inc. the fees specified in the letter
agreement dated September 4, 1997 by and between Borrower and the Agent, as such
agreement may be modified and supplemented (upon prior notice to the Banks) from
time to time, the terms of which letter agreement are incorporated herein by
reference.
2.6 Reduction of Commitment. The Borrower shall have the right to reduce
the amount of the Total Commitments, at any time and from time to time, in any
integral multiple of One Million Dollars ($1,000,000.00), which reduction shall
reduce each Bank's Commitment pro rata in accordance with its Commitment
Percentage. Contemporaneously with each such reduction, the Borrower shall repay
to the Agent for the account of each Bank in accordance with its respective
Commitment Percentage the amounts, if any, by which the then outstanding
principal balance of each Note exceeds each Commitment as so reduced. After each
such reduction: (a) the Borrower shall immediately pay the Agent any Nonuse Fee
provided for in Paragraph 2.5 with respect to the amount by which the Total
Commitments are so reduced, but only with respect to the time such Commitment
existed and only to the extent not previously paid; (b) the nonusage fee
provided for in Paragraph 2.5 shall be calculated with respect to the Total
Commitments as so reduced; and (c) the Total Commitments may not be increased
without the written consent of the Banks.
2.7 Alternate Rate of Interest.
(A) In the event, and on each occasion, that on the date of commencement
of any Interest Period for a Eurodollar Loan, any Bank shall have determined:
(1) That dollar deposits in the amount of the requested principal
amount of such Eurodollar Loan are not generally available in the London
Interbank Market;
(2) That the rate at which such dollar deposits are being offered
will not adequately and fairly reflect the cost to Banks of making or
maintaining such Eurodollar Loan during such Interest Period; or
(3) That reasonable means do not exist for ascertaining the Adjusted
LIBO Rate,
such Bank shall, as soon as practicable thereafter, give written or
telephonic notice of such determination to the Borrower. In the event of any
such determination, any request by the Borrower for a Eurodollar Loan pursuant
to Paragraph 2.2 shall, until the circumstances giving rise to such notice no
longer exist, be deemed to be a request for a Base Rate Loan. Each determination
by a Bank hereunder shall be conclusive absent manifest error.
2.8 Change in Circumstances.
(A) Notwithstanding any other provision herein, if after the date of
this Agreement any change in applicable Laws or regulation or in the
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not
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having the force of law) shall change the basis of taxation of payments
to a Bank under any Eurodollar Loan made by a Bank or any other fees or amounts
payable hereunder (other than taxes imposed on the overall net income of such
Bank by the country in which such Bank is located, or by the jurisdiction in
which such Bank has its principal office, or by any political subdivision or
taxing authority therein), or shall impose, modify or deem applicable any
reserve requirement, special deposit, insurance charge (including FDIC insurance
on Eurodollar deposits) or similar requirement against assets of, deposits with
or for the account of, or credit extended by, such Bank or shall impose on such
Bank or the London Interbank Market any other condition affecting this Agreement
or Eurodollar Loans made by such Bank, and the result of any of the foregoing
shall be to increase the cost to such Bank of making or maintaining any
Eurodollar Loan or to reduce the amount of any sum received or receivable by
such Bank hereunder (whether of principal, interest or otherwise) in respect
thereof by an amount deemed by such Bank to be material, then the Borrower will
pay to such Bank such additional amount or amounts as will compensate such Bank
for such additional costs of reduction.
(B) If either:
(1) The introduction of, or any change in, or in the interpretation
of, any United States or foreign law, rule or regulation; or
(2) Compliance with any directive, guidelines or request from any
central bank or other United States or foreign governmental authority (whether
or not having the force of law) promulgated or made after the date hereof (but
excluding, however, any law, rule, regulation, interpretation, directive,
guideline or request contemplated by or resulting from the report dated July,
1988, entitled "International Convergence of Capital Measurement and Capital
Standards" issued by the Basle Committee on Banking Regulations and Supervisory
Practices), affects or would affect the amount of capital required or expected
to be maintained by a Bank (or any lending office of such Bank) or any
corporation directly or indirectly owning or controlling such Bank (or any
lending office of such Bank) based upon the existence of this Agreement, and
such Bank shall have determined that such introduction, change or compliance has
or would have the effect of reducing the rate of return on Bank's capital or on
the capital of such owning or controlling corporation as a consequence of its
obligations hereunder (including its Commitment) to a level below that which
such Bank or such owning or controlling corporation could have achieved but for
such introduction, change or compliance (after taking into account that Bank's
policies or the policies of such owning or controlling corporation, as the case
may be, regarding capital adequacy) by an amount deemed by such Bank (in its
reasonable discretion) to be material, then, from time to time, the Borrower
shall pay to such Bank such additional amount or amounts as will compensate such
Bank for such reduction attributable to making, funding and maintaining its
Commitment and Loans hereunder.
(C) A certificate of any Bank setting forth such amount or amounts as
shall be necessary to compensate such Bank (or its participating Bank or other
entities pursuant to Paragraph 9.8) as specified in paragraph (A) or (B) above,
as the case may be, shall be delivered to the Borrower and shall be conclusive
absent manifest error; provided however, that the Borrower shall be responsible
for compliance herewith and the payment of increased costs only to the extent:
(1) Any change in Laws giving rise to increased costs occurs after
the date of this Agreement;
(2) Such change in Laws or the application thereof applies generally
to the banking industry and is not the result of one or more of the Banks in
this Agreement having inadequate or substandard capital as determined by its
regulators; and
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(3) The affected Bank gives notice of the change giving rise to
increased costs within one hundred eighty (180) Business Days after such Bank
has, or with reasonable diligence should have had, knowledge of the change, or
else such Bank can only collect costs from and after the date of the notice.
Subject to the foregoing, the Borrower shall pay the affected Bank
the amount shown as due on any such certificate within ten (10) days after its
receipt of such certificate.
(D) The protection of this Paragraph 2.8 shall be available to each
Bank regardless of any possible contention of invalidity or inapplicability of
the law, regulation or condition that shall have been imposed; provided, if a
court of competent jurisdiction (or a final administrative proceeding which is
not judicially challenged) finally determines that such law or regulation is
invalid or unapplicable, then the protection of this Paragraph shall not be
available.
2.9 Change in Legality.
(A) Notwithstanding anything to the contrary herein contained, if any
change in any law or regulation or in interpretation thereof by any governmental
authority charged with the administration or interpretation thereof shall make
it unlawful for any Bank to make or maintain any Eurodollar Loan or to give
effect to its obligations as contemplated hereby, then, by written notice to the
Borrower, such Bank may:
(1) Declare that Eurodollar Loans will not thereafter be made by such
Bank hereunder, whereupon the Borrower shall be prohibited from requesting
Eurodollar Loans from such Bank hereunder unless such declaration is
subsequently withdrawn; and
(2) Require that all outstanding Eurodollar Loans made by it be
converted to Base Rate Loans, in which event (a) all such Eurodollar Loans shall
be automatically converted to Base Rate Loans as of the effective date of such
notice as provided in paragraph (B) below and (b) all payments and prepayments
of principal that would otherwise have been applied to repay the converted
Eurodollar Loans shall instead be applied to repay the Base Rate Loans resulting
from the conversion of such Eurodollar Loans.
(B) For purposes of this Paragraph 2.9, a notice to the Borrower by any
Bank pursuant to (A) above shall be effective, if lawful, on the last day of the
then current Interest Period; in all other cases, such notice shall be effective
on the date of receipt by the Borrower.
2.10 Optional Prepayment - Premiums in Certain Events.
(A) The Borrower may, upon three (3) Business Days' prior written notice
to the Agent, and upon payment of all premiums set forth in subparagraph (D)
hereinbelow, prepay any outstanding Eurodollar Loans prior to any Interest
Payment Date for such Eurodollar Loans, in whole or in part.
(B) The Borrower may at any time prepay any outstanding Base Rate Loans
in whole or in part without premium or penalty.
(C) Each notice of prepayment of any Eurodollar Loan shall specify the
date and amount of such prepayment and shall be irrevocable. The Agent shall
promptly notify the Banks of its receipt of a notice of prepayment. Each partial
prepayment of any Eurodollar Loans shall be in an
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aggregate principal amount which is the lesser of (1) the then outstanding
principal balance of the one or more Eurodollar Loans to be prepaid, or (2) One
Hundred Thousand Dollars ($100,000.00) or an integral multiple thereof. Interest
on the amount prepaid accrued to the prepayment date shall be paid on such date.
(D) Upon prepayment of any Eurodollar Loan on a date other than the
relevant Interest Payment Date for such borrowing, Borrower shall pay to Agent
for the account of each Bank, in addition to all other payments then due and
owing the Banks, premiums which shall be equal to an amount, if any, reasonably
determined by each Bank to be the difference between the rate of interest then
applicable to the relevant Eurodollar Loan and the yield each Bank receives upon
reinvestment of so much of the relevant Eurodollar Loans as is prepaid for the
remainder of the term of the relevant Eurodollar Loan or Loans. Anything in this
section 2.10(D) to the contrary notwithstanding, the premiums payable upon any
such prepayment shall not exceed the amount, if any, reasonably determined by
each Bank to be the difference between the rate of interest then applicable to
the relevant Eurodollar Loan and the yield that each Bank could receive upon
reinvestment in the "Floor Reinvestment" of so much of the relevant Eurodollar
Loan as is prepaid for the remainder of the term of the relevant Eurodollar
Loan. For purposes hereof, "Floor Reinvestment" shall mean an investment for the
time period from the date of such prepayment to the end of the relevant Interest
Period applicable to such Eurodollar Loan at an interest rate per annum equal to
the Federal Fund Rate "offered" as published in the Wall Street Journal on the
date of such prepayment. All determinations, estimates, assumptions, allocations
and the like required for the determination of such premiums shall be made by
each Bank in good faith and shall be conclusive and binding absent manifest
error.
2.11 Swingline Loan Subfacility.
(A) Subject to the terms and conditions hereof and in reliance upon the
representations and warranties herein set forth, the Swingline Bank, in its
individual capacity, agrees to make certain revolving credit loans requested by
the Borrower to the Borrower (each a "Swingline Loan" and, collectively, the
"Swingline Loans") from time to time from the Amendment and Restatement Closing
Date until the Termination Date for the purposes hereinafter set forth;
provided, however, (i) the aggregate principal amount of Swingline Loans
outstanding at any time shall not exceed Two Million Five Hundred Thousand
Dollars ($2,500,000.00) (the "Swingline Committed Amount"), and (ii) the
aggregate principal amount of outstanding Revolving Loans plus the aggregate
Letter of Credit Liabilities plus the aggregate principal amount of outstanding
Swingline Loans shall not exceed the Total Commitments.
(B) Whenever the Borrower desires a Swingline Loan advance hereunder it
shall give written notice (or telephone notice promptly confirmed in writing) to
the Swingline Bank not later than 2:00 P.M. (Charlotte, North Carolina time) on
the Business Day of the requested Swingline Loan advance. Each such notice shall
be irrevocable and shall specify (a) that a Swingline Loan advance is requested,
(b) the date of the requested Swingline Loan advance (which shall be a Business
Day) and (c) the principal amount of the Swingline Loan advance requested. Each
Swingline Loan shall be made as a Base Rate Loan and shall have such maturity
date as the Swingline Bank and the Borrower shall agree upon receipt by the
Swingline Bank of any such notice from the Borrower. The Swingline Bank shall
initiate the transfer of funds representing the Swingline Loan advance to
Borrower's account by 3:30 P.M. (Charlotte, North Carolina time) on the Business
Day of the requested borrowing. Each Swingline Loan advance shall be in a
minimum principal amount of $100,000 and in integral multiples of $50,000 in
excess thereof (or the remaining amount of the Swingline Committed Amount, if
less).
(C) The principal amount of all Swingline Loans shall be due and payable
on the earlier of (a) the maturity date agreed to by the Swingline Bank and the
Borrower with respect to such
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Loan (which maturity date shall not be a date more than seven (7)
Business Days from the date of advance thereof) or (b) the Termination Date. The
Swingline Bank may, at any time, in its sole discretion, by written notice to
the Borrower and the Banks, demand repayment of its Swingline Loans by way of a
Revolving Loan advance, in which case the Borrower shall be deemed to have
requested a Revolving Loan advance comprised solely of Base Rate Loans in the
amount of such Swingline Loans; provided, however, that any such demand shall be
deemed to have been given one Business Day prior to the Termination Date and on
the date of the occurrence of any Event of Default described in Section VIII and
upon acceleration of the indebtedness hereunder and the exercise of remedies in
accordance with the provisions of Paragraphs 8.2 and 8.3. Each Bank hereby
irrevocably agrees to make its pro rata share of each such Revolving Loan in the
amount, in the manner and on the date specified in the preceding sentence
notwithstanding (i) the amount of such borrowing may not comply with the minimum
amount for advances of Revolving Loans otherwise required hereunder, (ii)
whether any conditions specified in Paragraph 3.2 are then satisfied, (iii)
whether a Default or an Event of Default then exists, (iv) failure of any such
request or deemed request for Revolving Loan to be made by the time otherwise
required hereunder, (v) whether the date of such borrowing is a date on which
Revolving Loans are otherwise permitted to be made hereunder or (vi) any
termination of the Commitments relating thereto immediately prior to or
contemporaneously with such borrowing. In the event that any Revolving Loan
cannot for any reason be made on the date otherwise required above (including,
without limitation, as a result of the commencement of a proceeding under the
Bankruptcy Code with respect to the Borrower), then each Bank hereby agrees that
it shall forthwith purchase (as of the date such borrowing would otherwise have
occurred, but adjusted for any payments received from the Borrower on or after
such date and prior to such purchase) from the Swingline Bank such
participations in the outstanding Swingline Loans as shall be necessary to cause
each such Bank to share in such Swingline Loans ratably based upon its
Commitment Percentage (determined before giving effect to any termination of the
Commitments pursuant to Paragraph 2.6), provided that (a) all interest payable
on the Swingline Loans shall be for the account of the Swingline Bank until the
date as of which the respective participation is purchased and (b) at the time
any purchase of participations pursuant to this sentence is actually made, the
purchasing Bank shall be required to pay to the Swingline Bank, to the extent
not paid to the Swingline Bank by the Borrower in accordance with the terms
hereof, interest on the principal amount of participation purchased for each day
from and including the day upon which such borrowing would otherwise have
occurred to but excluding the date of payment for such participation, at the
rate equal to the Federal Funds Rate.
(D) Subject to the provisions of Paragraph 2.2(D), each Swingline Loan
shall bear interest at a per annum rate (computed on the basis of the actual
number of days elapsed over a year of 360 days) equal to the Base Rate plus the
Applicable Margin. Interest on Swingline Loans shall be payable in arrears on
each applicable Interest Payment Date (or at such other times as may be
specified herein).
(E) The Swingline Loans shall be evidenced by a duly executed promissory
note of the Borrower to the Swingline Bank in an original principal amount equal
to the Swingline Committed Amount substantially in the form of Exhibit A.
2.12 Payment to the Agent.
(A) The Agent shall send the Borrower statements of all amounts due
hereunder, which statements shall be considered correct and conclusively binding
on the Borrower unless the Borrower notifies the Agent to the contrary within
ninety (90) days of its receipt of any statement to which it objects. All sums
payable to the Banks hereunder shall be paid directly to the Agent for the
account of each Bank in immediately available funds prior to 12:00 noon,
Charlotte, North Carolina time, on the date when such sums are due and payable.
Any amounts received by the Agent after 12:00 noon
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Charlotte, North Carolina time on any Business Day shall be deemed to
have been received on the next Business Day. Alternatively, at its sole
discretion, the Agent may charge against any deposit account of the Borrower
maintained with any of the Banks all or any part of any amount due pursuant to
this Agreement.
(B) Each payment made to the Agent on the Notes or for other sums or
fees due hereunder for the account of the Banks shall be properly remitted by
the Agent to each Bank, pro rata in accordance with the outstanding unpaid
principal amount of the Notes held by each Bank, no later than 2:00 p.m.
Charlotte, North Carolina time on the date on which Agent receives such payment.
(C) Borrower shall give Agent two (2) Business Days notice of payments
of principal and/or interest other than payments on a regularly scheduled
payment date set forth herein.
SECTION III. CONDITIONS PRECEDENT
The obligation of the Banks to fund and/or continue funding the Loans
hereunder is subject to the following conditions precedent:
3.1 Documents Required for Amendment and Restatement. The effectiveness
of this Agreement is subject to the conditions precedent that the Agent shall
have received on or before the Amendment and Restatement Closing Date the
following, each in form and substance satisfactory to the Agent:
(A) This Agreement, duly executed by the Borrower, Guarantors, the Agent
and the Banks;
(B) The Notes;
(C) Amended and Restated Pledge Agreement (collectively the "Pledge
Agreement") in the form attached hereto as Exhibit E, including Schedule A
thereto, duly executed by the Borrower, together with all originals of the West
Central Ohio Loan Documents (with the notes appropriately endorsed to the Agent)
and all certificates representing any stock or membership interests (if in
certificated form) pledged thereby, duly endorsed in blank, and stock powers
duly endorsed in blank;
(D) Duly executed Guaranty and Suretyship Agreement (collectively the
"Guaranty and Suretyship Agreement") of the Guarantor(s), in the form attached
hereto as Exhibit F;
(E) The Financing Statements and mortgagee waivers required by Section
IV;
(F) A copy of resolutions of the Borrower's board of directors,
certified by the corporate secretary of Borrower as of the date of Closing,
authorizing the execution, delivery and performance of this Agreement, the
Notes, the Collateral Documents, and each other document to be delivered
pursuant hereto;
(G) A copy of resolutions of each Subsidiary's board of directors,
certified as of the date of Closing by the secretary of each of such
corporations, authorizing the execution, delivery and performance of any
documents to be delivered by such corporation pursuant to this Agreement,
including without limitation any of the Collateral Documents.
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(H) A copy, certified as of the most recent date practicable, by the
applicable Secretaries of State of, of the Borrower's and each Subsidiary's
Charter, together with a certificate dated the date of the Closing of the
Borrower's corporate secretary to the effect that such certificates of
incorporation have not been amended since the date of the aforesaid Secretary of
State certifications;
(I) A copy of the Borrower's by-laws certified by Borrower's secretary
as of the date of the Closing;
(J) A certificate dated the date of the Closing of the Borrower's
corporate secretary as to the incumbency and signatures of the officers of the
Borrower executing this Agreement, the Notes, the Collateral Documents, and each
other document to be delivered pursuant hereto;
(K) A certificate dated the date of the Closing of each Subsidiary's
corporate secretary as to the incumbency and signatures of the officers of each
of such corporation executing any document to be delivered pursuant hereto,
including without limitation any of the Collateral Documents.
(L) Certificates, as of the most recent dates practicable, of the
aforesaid Secretary of State and the Secretary of State of each state in which
the Borrower is qualified as a foreign corporation as to the good standing of
the Borrower;
(M) A written opinion of Messrs. Baker, Donelson, Bearman & Caldwell,
the Borrower's counsel, dated the date of the Closing and addressed individually
to each Bank, in the form attached hereto as Exhibit G and otherwise
satisfactory to the Banks.
(N) A certificate, dated the date of the Closing, signed by the
president, vice president, chief financial officer, or corporate controller of
the Borrower and to the effect that:
(1) The representations and warranties set forth within Paragraph 5.1
are true as of the date of the Closing;
(2) No Event of Default hereunder, and no event which, with the
giving of notice or passage of time or both, would become such an Event of
Default, has occurred as of such date;
(3) All of the Collateral Documents are and shall remain in full
force and effect.
(O) Copies of all documents evidencing the terms and conditions of any
debt specified as Subordinated Indebtedness on Exhibit C in form and substance
satisfactory to Banks;
(P) Draft copy of the Borrower's Compliance Procedures regarding Fraud
and Abuse Laws;
(Q) A Federal Reserve Form (or Forms) U-1, duly completed and executed
by the Borrower and each Pledgor.
3.2 Documents Required for All Subsequent Disbursements. At the
Amendment and Restatement Closing, and as an express condition precedent to each
disbursement of a Loan or the issuance of a Letter of Credit after the Amendment
and Restatement Closing, the Borrower shall deliver to the Agent a true and
accurate certificate together with any Borrowing Notice and/or Letter of Credit
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application, dated the date on which such credit is to be extended,
signed by the president, vice president, chief financial officer, or corporate
controller of the Borrower and to the effect that:
(A) As of the date thereof, no Event of Default has occurred and is
continuing, and no event has occurred and is continuing that, with the giving of
notice or passage of time or both, would be an Event of Default;
(B) The Loans and/or Letter of Credit will be used only as permitted in
Paragraph 2.1;
(C) No Material Adverse Change has occurred since the date of the
Financial Statements or the date of the Amendment and Restatement Closing Date,
as applicable; and
(D) All of the Collateral Documents remain in full force and effect, and
Borrower has provided or caused to be provided such additional Collateral
Documents as required by Paragraph 7.13.
If any of the foregoing statements is not true and correct in the judgment of
the Banks, then the Banks shall have no obligation to fund the requested
disbursement and/or issue the requested Letter of Credit.
3.3 Information Required for Permitted Acquisition. Without limiting the
provisions of Paragraph 3.2 above, not less than five (5) Business Days prior to
entering into any Permitted Acquisition, Borrower shall also submit to the Agent
(and to each Bank who requests it) the following information:
(A) A completed Acquisition Certificate in the form attached hereto as
Exhibit A-3;
(B) A copy of the most current letter of intent and a current draft of
the acquisition agreement with all prepared exhibits, including the Service
Agreement, any seller financing documents, and any lease agreements;
(C) A written description of the company to be acquired, including
location and type of centers, key management, and real estate assets (including
legal descriptions of any owned real estate), if any; and
(D) If three (3) or more Permitted Acquisitions have already closed in
such fiscal quarter of the Borrower, then a Covenant Compliance Worksheet
reflecting the computation of and compliance with the financial covenants set
forth in Paragraph 6.16 after giving Pro-Forma Effect to the Permitted
Acquisition.
3.4 Legal Matters. At the time of the Closing and thereafter, all legal
matters incidental to the Loans shall be satisfactory to Messrs. Boult,
Cummings, Conners & Berry, counsel to the Banks.
SECTION IV. COLLATERAL SECURITY
4.1 Composition of the Collateral. The property in which a security
interest is granted pursuant to the provisions of Paragraphs 4.2 and 4.3 is
herein collectively called the "Collateral." The Collateral, together with all
of the Borrower's and any Subsidiary's other property of any kind, both
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real and personal, held by, assigned to, mortgaged to or conveyed in
favor of the Banks, shall stand as one general, continuing collateral security
for all Obligations and may be retained by the Agent and/or Banks until all
Obligations have been satisfied in full.
4.2 Rights in Property Held by the Banks. As security for the prompt
satisfaction of all Obligations and all Guaranties of the Obligations, the
Borrower and each Subsidiary hereby assign, transfer and set over to the Banks
all of their right, title and interest in and to, and grant the Banks a lien on
and a security interest in, all amounts that may be owing from time to time by
the Banks to the Borrower or such Subsidiary in any capacity, including, but
without limitation, any balance or share belonging to the Borrower or such
Subsidiary of any deposit or other account with the Banks, which lien and
security interest shall be independent of any right of set-off which the Banks
may have.
4.3 Rights in Property of the Borrower and Subsidiaries. As further
security for the prompt satisfaction of all Obligations and all Guaranties of
the Obligations, the Borrower and each Subsidiary hereby assign to the Banks by
and through the Agent all of their respective right, title and interest in and
to, and grant the Banks a lien upon and security interest in, all of the
following, wherever located, whether now owned or hereafter acquired, together
with all substitutions, replacements, improvements, accessions or appurtenances
thereto, and proceeds (including without limitation insurance proceeds) thereof:
(A) Accounts;
(B) Chattel Paper;
(C) Contract Rights;
(D) Documents;
(E) Equipment;
(F) Fixtures;
(G) General Intangibles;
(H) Instruments;
(I) Inventory;
(J) Service Agreements;
(K) The Pledged Instruments, including without
limitation any pledged stock, membership
interests, partnership interests, notes, the
West Central Ohio Loan Documents and the
Specialists-SCN Loan Documents; and
(L) All Records pertaining to any other Collateral.
4.4 Priority of Liens. The foregoing liens shall be first and prior
liens except for (1) any Permitted Liens on assets which have priority or would
have priority by the operation of Laws, and (2) any Accounts that may not be
legally assignable under applicable federal Medicare and Medicaid laws and
regulations.
4.5 Financing Statements.
(A) The Borrower and each Subsidiary will:
(1) Join with the Agent in executing such additional Financing
Statements (including amendments thereto and continuation statements thereof) in
form satisfactory to the Banks as the Banks may specify;
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(2) Pay or reimburse the Banks for all costs and taxes of filing or
recording the same in such public offices as the Banks may designate, and
performing subsequent verification searches; and
(3) Take such other steps as the Banks may reasonably direct,
including the noting of the Banks' lien on the Collateral and on any
certificates of title therefor all to perfect the Banks' security interest in
the Collateral.
(B) A carbon, photographic, or other reproduction of this Agreement
shall be sufficient as a financing statement and may be filed in any appropriate
office in lieu thereof.
(C) To the extent lawful, the Borrower and each Subsidiary hereby
appoint the Agent as their attorney-in-fact (without requiring the Agent to act
as such) to execute any Financing Statement in the name of the Borrower or such
Subsidiary, and to perform all other acts that the Agent reasonably deems
appropriate to perfect and continue the Banks' security interest in, and to
protect and preserve, the Collateral.
4.6 Service Agreements. The Borrower and each Subsidiary will,
within ten (10) days of the closing of any Acquisition, deliver to the Agent a
copy of the fully executed Service Agreement pertaining thereto together with
copies of any accompanying employment/noncompete agreement with the physicians.
4.7 Collection of Receivables. Following the occurrence of any Event of
Default and for so long as such Event of Default remains uncured, upon demand of
the Majority Banks, Borrower and each Subsidiary shall deposit or cause to be
deposited, all checks, drafts, cash, and other remittances received in payment
of services rendered or inventory sold or in payment or on account of its
accounts, immediately upon receipt thereof with Agent in one or more special
"lockboxed" bank accounts maintained with Agent, over which the Majority Banks
alone have power of withdrawal. The funds in said special bank accounts shall,
to the maximum extent allowed by applicable law, be held by the Banks as
security for all loans made hereunder and all other Obligations of Borrower to
the Banks secured hereby. Said proceeds shall be deposited in precisely the form
received, except for the endorsement of Borrower and each Subsidiary where
necessary to permit collection, which endorsement Borrower and each Subsidiary
agree to make and which Agent also hereby is irrevocably authorized to make on
their behalf. Pending such deposit, Borrower and each Subsidiary agree that they
will not commingle any such checks, drafts, cash, and other remittances with any
of their funds or property, but will hold them separate and apart therefrom and
upon an express trust for the Banks until deposit thereof is made in the said
special bank account. At least twice weekly, Agent will apply the whole or any
part, as the Majority Banks deem appropriate, of the collected funds on deposit
in the said special bank accounts against the principal and/or interest of any
loans made hereunder and/or on Borrower's other Obligations secured hereby, the
order and method of such application to be in the discretion of the Majority
Banks. Any portion of said funds on deposit in the special bank account that the
Majority Banks elect not to apply will be paid over by Agent to Borrower.
4.8 Mortgagees' Waivers. At the request of the Majority Banks, the
Borrower will cause each mortgagee of all real estate owned by the Borrower or
any Subsidiary, to execute and deliver to the Agent instruments, in form and
substance satisfactory to the Banks, by which such mortgagee waives its rights,
if any, to any portion of the Collateral located on such premises, and agrees to
provide Agent notice of and an opportunity to cure any default by Borrower or
such Subsidiary under such mortgage.
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SECTION V. REPRESENTATIONS AND WARRANTIES
To induce the Banks to enter into this Agreement, the Borrower and each
Subsidiary jointly and severally represent and warrant to each Bank as of the
Closing and initial funding hereunder as follows:
5.1 Due Organization and Qualification. The Borrower is a corporation
duly organized, validly existing and in good standing under the Laws of the
State of Delaware; each Subsidiary is a corporation duly organized, validly
existing and in good standing under the Laws of its state of incorporation, all
as set forth in Exhibit H; the Borrower and each Subsidiary have the lawful
power to own their properties and to engage in the business they conduct, and
each is duly qualified and in good standing as a foreign corporation in the
jurisdictions wherein the nature of the business transacted by it or property
owned by it is both material and makes such qualification necessary; the states
in which the Borrower and each Subsidiary are qualified to do business are set
forth in Exhibit H; the percentage of the Borrower's ownership of the
outstanding stock and membership interests of each Subsidiary is as listed in
Exhibit H; and the addresses of all places of business of the Borrower and each
Subsidiary are as set forth in Exhibit I;
5.2 No Conflicting Agreement. Neither the Borrower nor any Subsidiary is
in default with respect to any of its existing Indebtedness, and the making and
performance of this Agreement, the Notes and the Collateral Documents will not
(immediately, or with the passage of time or the giving of notice, or both):
(A) Violate the charter or bylaw provisions of the Borrower or any
Subsidiary, or violate any Laws (except with respect to the assignment of
Accounts due from Medicare and Medicaid), or result in a default under any
material contract, agreement, or instrument to which the Bor rower or any
Subsidiary is a party or by which the Borrower or any Subsidiary or its property
is bound; or
(B) Result in the creation or imposition of any security interest in, or
lien or encumbrance upon, any of the assets of the Borrower or any Subsidiary,
except in favor of the Banks;
5.3 Capacity. The Borrower and each Subsidiary have the power and
authority to enter into and perform this Agreement, the Notes and the Collateral
Documents, as applicable, and to incur the Obligations herein and therein
provided for, and have taken all corporate action necessary to authorize the
execution, delivery, and performance of this Agreement, the Notes and the
Collateral Documents;
5.4 Binding Obligations. This Agreement and the Collateral Documents
are, and the Notes when delivered will be, valid, binding, and enforceable in
accordance with their respective terms subject to the general principles of
equity (regardless of whether such question is considered in a proceeding in
equity or at law) and to applicable bankruptcy, insolvency, moratorium,
fraudulent or preferential conveyance and other similar laws affecting generally
the enforcement of creditors' rights;
5.5 Pledged Instruments. The Pledgor owns the Pledged Instruments; the
pledged stock constitutes one hundred percent (100%) of the issued and
outstanding capital stock of the respective issuers thereof; the pledged
membership interests constitute fifty percent (50%) of the total membership
interests of West Central Ohio Group, Ltd.; the pledged stock has been duly
issued, is fully paid and non-assessable; and both the pledged stock and
membership interests are free of all claims, security interests, liens, charges
and encumbrances;
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5.6 Litigation. Except as disclosed in Exhibit J hereto, there is no
pending or threatened order, notice, claim, litigation, proceeding or
investigation against or affecting the Borrower or any Subsidiary, whether or
not covered by insurance, that would involve the payment of One Hundred Thousand
Dollars ($100,000.00) or more if adversely determined;
5.7 Title. The Borrower and its Subsidiaries have good and marketable
title to all of their respective assets, including without limitation the
Collateral and the Real Property, subject to no security interest, encumbrance
or lien, or the claims of any other Person except for Permitted Liens;
5.8 Financial Statements. The Financial Statements, including any schedules
and notes pertaining thereto, have been prepared in accordance with generally
accepted accounting principles consistently applied, and fully and fairly
present the financial condition of the Borrower and its Subsidiaries at the
dates thereof and the results of operations for the periods covered thereby, and
there have been no Material Adverse Change in the consolidated financial
condition or business of the Borrower and its Subsidiaries from December 31,
1996 to the date hereof;
5.9 No Other Indebtedness. As of the date hereof, the Borrower and its
Subsidiaries had no Indebtedness of any nature, including, but without
limitation, liabilities for taxes and any interest or penalties relating
thereto, except to the extent reflected (in a footnote or otherwise) and
reserved against in the December 31, 1997 Financial Statements or as disclosed
in or permitted by this Agreement; the Borrower does not know, and has no
knowledge of any basis for the assertion against it or any Subsidiary as of the
date hereof, of any material Indebtedness of any nature not fully reflected and
reserved against in the December 31, 1996 Financial Statements;
5.10 Taxes. Except as otherwise permitted herein, the Borrower and its
Subsidiaries have filed all federal, state and local tax returns and other
reports they are required by Laws to file prior to the date hereof and which are
material to the conduct of their respective businesses, have paid or caused to
be paid all taxes, assessments and other governmental charges that are due and
payable prior to the date hereof, and have made adequate provision for the
payment of such taxes, assessments or other charges accruing but not yet
payable; the Borrower has no knowledge of any deficiency or additional
assessment in connection with any taxes, assessments or charges not provided for
on its books;
5.11 Compliance with Laws; Reimbursement Audits. Except as otherwise
disclosed in Exhibit K hereto, or except to the extent that the failure to
comply would not have a Material Adverse Effect on the Borrower or any
Subsidiary, the Borrower and its Subsidiaries have complied in all material
respects with all applicable Laws with respect to: (1) any restrictions,
specifications, or other requirement pertaining to services that the Borrower or
any Subsidiary performs, including Fraud and Abuse Laws; (2) the conduct of
their respective businesses; (3) the use, maintenance, and operation of the real
and personal properties owned or leased by them in the conduct of their
respective businesses; and (4) health, safety, worker's compensation, and equal
employment opportunity; without limiting the foregoing, if the Borrower or any
Provider with whom Borrower has entered into a Service Agreement has been
audited by Medicare or Medicaid, none of such audits provides for adjustments in
reimbursable costs or asserts claims for reimbursement or repayment by such
Person of costs and/or payments theretofor made by such governmental payor that,
if adversely determined, could reasonably be expected to have or result in a
Material Adverse Effect;
5.12 Environmental Compliance. The Borrower and its Subsidiaries and their
respective assets and operations are in compliance in all material respects with
all Environmental Laws, and the Borrower and its Subsidiaries will comply in all
material respects with all such Environmental Laws and regulations which may be
imposed in the future; all plants, facilities and properties owned by
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the Borrower and its Subsidiaries are and will be on the date of Closing in
a clean and healthful condition, free of asbestos and of all contamination by
Hazardous Materials and other potentially harmful chemical or physical
conditions, including, without limitation, any contamination of the air, soil,
groundwater or surface waters associated with or adjacent to such plants,
facilities and properties; all storage tanks (whether above or below ground)
located in or on such plants, facilities and properties are in sound condition,
free or corrosion or leaks that could allow or threaten the release of any
stored material; no Hazardous Materials have been or are used, stored, treated
or disposed of in violation of applicable Laws and regulations; and neither the
Borrower nor any Subsidiary is a defendant in any administrative or judicial
action alleging liability under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended ("CERCLA"), nor has the Borrower or
any Subsidiary received a notice that it is a potentially responsible party
under CERCLA or similar state Laws;
5.13 Full Disclosure. No representation or warranty by the Borrower or any
Subsidiary contained herein or in any certificate or other document furnished by
the Borrower or any Subsidiary pursuant to this Agreement contains any untrue
statement of material fact or omits to state a material fact necessary to make
such representation or warranty not misleading in light of the circumstances
under which it was made;
5.14 Consents. Each consent, approval or authorization of, or filing,
registration or qualification with, any Person required to be obtained or
effected by the Borrower or any Subsidiary in connection with the execution and
delivery of the Loan Documents or the undertaking or performance of any
obligation thereunder has been duly obtained or effected;
5.15 Existing Borrowings. All existing Indebtedness: (1) for money
borrowed; or (2) under any security agreement or mortgage from the Borrower or
any Subsidiary is described in Exhibit B, unless the same are immaterial (i.e.,
less than $25,000.00 in amount);
5.16 Material Contracts. Except as described on Exhibit L hereto, the
Borrower and its Subsidiaries have no material lease, contract or commitment of
any kind (such as employment agreements; collective bargaining agreements;
powers of attorney; distribution arrangements; patent license agreements;
contracts for future purchase or delivery of goods or rendering of services;
bonus, pension and retirement plans; or accrued vacation pay, insurance and
welfare agreements) which would be required to be listed as an Exhibit to the
Borrower's Annual Report on Form 10-K; all parties (including the Borrower and
Subsidiaries) to all such material leases, contracts and other commitments to
which the Borrower or any Subsidiary is a party have complied with the
provisions of such leases, contracts and other commitments; no party is in
default under any provision thereof; and no event has occurred which, but for
the giving of notice or the passage of time, or both, would constitute a
default;
5.17 No Commissions. Neither the Borrower nor any Subsidiary has made any
agreement or has taken any action which may cause anyone to become entitled to a
commission or finder's fee as a result of the making of the Loans;
5.18 ERISA. All Defined Benefit Pension Plans, as defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), of the Borrower
and each Subsidiary meet, as of the date hereof, the minimum funding standards
of Section 302 of ERISA, and no Reportable Event or Prohibited Transaction, as
defined in ERISA, has occurred with respect to any such Plan.
5.19 Survival. All of the representations and warranties set forth in
Paragraph 5.1 shall survive until all Obligations are satisfied in full.
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SECTION VI. AFFIRMATIVE COVENANTS
The Borrower does hereby covenant and agree with each Bank that, so long as
any of the Obligations remain unsatisfied, it will comply, and it will cause its
Subsidiaries to comply, with the following covenants:
6.1 Use of Proceeds. The Borrower will use the proceeds of the Loans only
for the purposes described in Paragraph 2.1 and will furnish the Agent such
evidence as it may reasonably require with respect to such use.
6.2 Financial Statements and Reports. The Borrower will furnish to each of
the Banks:
(A) Within thirty (30) days after the close of each calendar month in
each fiscal year of the Borrower and its Subsidiaries: (a) consolidated
statements of cash flows of the Borrower and its Subsidiaries for such month;
(b) consolidated income statements of the Borrower and its Subsidiaries for such
month; and (c) consolidated balance sheets of the Borrower and its Subsidiaries
as of the end of such month -- all in reasonable detail, subject to year-end
audit adjustments, and certified by Borrower's president, vice-president, chief
financial officer, or corporate controller to have been prepared in accordance
with generally accepted accounting principles consistently applied by the
Borrower and its Subsidiaries, except for any inconsistencies explained in such
certificate;
(B) Within forty-five (45) days after the close of each quarter-annual
accounting period in each fiscal year of Borrower and its Subsidiaries: (a) a
consolidated statement of cash flows of the Borrower and its Subsidiaries for
such quarter annual period; (b) consolidated and consolidating income statements
of the Borrower and its Subsidiaries for such quarter-annual period; and (c) a
consolidated balance sheet of the Borrower and its Subsidiaries as of the end of
such quarter-annual period--all in reasonable detail, subject to year-end audit
adjustments, compared to budget, and certified by the Borrower's president, vice
president, chief financial officer, or corporate controller to have been
prepared in accordance with generally accepted accounting principles
consistently applied by the Borrower and its Subsidiaries, except for any
inconsistencies explained in such certificate;
(C) Within ninety-five (95) days after the close of each fiscal year of
Borrower and its Subsidiaries: (a) consolidated statements of cash flows of the
Borrower and its Subsidiaries for such fiscal year; (b) consolidated and
consolidating income statements of the Borrower and its Subsidiaries for such
fiscal year; and (c) consolidated and consolidating balance sheets of the
Borrower and its Subsidiaries as of the end of such fiscal year--all in
reasonable detail, including all supporting schedules, notes and comments; the
consolidated statements and balance sheets shall be audited by Ernst & Young or
another independent certified public accountant selected by the Borrower and
reasonably acceptable to the Banks, and certified by such accountants to have
been prepared in accordance with generally accepted accounting principles
consistently applied by the Borrower and its Subsidiaries, except for any
inconsistencies explained in such certificate, and the consolidating statements
shall be internally prepared by Borrower's controller and certified to the Agent
as true and correct. The Banks shall have the right, from time to time, to
discuss the Borrower's affairs directly with the Borrower's independent
certified public accountants after notice to the Borrower and opportunity of the
Borrower to be present at any such discussions;
(D) As soon as reasonably practicable but in any event within forty-five
(45) days after the close of each quarter-annual accounting period in each
fiscal year of the Borrower and its Subsidiaries, a certificate of the
president, vice president, chief financial officer or corporate controller
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of the Borrower stating that: (i) such officer has individually reviewed
the provisions of this Agreement; (ii) a review of the activities of the
Borrower and its Subsidiaries during such year or quarter-annual period, as the
case may be, has been made by such officer or under such officer's supervision,
with a view to determining whether the Borrower has fulfilled all its
obligations under this Agreement; and (iii) to the best of such officer's
knowledge, the Borrower has observed and performed each undertaking contained in
this Agreement and there is no Default or Potential Default under any of the
provisions hereof or, if the Borrower shall be so in default, specifying all
such defaults and events of which he may have knowledge. Such certificate shall
have attached a Compliance Certificate setting forth the Applicable Margins,
financial ratios and covenants set forth in Paragraphs 2.2, 2.3, 2.5, and 6.16,
including without limitation any antecedent calculations and the source of any
information that was used in such calculations;
(E) Within sixty (60) days of the close of the prior fiscal year, a copy
of Borrower's proposed income, expense and capital budget for the present fiscal
year, including within the capital budget a listing of proposed Capital
Expenditures;
(F) Promptly after the sending or making available or filing of the
same, copies of all correspondence, reports, proxy statements and financial
statements that the Borrower sends or makes available to its stockholders and
all registration statements and reports that the Borrower files with the
Securities and Exchange Commission or any successor Person;
(G) Within ten (10) days of receipt of the same by Borrower or any
Subsidiary, copies of all management letters and any other reports which are
submitted to the Borrower or any of its Subsidiaries by its independent
accountants in connection with any annual or interim audit of the Records of the
Borrower or its Subsidiaries by such accountants; and
(H) As soon as reasonably practicable but in any event within ten (10)
days after the closing of any Acquisition, a copy of the fully executed Service
Agreement pertaining thereto together with any accompanying
employment/noncompete agreements with the affected physicians.
6.3 Good Condition. The Borrower and its Subsidiaries will maintain
their respective Inventory, Equipment, Real Property and other properties in
good condition and repair (normal wear and tear excepted), and will pay and
discharge or cause to be paid and discharged when due, the cost of repairs to or
maintenance of the same, and will pay or cause to be paid all rental or mortgage
payments due on such Equipment or Real Property. The Borrower hereby agrees
that, in the event it or any Subsidiary fails to pay or cause to be paid any
such payment, the Banks may do so and be reimbursed by the Borrower therefor.
6.4 Insurance. The Borrower and its Subsidiaries will maintain, or cause
to be maintained, public liability insurance, medical malpractice insurance, and
fire and extended coverage insurance on all assets owned by them, all in such
form and amounts as are consistent with industry practices and with such
insurers as may be reasonably satisfactory to the Banks. Such policies shall
name the Banks as loss payees under a standard mortgagee loss payee clause and
as an additional insured, as their interests may appear, and shall contain a
provision whereby they cannot be canceled except after thirty (30) days' written
notice to the Agent. The Borrower will furnish to the Agent such evidence of
insurance as the Banks may require. The Borrower hereby agrees that, in the
event it or any Subsidiary fails to pay or cause to be paid the premium on any
such insurance, the Banks may do so and be reimbursed by the Borrower therefor.
The Agent is hereby appointed the Borrower's attorney-in-fact (without requiring
the Agent to act as such) to endorse any check which may be payable to the
Borrower
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to collect such returned or unearned premiums or the proceeds of such insurance,
and any amounts so collected may be applied by the Agent toward satisfaction of
any of the Obligations.
6.5 Taxes; Copies of Returns. The Borrower and its Subsidiaries will pay or
cause to be paid when due, all taxes, assessments and charges or levies imposed
upon them or on any of their property or which any of them is required to
withhold or pay over, except where contested in good faith by appropriate
proceedings with adequate security therefor having been set aside in a manner
satisfactory to Banks. The Borrower and each Subsidiary shall pay or cause to be
paid all such taxes, assessments, charges or levies forthwith whenever
foreclosure on any lien that attaches (or security therefor) appears imminent.
6.6 Records and Inspection. The Borrower and its Subsidiaries will keep
accurate and complete Records and will, when requested so to do, make available
any of their Records for inspection during regular business hours by duly
authorized representatives of the Banks, and will furnish the Banks any
information regarding their business affairs and financial condition within a
reasonable time after written request therefor.
6.7 Maintenance of Existence and Business; Licenses. The Borrower and its
Subsidiaries will take all necessary steps to renew, keep in full force and
effect, and preserve their corporate existence, good standing, and franchises,
and will comply in all material respects with all present and future Laws
(including, but not limited to, Fraud and Abuse Laws) applicable to them in the
operation of their musculoskeletal clinics and centers. The Borrower and any
Subsidiary shall further use its best efforts to assure the compliance by all
Providers with all applicable Laws, including, but not limited to, medical
licensure and Fraud and Abuse Laws relating to their providing of professional
services. The Borrower and its Subsidiaries will preserve, renew and keep in
full force and effect all material contracts, leases, governmental licenses,
authorizations, consents and approvals, rights, privileges and franchises
necessary in the normal course of business, including without limitation
maintaining in full force and effect Medicare certification for all
musculoskeletal centers and agencies. Within ten (10) days of the Agent's
request therefor, the Borrower will furnish the Agent with copies of federal
income tax returns filed by the Borrower.
6.8 Ordinary Course; Pledge of Notes. The Borrower and its Subsidiaries
will collect their Accounts and sell their Inventory only in the ordinary course
of business. If any Accounts should be evidenced by promissory notes, then the
holders shall immediately deliver the same to Agent, appropriately endorsed to
Agent's order. The Borrower and each Subsidiary hereby waive presentment,
demand, notice of dishonor, protest, notice of protest, and all other notices
with respect thereto.
6.9 Notice of Litigation. The Borrower and its Subsidiaries will give
immediate notice to the Agent of: (1) any litigation or proceeding in which any
of them is a party if an adverse decision therein would require the payment of
more than Five Hundred Thousand Dollars ($500,000.00) or deliver assets the
value of which exceeds such sum (if such claim is not considered to be covered
by insurance) or pay over more than One Million Dollars ($1,000,000.00) (if such
claim is considered to be covered by insurance); and (2) the institution of any
other suit or proceeding involving any of them, or the overt threat thereof,
that might result in a Material Adverse Change.
6.10 Payment of Indebtedness. The Borrower and its Subsidiaries will pay
when due (or within applicable grace periods) all Indebtedness for borrowed
money due any Person, except when the amount thereof is being contested in good
faith by appropriate proceedings and with adequate security therefor being set
aside in a manner satisfactory to Banks. If default is made by the Borrower or
any Subsidiary in the payment of any principal (or installment thereof) of, or
interest on, any such
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Indebtedness, the Banks shall have the right, in their discretion, to pay
such interest or principal for the account of the Borrower or such Subsidiary
and be reimbursed by the Borrower therefor.
6.11 Notice to Banks of Default. The Borrower and its Subsidiaries will
notify each Bank immediately if any of them becomes aware of the occurrence of
any Event of Default or of any fact, condition or event that only with the
giving of notice or passage of time or both, could become an Event of Default,
or of the failure of the Borrower or any Subsidiary to observe any of their
respective undertakings hereunder.
6.12 Notice of Name Change or Location. The Borrower and its Subsidiaries
will notify each Bank thirty (30) days in advance of any change in (i) the name
of the Borrower or any Subsidiary, (ii) the location of any Collateral, (iii)
the location of any of their places of business or (iv) of the establishment of
any new, or the discontinuance of any existing, place of business.
6.13 Environmental Compliance.
(A) Borrower and its Subsidiary will (i) maintain compliance with any
applicable Environmental Laws, (ii) obtain and maintain, and cause each of its
Subsidiaries to obtain and maintain, any and all material permits required by
applicable Environmental Laws in connection with its or its Subsidiaries'
operations and (iii) dispose of, and cause each of its Subsidiaries to dispose
of, any and all Hazardous Materials only at facilities and with carriers
reasonably believed to possess valid permits under RCRA, if applicable, and any
applicable state and local Environmental Laws. The Borrower shall use its best
efforts, and cause each of its Subsidiaries to use its best efforts, to obtain
all certificates required by law to be obtained by the Borrower and its
Subsidiaries from all contractors employed by the Borrower or any of its
Subsidiaries in connection with the transport or disposal of any Hazardous
Materials.
(B) If the Borrower or any of its Subsidiaries shall:
(1) receive written notice that any material violation of any
Environmental Laws may have been committed or is about to be committed by the
Borrower or any of its Subsidiaries;
(2) receive written notice that any administrative or judicial
complaint or order has been filed or is about to be filed against the Borrower
or any of its Subsidiaries alleging any material violation of any Environmental
Laws or requiring the Borrower or any of its Subsidiaries to take any action in
connection with the release or threatened release of Hazardous Substances or
solid waste into the environment; or
(3) receive written notice from a federal, state, foreign or local
governmental agency or private party alleging that the Borrower or any of its
Subsidiaries is liable or responsible for costs associated with the response to
cleanup, stabilization or neutralization of any environmental activity;
then it shall provide each Bank with a copy of such notice within fifteen (15)
Business Days of the Borrower's or such Subsidiary's receipt thereof. Subject to
the right of the Borrower or such Subsidiary to contest in good faith any such
action or proceedings, the Borrower and its Subsidiaries shall as promptly as
possible resolve, cure and/or have dismissed with prejudice any such action or
proceedings to the satisfaction of the Banks.
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6.14 Fraud and Abuse. Borrower agrees to deliver to the Agent on or before
June 30, 1998 a copy of Borrower's written compliance procedures and manual
regarding Fraud and Abuse Laws. Borrower further agrees that Agent may from time
to time, but not more frequently than once per calendar year absent a Potential
Default or an Event of Default, request in writing the opinion of in-house
counsel and/or outside healthcare counsel to the Borrower as to the absence,
except as disclosed in the opinion, of such counsel's knowledge of any actual,
threatened or asserted violation of any Fraud and Abuse Laws on the part of the
Borrower, any Subsidiary and/or the Providers, and the sufficiency of
documentation then in use for the acquisition of Practices as complying with
Fraud and Abuse Laws. Absent the existence of a Potential Default or an Event of
Default, such opinions shall require no special diligence on the part of the
opining attorney(s), but only requiring a report of matters then known to such
attorneys as well as a review of the Borrower's compliance procedures (including
manuals and reports), unless Agent specifically inquires about facts that Agent
reasonably believes may raise a Fraud and Abuse Law issue. Such opinions shall
be in form and substance acceptable to Agent, shall be delivered to Agent at
Borrower's expense within fifteen (15) days of the date of request and shall
address specifically any facts inquired of in Agent's request.
6.15 ERISA Compliance. The Borrower and its Subsidiaries will: (1) fund all
their Defined Benefit Pension Plans in accordance with no less than the minimum
funding standards of Section 302 of ERISA and Section 412 of the Internal
Revenue Code; (2) furnish the Agent, promptly after the filing of the same, with
copies of all reports or other statements filed with the United States
Department of Labor or the Internal Revenue Service with respect to all such
Plans; and (3) promptly advise the Agent of the occurrence of any Reportable
Event or Prohibited Transaction with respect to any such Plan.
6.16 Financial Ratios. The Borrower will maintain the following financial
ratios and covenants:
(A) Funded Debt to Cash Flow Ratio. At the end of each fiscal quarter, a
ratio of Funded Debt to Consolidated Cash Flow for the four (4) quarters just
ended of not greater than 3.0 to 1.0.
(B) Shareholders Equity. At all times, Shareholders Equity in the amount
of not less than Fifty-Five Million Dollars ($55,000,000.00) plus (i)
seventy-five percent (75%) of Consolidated Net Income (no decreases for net
losses) on a cumulative basis from September 30, 1997, and (ii) one hundred
percent (100%) of the amount of any new contributions to the capital of
Borrower.
(C) Funded Debt to Consolidated Capital. At the end of each fiscal
quarter, a ratio of Funded Debt to Consolidated Capital of not more than 0.5 to
1.0.
(D) Debt Service Coverage. At the end of each fiscal quarter, a ratio of
Adjusted Consolidated Cash Flow for the four (4) quarters just ended divided by
Debt Service for such four (4) quarter period of not less than 1.25 to 1.0.
SECTION VII. NEGATIVE COVENANTS
Borrower and each Subsidiary hereby covenant and agree that without the
prior written consent of the Majority Banks:
7.1 Merger or Reorganization. Neither the Borrower nor any Subsidiary will
enter into any merger, consolidation, reorganization or recapitalization, or
reclassify its capital stock; provided, however, so long as no Event of Default
and no Potential Default has occurred or will occur immediately
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thereafter as a result of such: (1) any Subsidiary may transfer assets to the
Borrower following not less than fifteen (15) days prior written notice to the
Agent, (2) the Borrower may merge with any Person in a Permitted Acquisition,
subject to Paragraph 7.13 below and so long as the Borrower is the surviving
corporation, and (3) any Subsidiary may merge into the Borrower following not
less than fifteen (15) days prior written notice to the Agent.
7.2 Sale of Assets. Neither the Borrower nor any Subsidiary will sell,
transfer, lease or otherwise dispose of all or any material part of its assets;
provided, however, Borrower and its Subsidiaries may in the ordinary course of
business sell or dispose of obsolete Equipment, or may replace damaged or worn
Equipment with Equipment of similar value and use; and provided further, any
Subsidiary may transfer assets to the Borrower following not less than fifteen
(15) days prior written notice to the Agent.
7.3 Encumbrances. Neither the Borrower nor any Subsidiary will mortgage,
pledge, grant or permit to exist a security interest in or lien upon any of its
assets of any kind, now owned or hereafter acquired, except for Permitted Liens.
7.4 Guarantee. Neither the Borrower nor any Subsidiary will become liable,
directly or indirectly, as guarantor or otherwise, for any obligation of any
other Person, except for: (1) the endorsement of commercial paper for deposit or
collection in the ordinary course of business, (2) guarantees of Permitted
Acquisition Indebtedness, and (3) leases permitted under Paragraph 7.5(7) below.
7.5 Debts and Other Obligations. Neither the Borrower nor any Subsidiary
will incur, create, assume, or permit to exist any Indebtedness except: (1) the
Loans and Letters of Credit; (2) existing Indebtedness as set forth in Exhibit
B; (3) trade Indebtedness incurred in the ordinary course of business; (4)
contingent Indebtedness permitted by Paragraph 7.4; (5) Indebtedness secured by
Permitted Liens; (6) Indebtedness owed by any Subsidiary of the Borrower to the
Borrower, by the Borrower to any Subsidiary of the Borrower, or by a Subsidiary
of the Borrower to any other Subsidiary of the Borrower, provided that if any
such Indebtedness is evidenced by a document or instrument, the same is pledged
pursuant to an appropriate pledge agreement; (7) lease obligations not otherwise
prohibited by the financial ratios in Paragraph 6.16; and (8) Permitted
Acquisition Indebtedness.
7.6 Dividends and Distributions. The Borrower will not declare or pay any
cash dividends, or make any other cash payment or other distribution of an asset
on account of its capital stock.
7.7 Redemptions and Capital Stock. The Borrower will not redeem, purchase
or retire any of its capital stock, and no Subsidiary will issue, redeem,
purchase or retire any of its capital stock or membership interests or grant or
issue any warrant, right or option pertaining thereto or other security
convertible into any of the foregoing.
7.8 Prepayments. Neither the Borrower nor any Subsidiary will prepay any
Subordinated Indebtedness, or Indebtedness for borrowed money (exclusive of the
Obligations and any Permitted Acquisition Indebtedness), or enter into or modify
any agreement as a result of which the terms of payment of any of the foregoing
Indebtedness are waived or modified.
7.9 Subsidiary. Neither the Borrower nor any Subsidiary will form any
Subsidiary, make any investment in or make any loan in the nature of any
investment to any Subsidiary, except for: (1) the formation of a Subsidiary in
connection with making a Permitted Acquisition which qualifies as
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such under Paragraph 7.13 below, (2) advances by the Borrower to
Subsidiaries of the Borrower, and (3) advances by Subsidiaries of the Borrower
to the Borrower.
7.10 Loans and Advances. Neither the Borrower nor any Subsidiary will make
any loan or advance to any Person, including any Provider and any officer,
shareholder, director or employee of the Borrower or any Subsidiary, except for:
(1) secured, recourse loans to be made on or before December 31, 1997 in
the aggregate amounts of not more than $7,000,000.00 from Borrower to West
Central Ohio Group, Ltd., said loans to be cross-defaulted and to be
cross-collateralized by a first lien on all assets of the West Central Ohio
Group, Ltd., to incorporate the terms and covenants set forth in Exhibit O
hereto, and to otherwise be in form and substance satisfactory in all respects
to the Agent;
(2) a secured, recourse loan to be made on or before December 31, 1997
in an amount not to exceed $800,000.00 from Borrower to Specialists-SCN, LLC,
said loan to be secured by first lien on all real estate assets of
Specialists-SCN, LLC, to incorporate the terms and covenants set forth in
Exhibit P hereto, and to otherwise be in form and substance satisfactory in all
respects to the Agent;
(3) loans evidenced by recourse promissory notes to Providers not to
exceed in the aggregate Five Million Dollars ($5,000,000.00) in face amount;
provided, however, that neither the Borrower nor any Subsidiary will lend to the
Providers in any Practice the total sum of more than Two Million Dollars
($2,000,000.00) as evidenced by the face amount of executed, recourse promissory
notes; and
(4) temporary advances in the ordinary course of business not to exceed
Fifty Thousand Dollars ($50,000.00) individually or Two Hundred Fifty Thousand
Dollars ($250,000.00) in the aggregate.
7.11 Investments. Neither the Borrower nor any Subsidiary will purchase
or otherwise invest in or hold securities, non-operating real estate or other
non-operating assets, except: (1) Permitted Investments; (2) the present
investment in any such assets, including existing Subsidiaries; and (3)
operating assets that hereafter become non-operating assets.
7.12 Sale-Leaseback. Neither the Borrower nor any Subsidiary will enter
into any sale-leaseback transaction.
7.13 Acquisitions.
(A) Neither the Borrower nor any Subsidiary will make any Acquisition
without first obtaining the prior written consent of the Majority Banks unless
the Borrower has certified to the Agent that the Acquisition satisfies the
criteria for a Permitted Acquisition, as follows:
(1) Borrower has submitted to the Agent on a timely basis the
information required by Paragraph 3.3 above;
(2) the Permitted Acquisition Price does not exceed a multiple of eight
(8) times the annual Base Service Fee as defined and set forth in the Service
Agreement to be entered into with the Provider(s) whose Practice is being
acquired;
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(3) the cash portion of the Permitted Acquisition Price (including all
amounts thereon due within six (6) months of the closing) plus the sum of any
seller notes delivered by the Borrower or any Subsidiary and the amount of
outstanding Indebtedness for borrowed money assumed or to be assumed, do not
exceed in the aggregate Seven Million Five Hundred Thousand Dollars
($7,500,000.00);
(4) the business of the Person being acquired is in the musculoskeletal
service field;
(5) the acquisition is not opposed by the management and the holders of
a majority of its voting shares or partnership units of the Person being
acquired, as applicable;
(6) no Event of Default has occurred hereunder and not been cured, or
would otherwise occur as a result of or in connection with the Permitted
Acquisition, whether immediately or on a projected basis;
(7) in all cases, whether or not the Banks have been requested to
disburse funds, the Borrower must pledge or cause to be pledged to the Agent for
the benefit of the Banks a first priority lien on any outstanding stock or
ownership interests in the Person being acquired and a first priority lien
(subject only to Permitted Liens) on all of the assets of the Person being
acquired; and
(8) if a new Subsidiary is formed or the Acquisition is of corporate
stock or other ownership interests, the new Subsidiary and/or the acquired
entity must become a party to this Agreement and execute a Guaranty and
Suretyship with respect to the Obligations in form and substance like that
attached as Exhibit F hereto;
provided, however, after three (3) Permitted Acquisitions have been
closed in any fiscal quarter of the Borrower, any additional Permitted
Acquisitions occurring in such quarter shall be closed only if Borrower has
first submitted to the Agent a Covenant Compliance Worksheet demonstrating the
Pro-Forma Effect of the Permitted Acquisition all as more specifically set forth
in Subparagraph 3.3(D) hereinabove. The Agent shall be given not less than five
(5) Business Days written notice prior to the closing of any Acquisition to
prepare all necessary documentation, and the legal structure of the Collateral
and Loans following any Permitted Acquisition must be satisfactory to the Agent
and the Agent's counsel. Notwithstanding anything herein to the contrary, with
respect to West Central Ohio Group, Ltd., Borrower shall pledge all of its
membership interest in such entity but shall not be required to comply with the
other provisions of Subparagraphs (7) and (8) above.
(B) The consummation of each Permitted Acquisition shall be deemed to be
a representation and warranty by the Borrower that all conditions to be
satisfied by the Borrower hereinabove have been satisfied, that the same is
permitted in accordance with the terms of this Agreement and that the
information submitted by the Borrower pursuant to Paragraph 3.3, including that
contained in the Acquisition Certificate, is true and correct in all respects as
of the date such certificate is given, which representation and warranty shall
be deemed to be a representation and warranty for all purposes hereunder,
including, without limitation, for purposes of Paragraph 8.1.
(C) With respect to any proposed Acquisition which is not a Permitted
Acquisition, the Borrower shall submit a completed Acquisition Certificate in
the form attached hereto as Exhibit A-3 to the Agent and each of the Banks, and
neither the Borrower nor any Subsidiary shall
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close said Acquisition unless the Acquisition has been approved by the
Majority Banks in their sole good faith discretion. The Banks shall have a
reasonable time to review and analyze the material contained in the Acquisition
Certificate.
7.14 Management. Borrower shall not allow or suffer any change of
management effecting a material change in the duties or change in the personnel
presently staffing the positions of Chief Executive Officer, President or Chief
Financial Officer, as set forth in Exhibit M hereto. Notwithstanding the
foregoing, should any of the named managers cease such active participation in
Borrower's management due to their death or disability, Agent shall allow
Borrower a period of sixty (60) days thereafter in which a management succession
plan may be presented to Agent so that Agent may, in its discretion, elect to
accept new management in lieu of prior management, subject to such revisions of
this Agreement as Agent may require.
7.15 Untrue Certificate. Neither the Borrower nor any Subsidiary will
furnish the Agent or any Bank any certificate or other document that will
contain any untrue statement of material fact or that will omit to state a
material fact necessary to make it not misleading in light of the circumstances
under which it was furnished.
7.16 Margin Stock. Neither the Borrower nor any Subsidiary will directly or
indirectly apply any part of the proceeds of the Loans to the purchasing or
carrying of any "margin stock" within the meaning of Regulation U of the Board
of Governors of the Federal Reserve System, or any regulations, interpretations
or rulings thereunder.
7.17 Affiliate Transactions. Borrower will not, and will not permit any of
its Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction (including without limitation the purchase, sale, lease or exchange
of any property or the rendering of any service) with any Affiliate (other than
any Subsidiary which is wholly owned by Borrower) on terms that are less
favorable to the Borrower or its Subsidiaries than those that would be
obtainable at the time from any Person who is not an Affiliate. Borrower will
not, and will not permit any of its Subsidiaries to, pay or incur any obligation
to pay any management fee, consulting fee, service fee or similar fee or charge
to any Affiliate.
SECTION VIII. DEFAULT
8.1 Events of Default. The occurrence of any one or more of the following
events shall constitute an "Event of Default" hereunder:
(A) The Borrower shall fail to pay when due any installment of principal
hereunder or, within three (3) days of the date when due, any interest payable
hereunder, or shall fail to pay within ten (10) days of written notice any fee
payable hereunder.
(B) The Borrower shall fail to achieve any of the financial covenants
contained in Paragraph 6.16.
(C) The Borrower, any Subsidiary, or Pledgor shall fail to observe or
perform any obligation or covenant to be observed or performed by any of them,
jointly or severally, under any of the Loan Documents; provided, however, if
such failure is not related to the payment of money, the
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breach of a financial covenant contained in Paragraph 6.16, or the
breach of any negative covenant in Section VII, Borrower shall have thirty (30)
days to cure such failure before the Majority Banks and/or Agent exercise the
rights and remedies hereunder, with such thirty (30) day period commencing after
notice of such failure from the Agent or Banks.
(D) The Borrower or any Subsidiary shall fail to pay any Indebtedness
for borrowed money (whether direct or indirect, including guarantees of borrowed
money) due any Person and such failure shall continue beyond any applicable
grace period and shall equal or exceed, either individually or in the aggregate,
One Hundred Thousand Dollars ($100,000.00) in amount.
(E) The Borrower or any Subsidiary shall suffer a Material Adverse
Effect from any event of default arising under any agreement binding the
Borrower or such Subsidiary.
(F) Any financial statement, representation, warranty or certificate
made or furnished by the Borrower or any Subsidiary to the Agent or any Bank in
connection with this Agreement or the Loans, or as inducement to the Banks to
enter into this Agreement, or in any separate statement or document to be
delivered hereunder to the Agent or any Bank, shall be materially false,
incorrect, or incomplete when made.
(G) The Borrower or any Subsidiary shall admit its inability to pay its
debts as they mature, or shall make an assignment for the benefit of its or any
of its creditors.
(H) Proceedings in bankruptcy, or for reorganization of the Borrower or
any Subsidiary, or for the readjustment of any of their respective debts, under
the United States Bankruptcy Code, as amended, or any part thereof, or under any
other Laws, whether state or federal, for the relief of debtors, now or
hereafter existing, shall be commenced by the Borrower or any Subsidiary, or
shall be commenced against the Borrower or any Subsidiary.
(I) A receiver or trustee shall be appointed for the Borrower or any
Subsidiary or for any substantial part of their respective assets, or any
proceedings shall be instituted for the dissolution or the full or partial
liquidation of the Borrower or any Subsidiary, or the Borrower or any Subsidiary
shall discontinue business or materially change the nature of its business.
(J) The Borrower or any Subsidiary shall suffer final judgments for
payment of money aggregating in excess of Fifty Thousand Dollars ($50,000.00)
and shall not discharge the same within a period of thirty (30) days unless,
pending further proceedings, execution has been effectively stayed.
(K) A judgment creditor of the Borrower or any Subsidiary having a
judgment in excess of Twenty Thousand Dollars ($20,000.00) shall obtain
possession of any of the Collateral by any means, including, but without
limitation, levy, distraint, replevin or self-help.
(L) Any obligee of Subordinated Indebtedness shall fail to comply with
the subordination provisions of the instruments evidencing such Subordinated
Indebtedness.
(M) A breach or a default shall occur under any Letter of Credit
Document.
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(N) Borrower or any Subsidiary shall default in any other Indebtedness
(excluding the Obligations) owed to the Banks, or any of them, or under any
other agreements for credit or borrowed money it may have with any Bank, jointly
or severally, directly or indirectly, whether matured or unmatured.
(O) Receipt by the Borrower or any Subsidiary of a notice from a
Governmental Authority that it (i) intends to disallow requested reimbursements,
demand adjustment or repayment of past reimbursements in excess of five percent
(5%) of the gross revenues of Borrower and its Subsidiaries for the previous
four (4) fiscal quarters in the aggregate respecting amounts submitted for
reimbursement or collected by Borrower, any Subsidiary or a Provider, or (ii)
intends to impose civil money penalties or to seek to exclude Borrower, any
Subsidiary or a Provider from participation in the Medicare or Medicaid programs
due to a failure to comply with Fraud and Abuse Laws.
(P) The occurrence of a Change of Control.
8.2 Acceleration. Upon the occurrence of any of such Events of Default, the
Majority Banks may, at their option, immediately terminate the obligation to
make any further advances under the respective Commitments and/or declare the
principal and interest accrued on the Notes and all other Obligations to be
immediately due and payable, whereupon the same shall become forthwith due and
payable, without presentment, demand, protest, or any notice of any kind except
as set forth above; provided, that in the case of the Events of Default
specified in clause (G), (H) or (I) above with respect to Borrower, without any
notice to Borrower or any act by Agent or the Banks, the Commitments shall
thereupon terminate and the Notes and all other Obligations shall become
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are waived by the Borrower. In addition, and
regardless of whether the Notes have been accelerated, the Majority Banks may
upon the occurrence of any Event of Default elect to charge interest at the
Default Rate set forth in the Notes.
8.3 Remedies. After any acceleration, as provided for in Paragraph 8.2, the
Banks shall have, in addition to the rights and remedies given them by the Loan
Documents, all those allowed by all applicable Laws, including, but without
limitation, the UCC as enacted in any jurisdiction in which any Collateral may
be located. Without limiting the generality of the foregoing, the Banks may
immediately, without demand of performance and without other notice (except as
specifically required by the Loan Documents) or demand whatsoever to the
Borrower, all of which are hereby expressly waived, and without advertisement,
sell at public or private sale, in any manner and at any location authorized by
Laws, or otherwise realize upon, the whole or, from time to time, any part of
the Collateral, or any interest which the Borrower may have therein. After
deducting from the proceeds of sale or other disposition of the Collateral all
expenses (including all reasonable expenses for legal services), the Banks shall
apply such proceeds toward the satisfaction of the Obligations. Any remainder of
the proceeds after satisfaction in full of the Obligations shall be distributed
as required by applicable Laws. Notice of any sale or other disposition shall be
given to the Borrower at least five (5) days before the time of any intended
public sale or of the time after which any intended private sale or other
disposition of the Collateral is to be made, which the Borrower hereby agrees
shall be reasonable notice of such sale or other disposition. The Borrower
agrees to assemble, or to cause to be assembled, at its own expense, the
Collateral at such place or places as the Banks shall designate. At any such
sale or other disposition, the Banks may, to the extent permissible under
applicable Laws, purchase the whole
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or any part of the Collateral, free from any right of redemption on the
part of the Borrower, which right is hereby expressly waived and released.
Without limiting the generality of any of the rights and remedies conferred
upon the Banks under this Paragraph 8.3, the Banks may, to the full extent
permitted by applicable Laws:
(A) Enter upon the premises of the Borrower, exclude therefrom the
Borrower, any Subsidiary or any Affiliate thereof, and take immediate possession
of the Collateral, either personally or by means of a receiver appointed by a
court of competent jurisdiction, using all necessary and lawful self-help to do
so;
(B) The Issuing Bank and Agent may treat each then outstanding Letter of
Credit as if a draft in the full amount available to be drawn thereunder had
been properly drawn thereunder and paid by the Issuing Bank and the Borrower had
failed to reimburse the Agent, for the account of the Issuing Bank, for the
amount so paid;
(C) Upon demand of the Agent (except no demand shall be required if
there shall have occurred an Event of Default under clause (G), (H) or (I) of
Paragraph 8.1), the Borrower shall deposit in cash with the Agent an amount
equal to the amount of all Letter of Credit Liabilities then outstanding as
collateral security for the repayment thereof;
(D) At the Banks' option, use, operate, manage and control the
Collateral in any lawful manner;
(E) Collect and receive all receivables, rents, income, revenue,
earnings, issues and profits therefrom; and
(F) Maintain, repair, renovate, alter or remove the Collateral as the
Banks may determine in their discretion.
SECTION IX. THE AGENT
This Section IX is between and among the Agent and the Banks only. Neither
the Borrower nor any other creditor of the Borrower shall have any rights under
this section, whether as a third party beneficiary or otherwise.
9.1 Authorization. Each Bank authorizes the Agent to act on behalf of such
Bank or holder to the extent provided herein or in any document or instrument
delivered hereunder or in connection herewith and signed by such Bank, and to
take such other action as may be reasonably incidental thereto. The Agent shall
be considered as acting solely in an administrative and ministerial capacity,
not as trustee or other fiduciary of the Banks. The Agent shall not be construed
as having any agency or fiduciary relationship with the Borrower. The Agent
shall not have any duties or obligations to the Banks other than those expressly
provided for herein. The Agent shall not be required to exercise any discretion
or take any action, but shall be fully protected in so acting or in refraining
from acting, upon the instructions of the Majority Banks (except as otherwise
provided in Paragraph 10.3, for matters which require the consent of all Banks),
and such instructions shall be binding upon all Banks and holders of the Notes,
and the Agent shall not be liable to any party hereto for any consequence of any
such action
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or refraining from action. Notwithstanding any instructions of the Majority
Banks, the Agent shall not be required to take any action that exposes the Agent
to personal liability or that is contrary to any loan document or applicable
law.
9.2 Standard of Care. Neither the Agent nor any of its officers, directors,
agents, employees or representatives shall be liable for any action taken or
omitted to be taken by it or any of them under or in connection with this
Agreement, except for its or their own gross negligence or willful misconduct.
Without limitation of the generality of the foregoing, the Agent: (a) may treat
the payee of any Notes as the holder thereof and as a Bank hereunder until the
Agent receives written notice of the assignment or transfer thereof signed by
such payee and in form satisfactory to the Agent (which notice shall be binding
on all parties hereto); (b) may consult with legal counsel (including counsel
for the Borrower), independent public accountants and other experts and advisors
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants, experts or other advisors; (c) makes no warranty or representation
to any Bank and shall not be responsible to any Bank for any statements,
warranties or representations made in or in connection with this Agreement or
for any failure or delay in performance by the Borrower or any Bank under this
Agreement; (d) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of this
Agreement; (e) shall not be responsible to any Bank for the due execution,
legality, validity, enforceability, perfection, collectability, genuineness,
sufficiency or value of this Agreement, the Notes, or any other instrument or
document furnished pursuant thereto or for the accuracy or completeness of any
credit or other information provided to the Banks; (f) shall incur no liability
under or in respect of this Agreement by acting upon any notice, consent,
certificate or other instrument or writing (which may be by telecopier,
telegram, cable or telex) believed by it to be genuine and signed or sent by the
proper party or parties; and (g) shall incur no liability for relying upon any
matters of fact that might reasonably be expected to be within the knowledge of
the Borrower, upon a certificate or other writing signed by Borrower, or upon
telephone communications with Borrower which are reasonably believed to be true
and valid.
9.3 No Waiver of Rights. With respect to the Notes, the Agent shall have
the same rights and powers hereunder as any other Bank and may exercise the same
as though it were not the Agent, and the Agent may accept deposits from, and
generally engage in any kind of business with, the Borrower.
9.4 Payments. The Agent shall use its best efforts to deliver to each Bank
on the same day as received by Agent in immediately available funds such Bank's
pro rata share of all payments received by the Agent for the benefit of the
Banks, but in the event Agent is unable to deliver such payments to any Bank on
the same day of receipt, Agent agrees to pay such Bank interest on the payment
for each day the Agent is unable to deliver the payments after the date of its
receipt based on the overnight federal funds rate of interest. Any payment due
for any reason under this Agreement that is required to be made on a date on
which the Agent is not open for business shall be extended until the next day on
which the Agent is open for the transaction of business.
9.5 Indemnification. The Agent shall not be required to do any act
hereunder or under any other document or instrument delivered hereunder or in
connection herewith or take any action toward the execution or enforcement of
the agency hereby created, or to prosecute or defend any suit in respect of this
Agreement or the Notes or to advance funds hereunder upon the failure by any
Bank to fund its pro rata share of the Commitment hereunder, unless ratably
indemnified to its satisfaction (to the
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extent not reimbursed by Borrower) by the holders of the Notes against
loss, cost, liability and expense (including reasonable fees and out-of-pocket
expenses of counsel), claim, demand, action, loss or liability (except such as
result from Agent's gross negligence or willful misconduct) that Agent may
suffer or incur in connection with this Agreement or any action taken or omitted
by Agent hereunder. If any indemnity furnished to the Agent for or against any
loss, cost, liability, and expense or for any purpose shall, in the opinion of
the Agent, be insufficient or become impaired, the Agent may call for additional
indemnity and not commence or cease to do the acts indemnified against until
such additional indemnity is furnished. Each Bank agrees to reimburse the Agent
promptly upon demand for such Bank's pro rata share of any expenses referred to
in Paragraph 10.4 incurred by the Agent to the extent that the Agent is not
reimbursed for such expenses by the Borrower.
9.6 Exculpation. Neither Agent nor any of its directors, officers,
employees or agents shall be liable for any action taken or not taken by it in
connection herewith (a) with the consent or at the request of the Banks or
Majority Banks, as appropriate, or (b) in the absence of its own gross
negligence or willful misconduct. Neither Agent nor any of its directors,
officers, employees or agents shall (i) be responsible for any recitals,
representations or warranties contained in, or for the execution, validity,
genuineness, effectiveness or enforceability of this Agreement, any Note or any
other instrument or document delivered hereunder or in connection herewith, or
(ii) be under any duty to inquire into or pass upon any of the foregoing
matters, or to make any inquiry concerning the performance by Borrower or any
other obligor of its obligations.
9.7 Credit Investigation. Each Bank acknowledges that it has made such
inquiries and taken such care on its own behalf as would have been the case had
the Commitment been granted and the Loan made directly by such Bank to the
Borrower. Each Bank agrees and acknowledges that the Agent makes no
representations or warranties about the creditworthiness of the Borrower or any
other party to this Agreement or with respect to the legality, validity,
sufficiency or enforceability of this Agreement, the Notes or the value of any
security therefor and that each Bank has not entered into this Agreement in
reliance upon any action, statement, representation, or warranty of any other
Bank or Agent. Each Bank agrees that it will, independently and without reliance
upon the Agent or any other Bank and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under this Agreement. Neither the Agent nor any
other Bank shall have any obligation whatsoever to make any such credit analysis
or decisions for a Bank or to provide any credit or other information with
respect to the Borrower now or in the future in the possession of the Agent or
such other Bank, except that the Agent shall promptly forward to the Banks a
copy of any notice received by the Agent from the Borrower of the occurrence of
an Event of Default hereunder and copies of all material documents delivered to
it by the Borrower pursuant to the terms hereof.
9.8 Resignation. The Agent may resign at any time as the Agent under this
Agreement by giving written notice thereof to the Banks and the Borrower, which
resignation shall be effective upon a successor Agent's acceptance of its
appointment. Upon any such resignation, the Majority Banks shall have the right
to appoint a successor Agent hereunder. If no such successor Agent shall have
been so appointed by the Majority Banks, or Borrower shall have reasonably
rejected such appointment, within thirty (30) days after the retiring Agent's
giving of notice of resignation, then the retiring Agent may, on behalf of the
Banks, appoint a successor Agent, which shall be a commercial bank organized
under the laws of the United States of America or of any State thereof having
assets of at least One Billion Dollars ($1,000,000,000.00) and which shall be
reasonably acceptable to the Borrower.
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Upon the acceptance of any appointment as Agent hereunder by a successor
Agent, such successor Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations hereunder.
After any retiring Agent's resignation as an Agent hereunder, the provisions of
this Section IX shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was an Agent under the Loan Documents.
9.9 Proration of Payments. Except as may be provided in other sections of
this Agreement, all funds received by Banks, or any of them, shall be allocated
pro rata among all Banks in proportion to their respective Commitment
Percentages. If any Bank or other holder of any Notes shall obtain any payment
or other recovery (whether voluntary, involuntary, by application of offset or
otherwise) on account of principal of or interest on the Note then held by it in
excess of its pro rata share of payments and other recoveries obtained by all
Banks or other holders on account of principal of and interest on the Note then
held by them, such Bank or other holder shall purchase from the other Banks or
holders such participation in the Note held by them as shall be necessary to
cause such purchasing Bank or other holder to share the excess payment or other
recovery ratably with each of them; provided, however, if all or any portion of
the excess payment or other recovery is thereafter recovered from such
purchasing holder, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery, but without interest. Notwithstanding
the foregoing, no Bank shall have any obligation to account for or share any
amount, property or profit of any kind received by it for its own account
arising out of a banking or other relationship with the Borrower apart from the
obligations under the Loan Documents.
9.10 No Liability For Errors. The Agent shall not be liable for any error
in computing the amounts payable to any Bank in respect of any amounts due to
the Banks hereunder or in making payment of such amounts. In the event of an
error in computing any amount payable to any Bank or in the making of a payment,
the Agent, the Borrower and such Bank shall, forthwith upon discovery of such
error, make such adjustment as shall be required to correct such error,
including the payment of interest on any amounts that were incorrectly paid or
not paid from the date paid or of the date due to the date returned or paid, all
as the case may be, at the average daily rate for the overnight sale of federal
funds by the Agent in effect for such period.
9.11 Offset. In addition to and not in limitation of all rights of offset
that any Bank or other holder of any Note may have under applicable Laws, each
Bank or other holder of a Note shall, upon the occurrence of any Event of
Default described in this Agreement or in the Note in question, have the right
to appropriate and apply to the payment of such Notes any and all balances,
credits, deposits, accounts or moneys of the Borrower then or thereafter with
such Bank or other holder; provided, however, all funds received as a result of
such offsets shall be applied pro rata among the Banks in proportion to their
respective Commitment Percentages as set forth in Paragraph 2.1 hereof. Each
Bank agrees to notify the Borrower and other Banks immediately after the
exercise by it of this right of offset.
SECTION X. MISCELLANEOUS
10.1 Construction. The provisions of this Agreement shall be
in addition to those of any guaranty, pledge or security agreement, note or
other evidence of liability held by the Banks, all of which shall be construed
as complementary to each other; provided, in the event of any inconsistency, the
provisions of this Agreement shall control. Nothing herein contained shall
prevent the Banks from
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enforcing any or all other notes, guaranties, pledge or security agreements in
accordance with their respective terms.
10.2 Further Assurance. From time to time, the Borrower will execute and
deliver to the Banks such additional documents and will provide such additional
information as the Banks may reasonably require to carry out the terms of this
Agreement and be informed of the Borrower's operations, business and condition.
10.3 Enforcement and Waiver by the Banks. The Majority Banks shall have the
sole and exclusive right to administer, amend, or modify the Loan Documents, and
are hereby empowered to act for the Banks with regard to the aggregate
Commitments and the documentation thereof as if said Majority Banks were the
sole lenders or extenders of credit under the Loan Documents; provided, however,
that it shall take an affirmative vote of all Banks to: (i) increase any of the
several Commitments; (ii) decrease any of the interest rates on the Loans; (iii)
extend the Termination Date; (iv) approve prepayments of the Subordinated
Indebtedness; (v) release any Guaranty; (vi) release all or substantially all of
the Collateral; (vii) amend the definition of Majority Banks; and (viii) amend
this Paragraph 10.3. The Banks shall have the right at all times to enforce the
provisions of the Loan Documents in strict accordance with the terms thereof,
notwithstanding any conduct or custom on the part of the Banks and/or Agent in
refraining from so doing at any time or times. The failure of the Banks at any
time or times to enforce their rights under such provisions, strictly in
accordance with the same, shall not be construed as having created a custom in
any way or manner contrary to specific provisions of the Loan Documents or as
having in any way or manner modified or waived the same. All rights and remedies
of the Banks are cumulative and concurrent and the exercise of one right or
remedy shall not be deemed a waiver or release of any other right or remedy.
10.4 Expenses of the Banks. The Borrower will, on demand, reimburse the
Agent for all out-of-pocket expenses, including the reasonable fees and expenses
of legal counsel for the Agent, incurred by the Agent in connection with the
preparation, administration, amendment, modification, or enforcement of the Loan
Documents and the collection or attempted collection of the Notes; provided, the
expenses and legal counsel fees of all Banks will be reimbursed in connection
with the enforcement of this Agreement and other Loan Documents.
10.5 Notices. Any notices or consents required or permitted by
this Agreement shall be in writing and shall be deemed delivered when delivered
in person, or when sent by certified mail, postage prepaid, return receipt
requested, by overnight courier service, or by facsimile to the address and/or
telecopy number as follows, unless such address or number is changed by written
notice hereunder:
(A) If to the Borrower:
Specialty Care Network, Inc.
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
Attention: Chief Financial Officer
Telecopy: (303) 716-1298
53
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(B) If to the Agent:
NationsBank of Tennessee, N.A., Agent
One NationsBank Plaza
Nashville, Tennessee 37239
Attention: Healthcare Group
Telecopy: (615) 749-4951
(C) If to the Banks:
NationsBank of Tennessee, N.A.
One NationsBank Plaza
Nashville, Tennessee 37239
Attention: Healthcare Group
Telecopy: (615) 749-4951
AmSouth Bank
333 Union Street
Suite 200
Nashville, Tennessee 37201
Attention: Cathy Wind
Telecopy: (615) 291-5257
54
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Banque Paribas
227 West Monroe Street, Suite 3300
Chicago, Illinois 60606
Attention: Loan Administration
Telecopy: (312) 853-6020
Key Corporate Capital Inc.
127 Public Square, 6th Floor
OH-01-27-0605
Cleveland, OH 44114-1806
Attention: Mr. Rufus Heard
Telecopy: (216) 689-5970
10.6 Waiver and Release. To the maximum extent permitted by applicable
Laws, the Borrower and each Subsidiary:
(A) Waive: (1) protest of all commercial paper at any time held by the
Banks on which the Borrower or any Subsidiary is in any way liable; and (2)
notice and opportunity to be heard, after acceleration in the manner provided in
Paragraph 8.2, before exercise by the Banks of the remedies of self-help,
set-off, or of other summary procedures permitted by any applicable Laws or by
any agreement with the Borrower or any Subsidiary, and, except where required
hereby or by any applicable Laws, notice of any other action taken by the Banks;
and
(B) Release the Banks and their officers, directors, attorneys,
employees, and agents from all claims for loss or damage caused by any act or
omission on the part of any of them except for gross negligence, recklessness or
willful misconduct.
10.7 Indemnification. Borrower and each Subsidiary hereby indemnify and
hold the Banks and their officers, directors, attorneys, employees and agents
free and harmless from and against any and all actions, causes of action, suits,
losses, liabilities and damages, and expenses in connection therewith, including
without limitation counsel fees and disbursements, incurred by the Banks or any
of them as a result of, or arising out of, or relating to the execution,
delivery, performance or enforcement of the Loan Documents or any instrument
contemplated therein, except for any Bank's gross negligence or willful
misconduct. If and to the extent that the foregoing undertaking may be
unenforceable for any reason, Borrower and each Subsidiary hereby agree to make
the maximum contribution to the payment and satisfaction of such liabilities and
costs permitted under applicable Laws.
10.8 Participations and Assignments.
(A) This Agreement and the other Loan Documents shall be binding upon
and inure to the benefit of Borrower, Banks, and Agent and their respective
successors and assigns; provided, however, that Borrower may not assign,
transfer or delegate any of its rights, duties or obligations under this
Agreement or the other Loan Documents without the prior written consent of Agent
and Banks. Banks may assign, sell and transfer their interests, rights and
obligations under this Agreement and the other Loan Documents only in accordance
with this Paragraph 10.8.
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(B) With the prior written consent of the Agent and the Borrower, not to
be unreasonably withheld, any Bank may assign to one or more Eligible Assignees
all, or a proportionate part of all, of its interests, rights and obligations
under this Agreement and the other Loan Documents; provided, however, that (i)
each such assignment shall be of a constant, and not a varying, percentage of
all of the assigning Bank's interests, rights and obligations under this
Agreement, (ii) the amount of each such assignment (determined as of the date
the Assignment and Acceptance with respect to such assignment) shall not be less
than the lesser of (A) the entire amount of such Bank's Loans or (B) the
principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess
thereof, (iii) no more than three (3) Banks may be parties hereto without first
obtaining the prior written consent of the Agent and Borrower; and (iv) the
parties to each such assignment shall execute and/or deliver to Agent, for its
acceptance and recording in the Register, an Assignment and Acceptance, together
with the Notes subject to such assignment, and a processing and recordation fee
of $3,500 payable to Agent. Upon such execution, delivery, acceptance and
recording, from and after the "Effective Date" specified in the Assignment and
Acceptance, which "Effective Date," unless Agent otherwise agrees, shall be not
earlier than five Business Days after the date of acceptance and recording by
Agent (provided, however, that, as between the assigning Bank and the assignee
thereunder only, the effective date shall be the effective date of execution and
delivery as between such Persons as specified in the Assignment and Acceptance),
(A) the assignee thereunder shall be a Bank under this Agreement and, to the
extent provided in such Assignment and Acceptance, have the interests, rights
and obligations of a Bank hereunder and (B) the assigning Bank thereunder shall,
to the extent provided in such Assignment and Acceptance, be released from its
contractual obligations under this Agreement (and, in the case of an Assignment
and Acceptance covering all or the remaining portion of the assigning Bank's
interests, rights and obligations under this Agreement, such assigning Bank
shall cease to be a Bank under this Agreement). Each Bank shall, in a reasonably
prompt fashion after it has engaged in any material discussions with an Eligible
Assignee that may lead to an assignment referred to in this Paragraph 10.8,
notify Agent and Borrower of the identity of such Eligible Assignee so that they
will have sufficient time to determine if they are willing to consent.
(C) By executing and delivering an Assignment and Acceptance, the
assigning Bank thereunder and the Eligible Assignee thereunder shall be deemed
to confirm to and agree with each other and the other parties hereto as follows:
(i) such assignee is an Eligible Assignee; (ii) other than as provided in the
Assignment and Acceptance, such assigning Bank makes no representation or
warranty and assumes no responsibility with respect to any representations,
warranties or other statements made in or in connection with this Agreement or
any other Loan Document or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement or any other Loan Document
or any Collateral; (iii) such assigning Bank makes no representation or warranty
and assumes no responsibility with respect to the financial condition of
Borrower or any Subsidiary or the performance or observance by Borrower or any
Subsidiary of any of its obligations under this Agreement or any other Loan
Document; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent Financial Statements and such
other agreements, documents, instruments, certificates and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
such Assignment and Acceptance; (v) such assignee will independently and without
reliance upon Agent, such assigning Bank or any other Bank and based on such
agreements, documents, instruments, certificates and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents;
(vi) such assignee appoints and authorizes Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to the Agent by the terms
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hereof, together with such powers as are reasonably incidental thereto;
(vii) such assignee agrees that it will perform in accordance with their terms
all the obligations which by the terms of this Agreement and the other Loan
Documents are required to be performed by it as a Bank; and (viii) such assignee
makes loans in the ordinary course of its business.
(D) Upon its receipt of an Assignment and Acceptance executed by an
assigning Bank and an Eligible Assignee and the required processing and
recordation fee, Agent shall, if such Assignment and Acceptance is duly
completed and is in the required form, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt notice thereof to Banks and Borrower. Within five Business
Days after its receipt of any such notice from Agent, Borrower, at its own
expense, shall execute and deliver to Agent, in exchange for the surrendered
Note or Notes, a new Note or Notes payable to the order of such assignee in the
appropriate principal amount(s) evidencing such assignee's assigned Loans and
Commitments, and, if the assignor Bank has retained a portion of its Loans and
Commitments, a new Note or Notes payable to the order of such assignor in the
appropriate principal amount(s) evidencing such assignor's Loans and Commitments
retained by it. Such new Note(s) shall be dated the date of the surrendered
Note(s) which they replace and shall otherwise be in substantially the form of
the surrendered Notes, as appropriate.
(E) Each Bank may, without the consent of Borrower, any Subsidiary or
Agent, sell participations to one or more banks in all or a portion of its
interests, rights and obligations under this Agreement (including all or a
portion of its Loans or Commitments) held by it; provided, however, that (i)
such Bank shall remain a Bank for all purposes of this Agreement and the
transferee of such participation shall not constitute a Bank under this
Agreement, (ii) such Bank's obligations under this Agreement shall remain
unchanged, (iii) such Bank shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iv) the participating banks or
other entities shall be entitled to the benefit of the provisions contained in
Paragraphs 2.8 and 2.9 to the same extent as if they were Banks, except that no
such participant shall be entitled to receive any greater benefit or amounts
pursuant to Paragraph 2.8 than its assignor Bank would have been entitled to
receive with respect to the rights participated, and (v) Borrower, Subsidiaries,
Agent and the other Banks shall continue to deal solely and directly with such
Bank in connection with such Bank's interests, rights and obligations under this
Agreement, and such Bank shall retain the sole right to enforce the obligations
of Borrower and its Subsidiaries relating to the Loans and to approve any
amendment, modification or waiver of any provision of this Agreement, provided
that such participation agreement may provide that such Bank will not agree to
any amendment, modification or waiver of this Agreement or the other Loan
Documents, without the consent of such participant, that would (A) reduce the
principal or the rate of interest payable by Borrower on any Loan or reduce any
fees payable by Borrower, (B) postpone any date fixed for the payment of
principal of or interest on the Loans or any fees payable by Borrower, (C)
increase any Commitment of any Bank or subject any Bank to any obligation to
make Loans, or (D) amend Paragraph 10.3, 10.8(E) or any other provision of this
Agreement requiring the consent or other action of all Banks.
(F) Any Bank may, in connection with any assignment or participation or
proposed assignment or participation pursuant to this Paragraph 10.8, disclose
to the assignee or participant or proposed assignee or participant any
information relating to Borrower or any Subsidiary, the Collateral or the Loan
Documents furnished to such Bank by or on behalf of the Borrower or any
Subsidiary; provided, however, that, prior to any such disclosure, each such
assignee or participant or proposed assignee or participant shall execute an
agreement whereby such assignee or participant shall
57
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agree (subject to customary exceptions) to preserve the confidentiality
of any non-public information received from such Bank.
(G) If (i) any Bank has demanded compensation under Paragraph 2.8 in an
aggregate amount exceeding $5,000 during any calendar year, (ii) it becomes
unlawful, impossible or impractical for any Bank to make or continue to maintain
Eurodollar Loans pursuant to Paragraph 2.9 and such circumstance is not
applicable to NationsBank, or (iii) any Bank is or becomes insolvent or a
receiver, conservator or similar authority is appointed for any Bank, then Agent
and/or Borrower shall have the right, but not the obligation, upon notice to
such Bank and Borrower or Agent, as applicable, to designate, with the consent
of such assignee, an assignee for any such Bank, which assignee shall be an
Eligible Assignee mutually satisfactory to Agent and Borrower, to purchase such
Bank's Loans and Commitments and assume such Bank's obligations; provided,
however, that Borrower shall not have the right to designate any assignee for
NationsBank. Within ten Business Days after any such notice to such Bank and
Borrower or Agent, as applicable, such Bank shall be obligated to sell its Loans
and Commitments, and such assignee shall be obligated to purchase such Loans and
assume such Bank's obligations, pursuant to an Assignment and Acceptance. The
purchase price therefor shall be an amount equal to the sum of (A) the
outstanding principal amount of the Loans payable to such Bank, plus (B) all
accrued and unpaid interest on such Loans, (C) Letter of Credit Interest, plus
(D) all accrued and unpaid fees and other amounts due to such Bank pursuant to
this Agreement.
(H) Notwithstanding anything to the contrary contained in this Paragraph
10.8, any Bank may at any time or from time to time assign as collateral all or
any portion of its rights under this Agreement with respect to its Loans,
Commitments and Notes to a Federal Reserve Bank. No such assignment shall
release the assigning Bank from its obligations under this Agreement.
10.9 Applicable Laws. The Laws of the State of Tennessee shall govern the
construction of this Agreement and the rights and remedies of the parties
hereto.
10.10 Binding Effect, Assignment and Entire Agreement. This Agreement shall
inure to the benefit of, and shall be binding upon, the respective successors
and permitted assigns of the parties hereto. The Borrower has no right to assign
any of its rights or obligations hereunder without the prior written consent of
the Banks. This Agreement and the documents executed and delivered pursuant
hereto constitute the entire agreement between the parties, and supersede all
prior agreements and understandings among the parties hereto. This Agreement may
be amended only by a writing signed on behalf of each party.
10.11 Severability. If any provision of this Agreement shall be held
invalid under any applicable Laws, such invalidity shall not affect any other
provision of this Agreement that can be given effect without the invalid
provision, and, to this end, the provisions hereof are severable.
10.12 Counterparts. This Agreement may be executed by the parties
independently in any number of counterparts, all of which together shall
constitute but one and the same instrument which is valid and effective as if
all parties had executed the same counterpart.
10.13 Arbitration. Any controversy or claim between or among the parties
hereto including but not limited to those arising out of or relating to this
Instrument, Agreement or document or any related instruments, agreements or
documents, including any claim based on or arising from an alleged tort, shall
be determined by binding arbitration in accordance with the Federal Arbitration
Act (or if not applicable, the applicable state law), the Rules of Practice and
Procedure for the Arbitration
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of Commercial Disputes of Judicial Arbitration and Mediation Services, Inc.
(J.A.M.S.), and the "Special Rules" set forth below. In the event of any
inconsistency, the Special Rules shall control. Judgment upon any arbitration
award may be entered in any court having jurisdiction. Any party to this
Agreement may bring an action, including a summary or expedited proceeding, to
compel arbitration of any controversy or claim to which this agreement applies
in any court having jurisdiction over such action.
(a) Special Rules. The arbitration shall be conducted in the city of the
Borrower's domicile at the time of the execution of this instrument, agreement
or document and administered by J.A.M.S. who will appoint an arbitrator; if
J.A.M.S. is unable or legally precluded from administering the arbitration, then
the American Arbitration Association will serve. All arbitration hearings will
be commenced within 90 days of the demand for arbitration; further, the
arbitrator shall only, upon a showing of cause, be permitted to extend the
commencement of such hearing for up to an additional 60 days. In any such
arbitration, the prevailing party will be awarded attorney's fees, costs of
arbitration and all out-of-pocket expenses against the defaulting party.
(b) Reservation of Rights. Nothing in this instrument, agreement or
document shall be deemed to (i) limit the applicability of any otherwise
applicable statutes of limitation or repose or any waivers contained in this
Agreement; or (ii) be a waiver by the Agent or Banks of the protection afforded
to them by 12 U.S.C. ss. 91 or any substantially equivalent state law; or (iii)
limit the right of the Agent or Banks hereto (A) to exercise self help remedies
such as (but not limited to) setoff, or (B) to foreclose against any real or
personal property collateral, or (C) to obtain from a court provisional or
ancillary remedies such as (but not limited to) injunctive relief, writ of
possession or the appointment of a receiver. The Agent or Banks may exercise
such self help rights, foreclose upon such property, or obtain such provisional
or ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this instrument, agreement or document. Neither
this exercise of self help remedies nor the institution or maintenance of an
action for foreclosure or provisional or ancillary remedies shall constitute a
waiver of the right of any party, including the claimant in any such action, to
arbitrate the merits of the controversy or claim occasioning resort to such
remedies.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
BORROWER
SPECIALTY CARE NETWORK, INC.
BY: /s/ D. Paul Davis
----------------------------------------
TITLE: Senior Vice President-Finance
--------------------------------
Address:
Specialty Care Network, Inc.
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
Attention: Chief Financial Officer
Telecopy: (303) 716-1298
59
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GUARANTORS AND SUBSIDIARIES
SCN OF PRINCETON, INC.
BY: /s/ D. Paul Davis
---------------------------------------
TITLE: Senior Vice President-Finance
--------------------------------
Address:
SCN of Princeton, Inc.
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
Attention: Chief Financial Officer
Telecopy: (303) 716-1298
60
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NATIONSBANK OF TENNESSEE, N.A.,
individually, as Issuing Bank, Swingline
Bank, and as Agent
Committed Amount:
$30,000,000.00
Letter of Credit Sublimit BY: /s/ Walker Choppin
$10,000,000.00 --------------------------------------
TITLE: Senior Vice President
-----------------------------------
Swingline Amount Sublimit:
$2,500,000.00
Initial Commitment Percentage:
40%
Address:
NationsBank of Tennessee, N.A.
One NationsBank Plaza
M-4
Nashville, Tennessee 37219
Attn: Walker Choppin
Telephone: (615) 749-3023
Facsimile: (615) 749-4951
Address as Agent:
NationsBank of Tennessee, N.A.
One NationsBank Plaza
M-4
Nashville, Tennessee 37219
Attn: Walker Choppin
Telephone: (615) 749-3023
Facsimile: (615) 749-4951
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AMSOUTH BANK
Committed Amount:
$15,000,000.00
BY: /s/ Cathy M. Wind
-------------------------------------
Initial Commitment Percentage: TITLE: Vice President
20% ------------------------------
Address:
AmSouth Bank
333 Union Street
Suite 200
Nashville, Tennessee 37201
Attention: Cathy Wind
Telecopy: (615) 291-5257
62
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BANQUE PARIBAS
Committed Amount:
$15,000,000.00
BY: /s/ Russell A. Pomerantz
---------------------------------------
Initial Commitment Percentage: TITLE: Vice President
20% --------------------------------
BY: /s/ David I. Canavan
---------------------------------------
TITLE: Director
--------------------------------
Address:
Banque Paribas
227 West Monroe Street, Suite 3300
Chicago, Illinois 60606
Attention: Loan Administration
Telecopy: (312) 853-6020
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KEY CORPORATE CAPITAL INC.,
a Michigan Corporation
Committed Amount:
$15,000,000.00
BY: /s/ Rufus D. Heard
---------------------------------------
Initial Commitment Percentage: TITLE: Vice President
20% --------------------------------
Address:
Key Corporate Capital Inc.,
a Michigan corporation
127 Public Square, 6th Floor
Cleveland, Ohio 44114-1806
Attention: Rufus Heard
Telecopy: (216) 689-5970
64
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of this the 30th day of June, 1997, by
and between SPECIALTY CARE NETWORK, INC. , a Delaware corporation (the
"Company"), and MICHAEL WEST (the "Executive").
WHEREAS, the Company is engaged in the business of managing physician
practices in the musculoskeletal specialty and operating surgery centers serving
that medical specialty; and
WHEREAS, the Company desires to employ the Executive to devote full time to
the business of the Company (including, without limitation, executive management
of the Company) and to serve as the Company's Senior Vice President of Practice
Operations; and
WHEREAS, the Executive desires to be so employed on the terms and subject
to the conditions hereinafter stated.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the parties hereby agree as follows:
SECTION 1
POSITION AND RESPONSIBILITIES
Beginning on July 1, 1997 (the "Effective Date"), the Executive agrees to serve
as Senior Vice President of Practice Operations of the Company, performing such
duties during the Term of this Employment Agreement as are hereinafter set forth
and as may be assigned to him by the Company's Board of Directors or Chief
Executive Officer, and subject to the terms and conditions of this Agreement.
SECTION 2
TERM AND DUTIES
2.1 Term: Extension. The term of this Employment Agreement (the "Term of
this Employment Agreement") will commence as of the Effective Date, and, subject
to the terms herein contained, shall continue for a term of five (5) years from
that date. On the fifth and each successive anniversary of the Effective Date of
this Employment Agreement, the Term of this Employment Agreement shall be
extended for an additional one (1) year period, unless either party gives the
other party one (1) year's prior written notice of such party's intent not to
extend
-1-
<PAGE>
the Term of this Employment Agreement. Termination of the Executive's
employment shall be governed by Section 5 of this Employment Agreement.
2.2 Duties. During the Term of this Employment Agreement, the Executive
shall devote substantially all of his time and attention and best efforts to the
Company's affairs. Specifically, the Executive shall have authority and
responsibility, commensurate with and customary for the person holding the
office and position for which the Executive has contracted in this Agreement,
with respect to the day to day operations and long term management of the
Company, as well as implementation of the long range growth strategy of the
Company, consistent with directions from the Board of Directors or the Chief
Executive Officer. The Executive acknowledges that his title and position, as
well as his actual responsibilities, may be modified by the Company to reflect
changes in the nature, scope and direction of the Company's business, provided
that such modifications shall not substantially diminish Executive's level of
responsibilities or stature within the Company. The Executive acknowledges and
agrees further that all references herein to the Board of Directors and the
Chief Executive Officer include those senior members of management who are
delegated the responsibility for overseeing Executive's performance of his job
responsibilities.
2.3 Location. Initially, Executive shall be permitted to reside in the
Portsmouth, Virginia area where he currently resides and works, and to travel to
the extent necessary to fulfill his responsibilities hereunder. On or before
September 1, 1998, Executive shall relocate his residence to the Denver,
Colorado area or such other place as the Company or its successor maintains its
principal place of business. The duties of Executive shall be performed at the
Company's corporate offices and at such other locations and places as may be
directed by the Board of Directors or the Chief Executive Officer.
SECTION 3
COMPENSATION AND BENEFITS
3.1 Base Compensation. Upon the commencement of the Executive's full-time
employment by the Company, the Company shall pay the Executive an annual base
salary (the "Base Salary") in an amount not less than the base salary that he
was being paid by Medical Group Services, L.L.C. as of June 1, 1997. Upon the
relocation of Executive, as required in Section 2.3 above, his Base Salary will
be increased to $150,000 per year. Base Salary shall be payable according to the
customary payroll practices of the Company, subject to normal withholding, but
in no event less frequently than once each month.
3.2 Annual Incentive Awards. Executive will be eligible to participate in
such bonus plans or incentive compensation arrangements as are approved by the
Compensation Committee of the Board of Directors and made available to other
officers and executives of the Company.
-2-
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3.3 Additional Benefits. The Executive will be entitled to participate in
other compensation or employee benefit plans or programs and receive the
benefits and perquisites which executives at comparable levels are eligible to
receive under existing or future plans or programs established by the Company
for salaried employees. The Executive will participate to the extent permissible
under the terms and provisions of such plans or programs in accordance with
program provisions. These may include group hospitalization, health, dental
care, life or other insurance, tax qualified pension, car allowance, savings,
thrift and profit sharing plans, termination pay programs, sick leave plans,
travel or accident insurance, disability insurance, and contingent compensation
plans including capital accumulation programs, restricted stock programs, stock
purchase programs and stock option plans. Nothing in this Agreement will
preclude the Company from amending or terminating any of the plans or programs
applicable to salaried or senior executives. The Executive will be entitled to
an annual paid vacation as established by the Board.
3.4 Business Expenses. The Company will reimburse the Executive for all
reasonable travel and other expenses incurred by the Executive in connection
with the performance of his duties and obligations under this Agreement.
3.5 Relocation Expenses. In connection with his relocation to the Denver,
Colorado area Executive will be reimbursed for: (a) actual expenses incurred in
moving Executive's personal belongings, furnishings and possessions, provided
that Executive will first obtain three (3) bids from reputable, insured moving
companies before contracting for the transportation; and (b) reasonable rental
expenses for up to three (3) months for a temporary residence for Executive in
the event that Executive relocates to the Denver, Colorado area before his
family completes the relocation.
3.6 Withholding. The Company may withhold directly or indirectly from any
payments under this Agreement all federal, state, city or other taxes that shall
be required pursuant to any law or governmental regulation.
SECTION 4
DEATH BENEFIT, DISABILITY COMPENSATION; KEY MAN INSURANCE
4.1 Payment in Event of Death. In the event of the death of the Executive
during the Term of this Employment Agreement or any extension thereof, the
Company's obligation to make payments under this Agreement shall cease as of the
date of death, except for earned but unpaid Base Salary. The Compensation
Committee of the Board of Directors will have the discretion to decide whether
to pay a bonus on a pro-rated basis for the portion of the year preceding
Executive's death. The Executive's designated beneficiary will be entitled to
receive the proceeds of any life or other insurance or other death benefit
programs provided in this Agreement, other than "key man" life insurance
benefits.
-3-
<PAGE>
4.2 Disability Compensation. In the event of a disability of the Executive
during the Term of this Employment Agreement which precludes the Executive from
working or from satisfying fully his obligations hereunder, the Company will
continue to pay the Executive his base salary according to the compensation
provisions of this Agreement during the period of his disability for a period of
time up to three (3) months. In the event the disability continues for a period
in excess of three (3) months, the Company may terminate the employment of the
Executive. If the Executive is determined to be eligible for long-term
disability insurance benefits after he has been absent from work for a period of
time in excess of three (3) months, the Company will make supplemental payments
to the Executive in regular payroll installments in amounts equal to the
difference between any such disability insurance benefits and the base salary
which Executive would have been eligible to receive but for the disability, for
a period of time equal to the lesser of: (a) six (6) months; or (b) the duration
of the period in which Executive remains eligible to receive disability
insurance benefits.
4.3 Responsibilities in the Event of Disability. During the period the
Executive is receiving the payments described in this Agreement and as long as
she is physically and mentally able to do so, the Executive will furnish
information and assistance to the Company and from time to time will make
himself available to the Company to undertake assignments consistent with him
prior position with the Company and his physical and mental health.
4.4 Key-Man Life Insurance. Upon request by the Company, the Executive
agrees to cooperate with the Company in obtaining "key man" life insurance on
the life of the Executive, with death benefits payable to the Company. Such
cooperation shall include the submission by Executive to a medical examination
and medical history.
SECTION 5
TERMINATION OF EMPLOYMENT
5.1 Termination Without Cause; Constructive Termination.
(a) Without a Change in Control. If the Executive suffers a Termination
Without Cause (hereinafter defined) and there has not been a Change in Control
(hereinafter defined) the Company will continue to pay the Executive his Base
Salary as in effect at the time of the Termination Without Cause until the
earlier of: (i) twelve (12) months after the termination date; or (ii) the
expiration of the Term of this Employment Agreement or any renewal term.
Additionally, at the time of the payment of incentives or bonuses to other
executives for the year in which the Termination Without Cause occurs, Executive
will be paid a pro-rata bonus or incentive payment for the portion of the year
in which he worked prior to the effective date of his termination. For six (6)
months following such Termination Without Cause, to the extent that the
Executive is otherwise eligible to continue to participate in the Company's
health insurance plans, the Company shall reimburse Executive for the cost of
the Executive's
-4-
<PAGE>
health insurance premiums as in effect at the date of termination. The
exercisability of stock options granted to Executive shall be governed by any
applicable stock option agreements and the terms of the respective stock option
plans.
(b) Upon a Change in Control. If Executive suffers a Termination Without
Cause or Constructive Termination (hereinafter defined) upon a Change in
Control, the Company will pay to the Executive in a lump sum upon such
termination, an amount equal to 200% of Executive's Base Salary as in effect at
the time of the termination, plus 200% of Executive's prior year bonus (the
"Change in Control Severance Amount"), less the aggregate amount of all other
payments or value received by the Executive on account of the Change in Control
to the extent such additional payments or value would be considered in the
computation of "Excess Parachute Payments" pursuant to Section 28OG of the
Internal Revenue Code of 1986, as amended, and regulations thereunder. In
addition to the foregoing, earned but unpaid Base Salary through the date of
termination will be paid in a lump sum at the time of such termination. For six
(6) months following such Termination Without Cause or Constructive Termination
upon a Change in Control, and to the extent that the Executive is otherwise
eligible to continue to participate in the Company's health insurance plans, the
Company shall reimburse Executive for the cost of the Executive's health
insurance premiums as in effect at the date of termination. The exercisability
of stock options granted to Executive shall be governed by any applicable stock
option agreements and the terms of the respective stock option plans.
5.2 Termination With Cause. If the Executive suffers a Termination With
Cause, whether or not there has been a Change in Control, the Company will have
no obligation other than to pay Executive his Base Salary through the
termination date.
5.3 Voluntary Termination. In the event of a Voluntary Termination by the
Executive of his employment, the Company shall have no obligation other than to
pay Executive his Base Salary through the termination date.
5.4 Reimbursement of Excess Payment. In the event that all or any portion
of the Change in Control Severance Amount paid to Executive is disallowed by the
Internal Revenue Service as a deductible expense of the Company on grounds that
it does not constitute a "reasonable allowance," Executive agrees to reimburse
the Company to the extent of the disallowed amount within thirty (30) days after
the Company has notified Executive of the disallowed amount. Any amounts owed to
the Company by Executive pursuant to this Section 5.4 but unpaid after the
aforementioned thirty day period shall bear interest at a rate equal to the
commercial base rate of interest established from time to time by First
Tennessee Bank, N.A., Memphis, Tennessee.
-5-
<PAGE>
5.5 Definitions. For this Agreement, the following terms have the following
meanings:
(a) "Change in Control" means any transaction pursuant to which (a) the
Company merges with another corporation or other entity and is not the
surviving entity, (b) substantially all of the Company's assets are sold to
persons or entities not affiliated with the Company, (c) shares of Common
Stock of the Company are issued or acquired by persons or entities not
affiliated with the Company, who, acting as a group, have the voting power
to change the composition of the Board of Directors of the Company, or (d)
any other transaction of a similar nature to the foregoing. For purposes of
determining whether or not any termination of the Executive's employment
was upon a Change in Control, it shall be presumed that any termination
within 12 months after consummation of any transaction described above was
"upon a Change in Control."
(b) "Constructive Termination" means termination of the Executive's
employment by the Executive from a declined reassignment of a job that is
not similar to his then current position in status or level of
responsibility. The Executive shall have a period of ninety (90) days after
termination of his employment to assert against the Company, in writing,
that he suffered a Constructive Termination, and after the expiration of
such ninety (90) day period, the Executive shall be deemed to have
irrevocably waived the right to such assertion.
(c) "Termination With Cause" means a termination of Executive's employment
as a result of (a) any illegal, unprofessional or dishonest conduct which
adversely affects or may adversely affect the reputation, goodwill, or
business position of the Company or which involves Company funds or assets;
(b) any conduct which materially damages the property, reputation,
integrity or business of the Company; (c) theft, embezzlement or
misappropriation of Company property; (d) gross insubordination; or (e) the
failure or refusal of the Executive to carry out his duties as an employee
of the Company or to comply with the reasonable and lawful directives of
the Board of Directors or the Chief Executive Officer
(d) "Termination Without Cause" means termination of the Executive's
employment by the Company during the Term of this Employment Agreement or
any extension thereof, other than due to resignation by Executive, death,
retirement, disability, or Termination With Cause.
-6-
<PAGE>
SECTION 6
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE TERM OF THIS EMPLOYMENT AGREEMENT
6.1 Additional Information. The Executive will, with reasonable notice
during or after the Term of this Employment Agreement, furnish information as
may be in his possession and cooperate with the Company as may reasonably be
requested in connection with any claims or legal actions in which the Company is
or may become a party.
6.2 Confidentiality. The Executive recognizes and acknowledges that all
information pertaining to the affairs, business, clients, customers or other
relationships of the Company, as hereinafter defined, is confidential and is a
unique and valuable asset of the Company. Access to and knowledge of this
information are essential to the performance of the Executive's duties under
this Agreement. The Executive will not during the Term of this Employment
Agreement or after, except to the extent reasonably necessary in performance of
the duties under this Agreement, give to any person, firm, association or
corporation any information concerning the affairs, business, clients, customers
or other relationships of the Company except as required by law. The Executive
will not make use of this type of information for his own purposes or for the
benefit of any person or organization other than the Company. The Executive will
also use his best efforts to prevent the disclosure of this information by
others. All records, memoranda, documents and information, whether stored or
maintained electronically or on paper, relating to the business of the Company,
whether made by the Executive or otherwise coming into his possession, are
confidential and will remain the property of the Company.
6.3 Noncompetition.
(a) Voluntary Termination; Termination With Cause. In the event the
Executive suffers a Voluntary Termination or a Termination With Cause and there
has not been a Change in Control prior to the termination, the Executive will
not Compete (hereinafter defined) with the Company for a period of time equal to
the greater of: (i) the remaining Term of this Employment Agreement (as if this
Employment Agreement had not been terminated); or (ii) two (2) years from the
date of such termination. If the Executive suffers a Voluntary Termination or a
Termination With Cause and there has been a Change in Control, the Executive
will not Compete with the Company for a period of one (1) year after the date of
such termination.
(b) Termination Without Cause. In the event the Executive suffers a
Termination Without Cause, the Executive will not Compete with the Company for a
period of time equal to the greater of (i) the period of time in which he is
eligible to receive salary continuation under Section 5.1(a) above; or (ii) one
(1) year from the date of such termination (as if this Employment Agreement had
not been terminated).
-7-
<PAGE>
(c) Definition of "Compete" with the Company. For the purposes of this
Section 6, the term "Compete with the Company" means action by the Executive,
direct or indirect, for her own account or for the account of others, either as
an officer, director, stockholder, owner, partner, member, promoter, employee,
consultant, advisor, agent, or in any other capacity, resulting in the Executive
having any pecuniary interest, legal or equitable ownership, or other financial
or non-financial interest, in any corporation, business trust, partnership,
limited liability company, proprietorship or other business or professional
enterprise that provides management services to medical practices within the
musculoskeletal specialty or such other specialties practiced by any medical
practice contracted to provide management services at the time of termination of
employment; provided, however, that the term "Compete with the Company" shall
not include ownership (without any more extensive relationship) of a less than
5% interest in any publicly-held corporation or other business entity.
(d) Reasonableness of Scope and Duration; Remedies. The Executive
acknowledges that the covenants contained herein are reasonable as to geographic
and temporal scope. The Executive acknowledges that his breach or threatened or
attempted breach of any provision of Section 6 would cause irreparable harm to
the Company not fully compensable in monetary damages and that the Company shall
be entitled, in addition to all other applicable remedies, to a temporary and
permanent injunction and a decree for specific performance of the terms of
Section 6 without being required to prove damages or furnish any bond or other
security.
SECTION 7
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Agreement shall preclude the Company from consolidating
or merging into or with, or transferring all or substantially all of its assets
to, another corporation which assumes this Agreement and all obligations and
undertakings of the Company hereunder. Upon such a Consolidation, Merger or Sale
of Assets, the term "the Company" as used will mean the other corporation and
this Agreement shall continue in full force and effect. The Executive agrees to
the assignment by the Company of the Company's interest in the Confidentiality
and Noncompetition provisions of this Agreement in the event of any merger or
acquisition resulting in a Change of Control.
SECTION 8
MISCELLANEOUS
8.1 Entire Agreement. This Agreement contains the entire understanding
between the Company and the Executive with respect to the subject matter and
supersedes any prior employment or severance agreements between the Company and
its affiliates, and the Executive.
-8-
<PAGE>
8.2 Amendment; Waiver. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver shall operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
8.3 Severability; Modification of Covenant. Should any part of this
Agreement be declared invalid for any reason, such invalidity shall not affect
the validity of any remaining portion hereof and such remaining portion shall
continue in full force and effect as if this Agreement has been originally
executed without including the invalid part. Should any covenant of this
Agreement be unenforceable because of its geographic scope or term, its
geographic scope or term shall be modified to such extent as may be necessary to
render such covenant enforceable, and to give the maximum protection to the
Company as is determined by a Court to be permissible in law or equity.
8.4 Effect of Captions. Titles and captions in no way define, limit, extend
or describe the scope of this Agreement nor the intent of any provision thereof.
8.5 Counterpart Execution. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.6 Governing Law; Arbitration. This Agreement has been executed and
delivered in the State of Colorado and its validity, interpretation, performance
and enforcement shall be governed by the laws of that state. Any dispute among
the parties hereto shall be settled by arbitration in Denver, Colorado in
accordance with the Employment Dispute Resolution Rules then obtaining of the
American Arbitration Association and judgment upon the award rendered may be
entered in any court having jurisdiction thereof. All provisions hereof are for
the protection and are intended to be for the benefit of the parties hereto and
enforceable directly by and binding upon each party. Each party hereto agrees
that the remedy at law of the other for any actual or threatened breach of this
Agreement would be inadequate and that the other party
-9-
<PAGE>
shall be entitled to specific performance hereof or injunctive relief or
both, by temporary or permanent injunction or such other appropriate judicial
remedy, writ or order as may be decided by a court of competent jurisdiction in
addition to any damages which the complaining party may be legally entitled to
recover.
8.7 Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
(i) If to the Company, to its Chief Executive Officer, at its
headquarters, or at such other address as may have been furnished to the
Executive by the Company in writing; or
(ii) If to the Executive, at his personal residence, or such other
address as may have been furnished to the Company by the Executive in writing,
or by hand
8.8 Binding Agreement. This Agreement shall be binding on the parties'
successors, heirs and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
SPECIALTY CARE NETWORK, INC.
By: /s/ Kerry R. Hicks
---------------------------------
Kerry R. Hicks, President
Executive:
/s/ Michael West
-------------------------------------
Michael West
-10-
Exhibit 10.6.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is entered into
this 5th day of December, 1997 by and between Specialty Care Network, Inc.
("SCN") and D. Paul Davis ("Executive").
WHEREAS, Executive entered into an Employment Agreement, effective as of
February 22, 1996, with SCN pursuant to which Executive agreed to devote full
time to the business of the Company and to serve as a member of SCN's senior
management;
WHEREAS, Executive and SCN acknowledge and agree that it is in the best
interest of the parties to describe more accurately the reporting relationships
in view of the organizational structure at SCN.
NOW, THEREFORE, AND INTENDING TO BE LEGALLY BOUND HEREBY, the parties
hereby agree as follows:
1. Section 2.2 of the aforementioned Employment Agreement is hereby amended
to state as follows:
Duties. During the Term of the Employment Agreement, the Executive shall
devote substantially all of his time and attention and best efforts to the
Company's affairs. Specifically, the Executive shall have complete senior
management authority and responsibility, commensurate with and customary for the
person holding the office and position to which the Executive has contracted in
this Agreement, with respect to the day to day operations and long term
management of the Company, as well as implementation of the long range growth
strategy of the Company, consistent with directions from the Board of Directors
or the Chief Executive Officer. The Executive shall have full authority and
responsibility, subject to the general direction, approval and control of the
Board of Directors or the Chief Executive Officer, for formulating policies,
hiring and firing Company personnel, to retain consultants when he deems
necessary to implement the Company policies, to execute contracts on behalf of
the Company in ordinary course of business and to effect the growth strategy of
the Company.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first above written.
SPECIALTY CARE NETWORK, INC.
/s/ Kerry R. Hicks
-------------------------------------
BY: KERRY R. HICKS
Chief Executive Officer
EXECUTIVE
/s/ D. Paul Davis
-------------------------------------
EXHIBIT 10.7.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is entered into
this 1st day of October, 1997 by and between Specialty Care Network, Inc.
("SCN") and Peter A. Fatinow ("Executive").
WHEREAS, Executive entered into an Employment Agreement, effective as of
March 1, 1998, with SCN pursuant to which Executive agreed to devote full time
to the business of the Company and to serve as a member of SCN's senior
management;
WHEREAS, Executive and SCN acknowledge and agree that it is in the best
interest of the parties to describe more accurately the duties and reporting
relationships in view of the organizational structure at SCN.
NOW, THEREFORE, AND INTENDING TO BE LEGALLY BOUND HEREBY, the parties
hereby agree as follows:
1. Section 2.2 of the aforementioned Employment Agreement is hereby amended
to state as follows:
Duties. During the Term of the Employment Agreement, the Executive shall
devote substantially all of his time and attention and best efforts to the
Company's affairs. Specifically, the Executive shall have authority and
responsibility, commensurate with and customary for the person holding the
office and position for which the Executive has contracted in the
Employment Agreement, with respect to the day to day operations and long
term management of the Company, as well as implementation of the long range
growth strategy of the Company, consistent with directions from the Board
of Directors or the Chief Executive Officer. The Executive acknowledges
that his title and position, as well as his actual responsibilities, may be
modified by the Company to reflect changes in the nature, scope and
direction of the Company's business, provided that such modifications shall
not substantially diminish Executive's level of responsibilities or stature
within the Company. The Executive acknowledges and agrees further that all
references herein to the Board of Directors and the Chief Executive Officer
include those senior members of management who are delegated the
responsibility for overseeing Executive's performance of his job
responsibilities.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first above written.
SPECIALTY CARE NETWORK, INC.
/s/ Kerry R. Hicks
-----------------------------------
BY: KERRY R. HICKS
Chief Executive Officer
EXECUTIVE
/s/ Peter A. Fatinow
-----------------------------------
EXHIBIT 10.8.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is entered into
this 2nd day of December, 1997 by and between Specialty Care Network, Inc.
("SCN") and David Hicks ("Executive").
WHEREAS, Executive entered into an Employment Agreement, effective as of
March 1, 1998, with SCN pursuant to which Executive agreed to devote full time
to the business of the Company and to serve as a member of SCN's senior
management;
WHEREAS, Executive and SCN acknowledge and agree that it is in the best
interest of the parties to describe more accurately the duties and reporting
relationships in view of the organizational structure at SCN.
NOW, THEREFORE, AND INTENDING TO BE LEGALLY BOUND HEREBY, the parties
hereby agree as follows:
1. Section 2.2 of the aforementioned Employment Agreement is hereby amended
to state as follows:
Duties. During the Term of the Employment Agreement, the Executive shall
devote substantially all of his time and attention and best efforts to the
Company's affairs. Specifically, the Executive shall have authority and
responsibility, commensurate with and customary for the person holding the
office and position for which the Executive has contracted in the
Employment Agreement, with respect to the day to day operations and long
term management of the Company, as well as implementation of the long range
growth strategy of the Company, consistent with directions from the Board
of Directors or the Chief Executive Officer. The Executive acknowledges
that his title and position, as well as his actual responsibilities, may be
modified by the Company to reflect changes in the nature, scope and
direction of the Company's business, provided that such modifications shall
not substantially diminish Executive's level of responsibilities or stature
within the Company. The Executive acknowledges and agrees further that all
references herein to the Board of Directors and the Chief Executive Officer
include those senior members of management who are delegated the
responsibility for overseeing Executive's performance of his job
responsibilities.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first above written.
SPECIALTY CARE NETWORK, INC.
/s/ Kerry R. Hicks
------------------------------------
BY: KERRY R. HICKS
Chief Executive Officer
EXECUTIVE
/s/ David Hicks
------------------------------------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement Form
S-8 No. 333-36933 pertaining to the Specialty Care Network, Inc. 1996 Equity
Compensation Plan of our reports dated March 20, 1998 with respect to the
consolidated financial statements and schedule of Specialty Care Network, Inc.
and subsidiary and February 13, 1998 with respect to the financial statements of
Reconstructive Orthopaedic Associates II, P.C. (successor to Reconstructive
Orthopaedic Associates, Inc.) included in the Annual Report on Form 10-K of
Specialty Care Network, Inc. for the year ended December 31, 1997, filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
Denver, Colorado
March 27, 1998
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