<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
-------------------------------------------------
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 62-1623449
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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
-----------------------------
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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
On July 31, 1999, 12,429,197 shares of the Registrant's common stock, $.001
par value, were outstanding.
<PAGE> 2
Specialty Care Network, Inc. and Subsidiaries
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Condensed Balance Sheets -
June 30, 1999 and December 31, 1998 ...................................................... 1
Consolidated Statements of Income -
Three Months Ended June 30, 1999 and 1998
Six Months Ended June 30, 1999 and 1998 .................................................. 2
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 .................................................. 3
Notes to Consolidated Condensed Financial Statements ..................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................................... 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk ................................ 15
PART II. OTHER INFORMATION:
Item 3. Defaults Upon Senior Securities .......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 16
Item 6. Exhibits and Reports on Form 8-K ......................................................... 16
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Specialty Care Network, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,271,279 $ 1,418,201
Restricted cash 3,732,101 --
Accounts receivable, net 1,120,445 22,281,471
Due from affiliated practices in litigation, net 2,917,384 4,747,940
Receivables from sales of affiliated practices assets
and execution of new service agreements 3,928,411 7,953,068
Loans to physician stockholders 306,499 521,355
Note receivable from investee 136,935 --
Prepaid expenses and other 731,236 1,500,382
Prepaid and recoverable income taxes 2,192,402 4,258,102
------------ ------------
Total current assets 16,336,692 42,680,519
Property and equipment, net 3,974,326 11,050,365
Intangible assets, net 19,905 134,319
Management service agreements, net 2,299,360 13,153,048
Advances to affiliates and other 847,852 944,520
Equity investment in and advances to investee 407,308 --
Note receivable from investee, less current portion 1,983,683 --
Other assets 953,294 2,216,507
------------ ------------
Total assets $ 26,822,420 $ 70,179,278
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of capital lease obligations $ 49,148 $ 244,446
Accounts payable 262,222 785,649
Accrued payroll, incentive compensation and related
expenses 654,487 2,453,653
Accrued expenses 1,907,640 2,730,069
Line-of-credit 19,752,192 52,925,000
Due to affiliated physician practices -- 3,326,014
Deferred income 2,115,547 --
Deferred income taxes -- 1,083,178
Convertible debentures -- 589,615
------------ ------------
Total current liabilities 24,741,236 64,137,624
Capital lease obligations, less current portion 96,494 680,152
Deferred income 1,264,513 --
------------ ------------
Total liabilities 26,102,243 64,817,776
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, 18,618,955 shares
issued and outstanding in 1999 and
1998, respectively 18,619 18,619
Additional paid-in capital 67,032,678 66,993,627
Accumulated deficit (55,810,822) (57,687,071)
Treasury stock (10,520,298) (3,963,673)
------------ ------------
Total stockholders' equity 720,177 5,361,502
============ ============
Total liabilities and stockholders' equity $ 28,822,420 $ 70,179,278
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE> 4
Specialty Care Network, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Service fees $ 7,725,330 $ 19,270,799 $ 21,886,496 $ 36,484,602
Other 147,654 467,833 459,366 2,514,477
------------ ------------ ------------ ------------
7,872,984 19,738,632 22,345,862 38,999,079
Costs and expenses:
Clinic expenses 4,866,822 13,489,202 14,442,454 25,723,749
General and administrative expenses 2,397,384 3,379,811 5,829,987 6,021,961
Production, content and
product development 445,138 -- 556,785 --
Litigation and other costs 2,245,833 -- 3,363,260 --
------------ ------------ ------------ ------------
(Loss) income from operations (2,082,193) 2,869,619 (1,846,624) 7,253,369
Other:
Gain on sale of assets, amendment
and restatement of service
agreements, and litigation
settlement 3,531,758 -- 3,531,758 --
Gain on sale of minority interest
in subsidiary -- -- 221,258 --
Interest income 97,158 56,856 160,496 118,176
Interest expense (879,743) (977,679) (1,886,986) (1,643,703)
------------ ------------ ------------ ------------
Income before income taxes 666,980 1,948,796 179,902 5,727,842
Income tax benefit (expense) 1,502,093 (734,514) 1,696,347 (2,227,237)
------------ ------------ ------------ ------------
Net income $ 2,169,073 $ 1,214,282 $ 1,876,249 $ 3,500,605
============ ============ ============ ============
Net income per common share
(basic) $ 0.14 $ 0.07 $ 0.12 $ 0.19
============ ============ ============ ============
Weighted average common shares
outstanding (basic) 15,686,434 18,197,911 16,031,953 17,965,904
============ ============ ============ ============
Net income per common share (diluted) $ 0.13 $ 0.07 $ 0.11 $ 0.19
============ ============ ============ ============
Weighted average number of common shares
and common share
equivalents used in computation
(diluted) 16,388,548 18,579,726 16,383,102 18,427,192
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 5
Specialty Care Network, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,876,249 $ 3,500,605
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 1,230,566 913,768
Amortization 1,279,418 1,791,428
Gain on sale of subsidiary (221,258) --
Gain on sale of equity investment (3,531,758) (1,228,701)
Equity in loss of investee 18,978 --
Loss on disposal of assets 29,604 --
Deferred income tax (1,083,178) (301,914)
Non-cash compensation expense-stock options -- 55,002
Changes in operating assets and liabilities, net of
the non-cash effects of the acquisitions of the
net assets of physician groups:
Accounts receivable, net 3,251,158 (2,795,694)
Due to affiliated practices in litigation (1,358,716) --
Prepaid expenses and other assets 89,525 (1,000,249)
Accounts payable and accrued expenses (1,351,934) (23,864)
Accrued payroll, incentive compensation and
related expenses 113,204 (7,766)
Income taxes payable and prepaid and
recoverable income taxes, net 2,065,700 (1,155,083)
Due to affiliated physician practices (3,121,548) 1,668,787
Deferred income 3,380,060 --
------------ ------------
Net cash provided by operating activities 2,666,070 1,416,319
INVESTING ACTIVITIES
Purchases of property and equipment (846,413) (4,807,318)
Proceeds from sale of medical equipment 925,185 --
Proceeds from sale of majority interest in a subsidiary
and equity investments, net of cash 322,812 1,075,000
Increase in other assets (38,708) (16,472)
Increase in intangible assets -- (92,998)
Repayments from (advances to) affiliates 58,354 (1,473,226)
Advances to investee (757,467) --
Acquisition of physician groups -- (11,549,305)
------------ ------------
Net cash used in investing activities (336,237) (16,864,319)
FINANCING ACTIVITIES
Proceeds from sales of affiliated practices
assets and execution of new service agreements 34,388,567 --
Cash restricted for repayment of line-of-credit (3,732,101) --
Proceeds from line-of-credit agreement -- 13,225,000
Principal repayments on line of credit agreement (33,172,808) --
Principal repayments on capital lease obligations (47,686) (118,431)
Loans to physician stockholders (48,178) (130,269)
Repayments on loans to physician stockholders 135,451 --
</TABLE>
3
<PAGE> 6
Specialty Care Network, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Unaudited)
(continued)
<TABLE>
<S> <C> <C>
Exercise of common stock options $ -- $ 231,350
------------ ------------
Net cash (used in) provided by financing
Activities (2,476,755) 13,207,650
Net decrease in cash and cash equivalents (146,922) (2,240,350)
Cash and cash equivalents at beginning of period 1,418,201 3,444,517
------------ ------------
Cash and cash equivalents at end of period $ 1,271,279 $ 1,204,167
============ ============
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
------------ ------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,761,817 $ 1,545,610
============ ============
(Refund received) income taxes paid $ (2,678,869) $ 3,596,309
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
EFFECTS OF THE ACQUISITIONS OF THE NET ASSETS OF PHYSICIAN GROUPS:
Assets acquired $ -- $ 21,992,643
Liabilities assumed -- (280,482)
Convertible note payable issued -- (5,579,439)
Cash outlay -- (11,549,305)
------------ ------------
Common stock issued to effect acquisitions $ -- $ 4,583,417
============ ============
SALE OF ASSETS AND RESTRUCTURE OF SERVICE AGREEMENTS:
Assets disposed of $(37,676,456) $ --
Liabilities transferred 3,698,064 --
Convertible debenture forgiven 589,615 --
Treasury stock acquired 6,556,625 --
Receivable from affiliated practices 3,928,411 --
Cash received 26,435,499 --
------------ ------------
Gain on sale of assets, amendment and restatement
of service agreements, and litigation settlement $ 3,531,758 $ --
============ ============
SALE OF SUBSIDIARY:
Liabilities assumed $ (343,832) $ --
Assets disposed of (9,619) --
Note receivable 172,200 --
------------ ------------
Loss on sale $ (181,251) $ --
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 7
Specialty Care Network, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Specialty Care Network, Inc. and subsidiaries (collectively the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, these statements include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the results of the interim periods reported herein.
Operating results for the three and six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Beginning with the second quarter of 1999, the Company began incurring costs
related to the production, content and product development related to the
development and support of its HealthGrades.com web site. These costs (which
consist primarily of salaries and benefits, consulting fees and other costs
related to content acquisition and licensing, software development, application
development and operations expense) are expensed as incurred. Total costs for
the three and six months ended June 30, 1999 were $455,000 and $557,000,
respectively.
DESCRIPTION OF BUSINESS
Specialty Care Network, Inc. is a health care management service company that
provides practice management services to physicians in practices that focus on
musculoskeletal care. Healthcare Report Cards, Inc. ("HRCI") was formed in
September 1998 as a wholly-owned subsidiary of the Company. In November 1998,
HRCI launched an Internet web site, HealthcareReportCards.com(TM), that rated
the quality of outcomes at various hospitals for several medical procedures. In
June 1999, the Company formed HealthGrades.com, Inc. ("HGI"), as a
majority-owned subsidiary of the Company, which succeeded to and expanded on the
operations of HRCI. HGI completed the expansion and redesign of the HRCI
Internet web site with the launch of its new web site, HealthGrades.com(TM) on
August 4, 1999. HealthGrades.com rates the performance of hospitals, physcians
and health plans across the United States. The Company's wholly-owned
subsidiary, Provider Partnerships, Inc. ("PPI"), which provided consulting
services to hospitals, was sold to the former stockholders of PPI in June 1999
as part of an agreement reached between the Company and the former PPI
stockholders to resolve a dispute between the Company and the former PPI
stockholders. In addition, as part of this agreement, the former PPI
stockholders were given a minority interest in HGI. (See Note 2 for discussion
of the agreement between the Company and the former PPI stockholders).
Ambulatory Services, Inc., ("ASI"), a wholly-owned subsidiary of the Company,
owns an interest in, and manages an ambulatory surgery center.
NOTE 2 - AGREEMENT IN PRINCIPLE WITH THE FORMER PPI STOCKHOLDERS
In June 1999, the Company entered into an agreement with the former PPI
stockholders to resolve certain issues raised by the former stockholders of PPI
relating to the transaction in which the Company acquired PPI. The following is
a summary of the significant terms of the
5
<PAGE> 8
agreement:
o The Company formed a new company, HealthGrades.com, Inc. ("HGI"), that owns
the HealthCareReportCards.com web site and other related internet products.
With respect to HGI, the agreement provides, among other things, for the
following:
o The Company will facilitate financing to fund the operations of HGI.
If the Company is unable to facilitate a financing of at least $4
million by December 31, 1999, the Company will transfer sufficient
shares of HGI stock that the Company owns so that the former PPI
stockholders will become the majority stockholders of HGI.
o The former PPI stockholders and Peter A. Fatianow, an employee of
Specialty Care Network, Inc. who developed a new product included in
the healthcare rating web site, own a minority interest in HGI. The
Company owns the remainder.
o The former PPI stockholders' 25 percent position will not be diluted
below 25 percent unless certain events occur, including the reduction
of the Company's stock ownership interest below 50.1 percent after
completion of an initial round of financing or below 55 percent
following a subsequent round of financing.
o Until their ownership interest in HGI is reduced below five percent,
the former PPI stockholders are entitled to representation on HGI's
Board of Directors generally proportionate to the amount of stock that
they own. Certain corporate matters require a supermajority vote of
the Board of Directors.
o The former PPI stockholders have specified preemptive rights, tag-along
rights and registration rights with respect to their HGI shares.
o The Company sold most of the assets of PPI to the former PPI stockholders
for notes receivable totaling $172,200. The Company will fund up to a
maximum of $344,000 of expenses of HGI for the period July 1, 1999 through
December 31, 1999.
o The former PPI stockholders waived their rights under options to purchase
760,000 shares of the Company's common stock that they previously held.
o The parties to the agreement mutually released each other from claims
relating to the Company's acquisition of PPI.
NOTE 3 - RESTRUCTURE AND OTHER TRANSACTIONS
RESTRUCTURING TRANSACTION
Effective June 15, 1999, the Company closed its previously announced
restructuring transaction through nine separate restructure agreements
involving the following nine practices: Floyd R. Jaggears, Jr., M.D., P.C., II;
Riyaz H. Jinnah, M.D., II, P.A.; The Orthopaedic and Sports Medicine Center,
II, P.A.; Orthopaedic Associates of West Florida, P.A.; Orthopaedic Institute
of Ohio, Inc.; Orthopaedic Surgery Centers, P.C. II; Princeton Orthopaedic
Associates, II, P.A.; Reconstructive Orthopaedic Associates, II, P.C.; and
Steven P. Surgnier, M.D., P.A., II.
Under the restructure agreements, the Company transferred, with respect to each
practice, all of the accounts receivable relating to the practice; tangible and
intangible assets purchased or acquired by the Company in respect of the
practice, other than those disposed of in the ordinary course of business since
the date the Company affiliated with the practice; all prepaid expenses
relating to the practice; all inventory relating to the practice; and all other
assets relating to the practice. The amount payable to the Company from each
practice and its physician owners for the assets sold to the practice generally
equals the sum of (1) the book value of the accounts receivable relating to the
practice on the effective date of closing; (2) the book value of all fixed
assets and other capital assets relating to the practice on the effective date
of closing; (3) the book value of all prepaid expenses relating to the practice
on the effective date of closing; (4) the book value of all notes and other
receivables the physician owners of the practice owed to the Company on the
effective date of closing; and (5) the cash balance of the practice's deposit
account on the effective date of closing, reduced by the book value of the
liabilities and obligations relating to the practice on the effective date of
closing.
In addition, the Company and each of the practices and their physician owners
entered into a management services agreement to replace the existing service
arrangement. As consideration for the Company's entry into the management
services agreement, the practices and their physician owners either paid the
Company an additional amount of cash, or paid cash and returned to the Company
shares of the Company's common stock.
Under the management services agreements, the Company provides only limited
services to the practices. In addition, the terms of the management services
arrangements have been reduced, generally from forty year terms to five year
terms beginning from the initial affiliation date of the affected practice; the
management services agreements expire at various times between one year after
closing of the restructuring transaction and September 10, 2002. The practices
pay reduced service fees to the Company. Six of the practices pay monthly
service fees, while three paid a lump sum fee in connection with the closing of
the restructuring transaction, in lieu of the monthly fee obligation.
The Company received approximately $17.8 million in payment for the
restructuring transaction. Of this amount, approximately $17.1 million was used
to reduce outstanding indebtedness.
The Company is completing, with respect to each practice, an unaudited balance
sheet that sets forth the net book value of the assets purchased by the
practice and the liabilities assumed by the practice as of the date of closing
of the transaction. The purchase price will be adjusted based on the amount of
such net assets and liabilities.
OTHER TRANSACTIONS
Effective June 14, 1999, the Company entered into a termination agreement with
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center ("PPTC"), which
terminated the affiliation of PPTC with the Company. The consideration paid to
the Company consisted of payment for the tangible book value of assets relating
to PPTC and payment for the termination of the service agreement. In connection
with the termination agreement, the Company received a cash payment of
$8,700,000. Additionally, warrants to purchase approximately 545,000 shares of
Company common stock held by PPTC were canceled. The consideration paid to the
Company is subject to adjustment based on a calculation of the tangible book
value of practice assets as of June 14, 1999.
Also effective June 16, 1999, the Company entered into a settlement agreement
with TOC Specialists, PL ("TOC") that resolves all legal disputes and
litigation between the Company and TOC. In connection with the settlement
agreement, the Company received a cash payment of $3,500,000 and 760,000 shares
of the Company's common stock in consideration for the tangible book value of
the TOC assets and the termination of the service agreement.
The Company used the entire $12,200,000 of cash consideration received in these
transactions to reduce outstanding indebtedness.
As of June 30, 1999, approximately $3.7 million of the cash received from the
restructure transaction was restricted for the reduction of the Company's
outstanding bank indebtedness. The cash was used to reduce our bank
indebtedness in July 1999. As of August 14, 1999, the Company has reduced
outstanding bank indebtedness to approximately $14.2 million. Additionally, the
Company has reduced the total number of its common shares outstanding to
approximately 12.4 million.
NOTE 4 - SALE OF MAJORITY INTEREST IN A SUBSIDIARY
During 1998, the Company formed SCN of Maryland, LLC, a limited liability
corporation established to develop and operate an ambulatory surgery center in
Baltimore, Maryland. In March 1999, the Company sold 68% of its interest in SCN
of Maryland, LLC to certain physician owners of a practice affiliated with the
Company for total consideration of $360,505. The sale resulted in a pre-tax gain
of $221,258.
6
<PAGE> 9
NOTE 5 - SEGMENT DISCLOSURES
Management regularly evaluates the operating performance of the Company by
reviewing results on a product or service provided basis. The Company's
reportable segments are Physician Practice Management ("PPM") and Internet
Services. PPM is the Company's base business which derives its revenue primarily
from the management of physician practices. Internet Service's revenue is
derived primarily from advertising related to an Internet web site that rates
the performance of hospitals, physicians and health plans across the United
States. The Company's other segment represents ambulatory surgery center
services and health care consulting for the three and six months ended June 30,
1999.
The Company uses net (loss) income before income taxes for purposes of
performance measurement. The measurement basis for segment assets includes
intangible assets.
Summary information by segment is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
PPM
Revenue from external customers $ $
Interest income
Interest expense
Segment net income before income taxes
Segment assets
Segment asset expenditures
INTERNET SERVICES
Revenue from external customers $ $ --
Segment net (loss) income before income taxes --
Segment assets --
Segment asset expenditures --
OTHER
Revenue from external customers $ $ --
Interest income
Equity in net income of unconsolidated affiliate --
Segment net (loss) income before income taxes --
Segment assets --
Segment asset expenditures --
</TABLE>
7
<PAGE> 10
A reconciliation of the Company's segment revenue, segment net income before
income taxes, segment assets and other significant items to the corresponding
amounts in the Consolidated Condensed Financial Statements is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PPM
Revenue from external customers $ 7,822,094 $ 20,978,710 $ 22,237,419 $ 38,999,079
Interest income 54,462 56,856 117,800 118,176
Interest expense 879,743 977,679 1,886,986 1,643,703
Segment net income before income taxes 2,149,004 1,948,796 1,857,909 5,727,842
Segment assets 28,968,497 168,023,700 26,968,497 168,023,700
Segment asset expenditures 68,680 1,996,212 746,755 4,807,318
INTERNET SERVICES
Revenue from external customers $ 62,752 $ -- $ 136,792 $ --
Segment net loss before income taxes (794,951) -- (930,765) --
Segment assets 340,870 -- 340,740 --
Segment asset expenditures 78,521 -- 99,658 --
OTHER
Revenue from external customers $ -- $ -- $ 132,831 $ --
Interest income 27,812 -- 42,696 --
Equity in net loss of investee (33,862) -- (18,978) --
Segment net loss before income taxes (749,763) -- (638,625) --
Segment assets 2,232,298 -- 2,232,298 --
Segment asset expenditures -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Total for reportable segments $ 7,884,846 $ 20,978,710 $ 22,374,211 $ 38,999,079
Other revenue (11,862) -- (28,349) --
------------ ------------ ------------ ------------
Total consolidated revenue $ 7,872,984 $ 20,978,710 $ 22,345,882 $ 38,999,079
============ ============ ============ ============
INCOME BEFORE INCOME TAXES
Total net income before tax for
reportable segments $ 1,354,053 $ 1,948,796 $ 927,144 $ 5,727,842
Other net loss (580,308) -- (638,625) --
Adjustment (106,765) -- (108,617) --
------------ ------------ ------------ ------------
Income before income taxes $ 666,980 $ 1,948,796 $ 179,902 $ 5,727,842
============ ============ ============ ============
ASSETS
Total assets for reportable segments $ 27,309,367 $168,023,700 $ 27,309,367 $168,023,700
Other assets 2,232,298 -- 2,232,298 --
Elimination of investment in
subsidiaries (2,719,245) -- (2,719,245) --
------------ ------------ ------------ ------------
Consolidated total assets $ 26,822,420 $168,023,700 $ 26,822,420 $168,023,700
============ ============ ============ ============
</TABLE>
For each of the years presented, the Company's primary operations and assets
were within the United States.
8
<PAGE> 11
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this section regarding, the sufficiency of cash flows from
operations, possible additional bank borrowings and issuance of equity or debt
securities, adequacy of Company efforts to address Year 2000 issues and cost of
Year 2000 initiatives are "forward looking statements." Actual events or results
may differ materially from those discussed in forward looking statements as a
result of various factors, including the unwillingness of the Company's lending
bankers to restructure our credit arrangement, unavailability of bank or other
debt or equity financings on acceptable terms, unanticipated expenditures,
inadequacy of efforts to remediate Year 2000 issues, unanticipated costs related
to Year 2000 initiatives and other factors discussed below and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, particularly
under, "Risk Factors" in Item 1 and in the Company's proxy statement for its
special meeting of stockholders on June 11, 1999, particularly under
"Information About Specialty Care Network, Inc."
GENERAL
We are a health care management services company that provides practice
management services to physicians. We also provide a health care rating internet
site, HealthGrades.com, that rates the performance of hospitals, physicians and
health plans across the United States. In addition, through our subsidiary,
Ambulatory Services, Inc., we own an interest in, and manage an ambulatory
surgery center.
Prior to the restructuring transaction described below under "RESTRUCTURING
TRANSACTION", we entered into long-term service agreements with practices
affiliated with us pursuant to which we, among other things, provided facilities
and management, administrative and development services, and employed most
non-physician personnel, in return for specified service fees. The operating
expenses incurred by us included the salaries, wages and benefits of personnel
(other than physician owners and certain technical medical personnel), supplies,
expenses involved in administering the clinical aspects of the affiliated
practices and depreciation and amortization of assets. In addition to the
operating expenses discussed above, we incurred personnel and administrative
expenses in connection with our corporate offices, which provided management,
administrative and development services to the affiliated practices.
RESTRUCTURING TRANSACTION
Effective June 15, 1999, we closed our previously announced restructuring
transaction through nine separate restructure agreements involving the following
nine practices: Floyd R. Jaggears, Jr., M.D., P.C., II; Riyaz H. Jinnah, M.D.,
II, P.A.; The Orthopaedic and Sports Medicine Center, II, P.A.; Orthopaedic
Associates of West Florida, P.A.; Orthopaedic Institute of Ohio, Inc.;
Orthopaedic Surgery Centers, P.C. II; Princeton Orthopaedic Associates, II,
P.A.; Reconstructive Orthopaedic Associates, II, P.C.; and Steven P. Surgnier,
M.D., P.A., II. (See Note 3 to the Consolidated Condensed Financial Statements
for information regarding this transaction.)
<PAGE> 12
We have received to date approximately $17.8 million in payment for the
restructuring transaction. Of this amount, approximately $17.1 million was used
to reduce outstanding indebtedness.
We are completing, with respect to each practice, an unaudited balance sheet
that sets forth the net book value of the assets to be purchased by the practice
and the liabilities to be assumed by the practice as of the date of closing of
the transaction. The purchase price will be adjusted based on this balance
sheet.
OTHER TRANSACTIONS
Effective June 14, 1999, we entered into a termination agreement with
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center ("PPTC"), which
terminated the affiliation of PPTC with us.
Also effective June 16, 1999, we entered into a settlement agreement with TOC
Specialists, PL ("TOC") that resolves all legal disputes and litigation between
us and TOC. (See Note 3 to the Consolidated Condensed Financial Statements for
further information regarding these transactions.)
10
<PAGE> 13
We used the entire amount of the cash consideration received in these
transactions of $12,200,000 to reduce outstanding indebtedness. As of August 14,
1999, we have reduced our outstanding bank indebtedness to approximately $14.2
million. Additionally, we have reduced the total number of our common shares
outstanding to approximately 12.4 million.
ACCOUNTING TREATMENT
Commencing January 1, 1999, costs of obtaining long-term service agreements for
practices affiliated with us which are not party to the restructuring
transaction are amortized using the straight-line method over estimated lives of
five years from January 1, 1999
RESULTS OF OPERATIONS
Revenue
For the three months ended June 30, 1999, service fees revenue, including
reimbursement of clinic expenses, was $7.7 million compared with $19.3 million
for the same period of 1998. Our service fees revenue was $21.9 million for the
six months ended June 30, 1999, compared to $36.5 million for the same period in
1998. These decreases were primarily the result of the reduced service fees
received by us due to the modification of arrangements with four practices
beginning January 1, 1999 and reduced service fees related to the restructuring
transaction. (See Note 3 to the Consolidated Condensed Financial Statements for
information regarding the restructuring transaction). As a part of the
restructuring transaction the Company and the practices agreed to reduced
Company management services obligations and reduced service fees commencing on
April 1, 1999. We no longer pay clinic expenses with respect to any of our
practices; as a result, our revenues will no longer reflect reimbursement for
such expenses. Other revenue for the six months ended June 30, 1999 was
approximately $459,000 compared to $2.5 million for the same period in 1998.
Other revenue for the six months ended June 30, 1998 included a pre-tax gain of
$1.2 million from the sale of an equity investment in March 1998.
Clinic expenses and general and administrative expenses
For the three months ended June 30, 1999, total clinic expenses were $4.9
million compared to $13.5 million for the same period of 1998. For the six
months ended June 30, 1999, total clinic expenses were $14.4 million compared to
$25.7 million for the same period of 1998. These decreases were primarily the
result of the elimination of our payment of clinic expenses due to the
transactions described above under "Revenue". For the three months ended June
30, 1999, general and administrative expenses were $2.4 million compared with
$3.4 million for the same period of 1998. General and administrative expenses
were $5.8 million for the six months ended June 30, 1999, compared to $6.0
million for the same period in 1998. The decreases in general and administrative
expenses are primarily the result of the reduction in corporate overhead due to
the transactions described above.
Production, content and product development costs
Beginning with the second quarter of 1999, we began incurring costs related to
the production, content and product development related to the development and
support of our HealthGrades.com web site. These costs (which consist primarily
of salaries and benefits, consulting fee and other costs related to content
acquisition and licensing, software development, application development and
operations expense) are expensed as incurred. Total costs for the three and six
months ended June 30, 1999 were $445,000 and $557,000, respectively.
11
<PAGE> 14
Litigation and other costs
During the second quarter of 1999, we settled litigation with TOC Specialists,
PL. In addition, during the second quarter, we were involved in litigation with
The Specialists Orthopaedic Medical Corporation, 3B Orthopaedics and
Mid-Atlantic Orthopaedic Specialists, P.C. As a result of these disputes, we
recorded charges of approximately $1.4 million and $2.2 million for the three
and six months ended June 30, 1999, respectively to reserve for service fee
revenue for these practices.
For the three and six months ended June 30, 1999, we incurred approximately
$650,000 and $700,000, respectively, in expenses directly related to this
litigation. Additionally, we incurred legal and other consulting fee associated
with the negotiation of the restructuring transaction of approximately $200,000
and $500,000, for the three and six months ended June 30, 1999, respectively.
Gain on sale of assets, amendment and restatement of service agreements, and
litigation settlement
Effective June 15, 1999, we closed the restructuring transaction with nine
practices. Additionally, we entered into a termination agreement with Park Place
Therapeutic Center and entered into a settlement agreement with TOC Specialists,
PL, during the second quarter of 1999. We recorded a pre-tax gain on these
transactions of approximately $3.5 million for the quarter ended June 30, 1999.
Gain on sale of minority interest in subsidiary
In March 1999, we sold 68% of our interest in SCN of Maryland, LLC to certain
physician owners of a practice affiliated with us for total consideration of
approximately $360,000. The sale resulted in a pre-tax gain of approximately
$220,000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, we had a working capital deficit of approximately $8.4
million, a decrease of $13.1 million from $21.5 million as of December 31, 1998.
For the first six months of 1999, cash flow provided by operations was $2.7
million compared to cash flow provided by operations of $1.4 million for the
same period of 1998.
During the six months ended June 30, 1999, we received an income tax refund of
approximately $2.7 million related to the overpayment of 1998 estimated taxes.
Additionally, we received approximately $8.0 million from the sales of
affiliated practices, assets and execution of new service agreements and $1.6
million in prepayment of service fees for the new service agreements related to
the modification arrangements with four practices that were effective as of
December 31, 1998. In addition, through August 14, 1999, we received
approximately $17.8 million in connection with the restructuring transaction
with nine of our affiliated practices. Of this amount, approximately $17.1
million was used to reduce outstanding indebtedness. In connection with the
termination agreement with Park Place Therapeutic Center, we received a cash
payment of $8,700,000. Additionally, warrants to purchase approximately 545,000
shares of our common stock were canceled in connection with the PPTC termination
agreement. In connection with the settlement agreement with TOC Specialists, PL,
we received a cash payment of $3,500,000. We used the entire $12,200,000 cash
consideration received in these transactions to reduce outstanding indebtedness.
12
<PAGE> 15
As of June 30, 1999 and December 31, 1998, we were not in compliance with
certain of the financial ratio covenants required by our credit facility. As a
result of the non-compliance with certain financial ratio covenants, we are in
default under the terms of the credit facility. The terms of the credit facility
provide that in the event of default, the bank syndicate can immediately
terminate its obligation to make further advances under the credit facility
and/or declare our outstanding debt under the credit facility to be immediately
due and payable. Accordingly, the total amount outstanding under the credit
facility of approximately $19.8 million has been included in our Consolidated
Condensed Balance Sheet as a current liability at June 30, 1999. (This balance
has been paid down to approximately $14.2 million as of August 14, 1999.) The
bank syndicate notified us in December 1998 that it was suspending any further
advances under the credit facility. We are currently negotiating with the bank
syndicate to restructure our credit arrangement.
The issues described above raise substantial doubt about our ability to continue
as a going concern. The restructuring transaction described above, as well as
the termination agreement with Park Place Therapeutic Center and the settlement
agreement with TOC Specialists, PL, have enabled us to substantially reduce our
outstanding bank indebtedness. Additionally, we are currently negotiating with
the bank syndicate to restructure our credit arrangement. However, we are
currently incurring significant legal fees and other costs related to pending
litigation with four of our affiliated practices. Additionally, we are incurring
significant costs relating to the development and marketing of our
HealthGrades.com web site. We anticipate that we will require additional funds
to finance our operations. Management is currently examining various
alternatives to raise debt and/or equity financing. The availability and terms
of any financing will depend on market and other conditions. We cannot assure
that sufficient funds will be available on terms acceptable to us, if at all.
YEAR 2000
The Year 2000 (Y2K) issue is a result of a global programming standard that
records dates as six digits (i.e. MM/DD/YY), using only the last two digits for
the year. Any software application or hardware product that uses two-digit
fields could interpret the year 2000 as the year 1900. Systems that do not
properly recognize the correct year could generate erroneous data or cause a
system to fail, resulting in business interruption. This situation is not
limited to computers; it has the potential to affect many systems, components,
and devices that have embedded computer chips that may be date sensitive.
We are coordinating our efforts to address the Y2K issue with our affiliated
practices and vendors. We cannot assure that the systems of other companies on
which our systems rely will be timely converted. A failure to convert by another
company or a conversion that is incompatible with our systems could have a
material adverse effect on us.
In 1997, we established a Y2K Coordinator to oversee all corporate-wide Y2K
initiatives. These initiatives encompass all of our computer software and
embedded systems. Teams of internal and external specialists were established to
inventory and test critical computer programs and automated operational systems.
Additionally, a detailed project plan has been created that outlines all
activities related to the Y2K issue. Generally speaking, the project involves
three areas: Corporate Headquarters, Affiliated Practices, and Internet
Operations.
Corporate Headquarters: Because we began operations in 1996, most of our
corporate computer hardware is relatively new. Additionally, most of the
software applications are "off the shelf", resulting in few internal software
modifications. Since January 1998, all significant internal applications have
been reviewed and updated. We have completed identifying all internal
applications. We have substantially completed upgrading and modifying all
computer hardware, that required Y2K conversions. We anticipate that all
remaining computer hardware will be Y2K compliant by the end of the third
quarter of 1999. Total costs incurred by us to modify the software used at the
corporate office were not material.
13
<PAGE> 16
Affiliated Practices: We have completed the restructuring and other transactions
that eliminated our responsibility with respect to management information
systems of our former affiliated practices. This restructuring has shifted
responsibility for Year 2000 compliance to most of the practices we were
affiliated with. We have assessed the status of the computer systems at the
affiliated practices that continue to be affiliated with us. Based upon our
review, and discussion with our remaining practices, we believe that all
affiliated practices are compliant. All costs to modify systems to become Y2K
compliant have been, and will be borne by the affiliated practices.
Although we believe we are addressing all significant Y2K issues which could
affect us, we have few alternatives available, other than reversion to manual
methods, in order to avoid the effects of not establishing Y2K readiness. As a
result, if any significant issues arise with our corporate headquarters, we
could incur significant additional costs to correct the problem. There can be no
assurance that any remediation plan will address all the problems that may
arise. For the Y2K non-compliance issues identified to date, the cost to upgrade
or prepare for Y2K is not expected to have a material impact on our operating
results.
Internet Operations: To the extent that our assessment is finalized without
identifying any additional material non-compliant IT systems we operate, or that
are operated by third parties, the most reasonable worst case Y2K scenario is a
systemic failure beyond our control. This could include a prolonged
telecommunications or electrical failure. Such a failure could prevent us from
operating our business, prevent users from accessing our web site, or change the
behavior of advertising customers or persons accessing our web site. We believe
that the primary business risks, in the event of such failure, would include,
but not be limited to, lost advertising revenues, increased operating costs,
loss of customers or persons accessing our web site, or other business
interruptions of a material nature. These issues could lead to claims of
mismanagement, misrepresentation, or breach of contract, any of which could have
a material adverse effect on our business, results of operations and financial
condition. We have not made any contingency plans to address such risks.
Additionally, the computer systems necessary to maintain the viability of the
Internet or any of the Web sites that direct consumers to the Company's link to
online stores may not be Y2K compliant. Computers used by customers to access
these online stores may not be Y2K compliant, delaying customers' product
purchases.
14
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
15
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is currently not in compliance with certain of the financial ratio
covenants required by its credit facility. As a result of this non-compliance
with certain financial ratio covenants, it is in default under the terms of the
credit facility. (See further discussion in Part I - Financial Information,
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 11, 1999, the Company held a special meeting of stockholders to
consider approval of the restructuring transaction. The vote on approval was
as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
<S> <C> <C> <C>
9,496,738 389,086 470,562 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- The following is a list of exhibits filed
as part of this quarterly report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Form of Restructure Agreement.(1)
2.11 Form of Management Services Agreement.(1)
11 Statement re: computation of per share earnings
27 Summary financial data schedule
(1) - Effective June 15, 1999, the Company closed its previously announced
restructuring transaction through nine separate restructure agreements
involving the following nine practices: Floyd R. Jaggears, Jr., M.D., P.C., II;
Riyaz H. Jinnah, M.D., II, P.A.; The Orthopaedic and Sports Medicine Center,
II, P.A.; Orthopaedic Associates of West Florida, P.A.; Orthopaedic Institute
of Ohio, Inc.; Orthopaedic Surgery Centers, P.C. II; Princeton Orthopaedic
Associates, II, P.A.; Reconstructive Orthopaedic Associates, II, P.C.; and
Steven P. Surgnier, M.D., P.A., II. Simultaneously, the Company executed
revised Management Services Agreements with these practices. The Company has
attached a generic form of these agreements to this Quarterly Report on Form
10-Q as the terms of the agreements between the Company and the individual
practices are substantially equivalent.
(b) Reports on Form 8-K. During the period covered by this report, the
Company filed a Form 8-K with the Commission on June 30, 1999 reporting
information under Items 2 and 7. This report, dated June 14, 1999,
included unaudited pro forma consolidated financial statements of the
Company and subsidiaries for the year ended December 31, 1998 and for
the three months ended March 31, 1999.
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECIALTY CARE NETWORK, INC.
Date: August 16, 1999 By: /s/ Paul Davis
--------------------------------- ----------------------------
Paul Davis
Senior Vice President, Finance
(Chief Financial Officer)
<PAGE> 20
Specialty Care Network, Inc. and Subsidiaries
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
Exhibit 2.1 Form of Restructure Agreement.............................
Exhibit 2.11 Form of Management Services Agreement.....................
Exhibit 11 Computation of Per Share Earnings.........................
Exhibit 27 Summary Financial Data Schedule...........................
</TABLE>
<PAGE> 1
RESTRUCTURE AGREEMENT
BY AND AMONG
SPECIALTY CARE NETWORK, INC.,
AAA,
____________________________,
____________________________,
____________________________,
AND
____________________________
DATED AS OF XXX
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
DEFINITIONS.......................................................................................................1
ARTICLE II
BASIC TRANSACTION.................................................................................................4
2.1 Purchase and Sale of Assets.........................................................................5
2.2 Amendment and Restatement of Service Agreement......................................................5
2.3 Accounting; True-Up; Dispute Resolution.............................................................5
2.4 Assumption of Term Debt and Assumed Liabilities.....................................................6
2.5 The Closing.........................................................................................6
2.6 Reduction of Service Fee............................................................................6
2.7 Deliveries at Closing...............................................................................6
2.8 Taxes and Expenses..................................................................................6
2.9 Employees...........................................................................................7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SCN.............................................................................7
3.1 Organization, Qualification, and Power..............................................................7
3.2 Authorization of Transaction........................................................................7
3.3 Noncontravention....................................................................................7
3.4 Title; Condition....................................................................................7
3.5 Tax Matters.........................................................................................7
3.6 Brokers' Fees.......................................................................................8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DDD AND THE PHYSICIAN OWNERS....................................................8
4.1 Organization........................................................................................8
4.2 Ownership Interest of DDD...........................................................................8
4.3 Authorization of Transaction........................................................................8
4.4 Noncontravention....................................................................................8
4.5 Brokers' Fees.......................................................................................8
4.6 Title to SCN Shares.................................................................................8
ARTICLE V
COVENANTS.........................................................................................................9
5.1 General.............................................................................................9
5.2 Notices and Consents................................................................................9
5.3 Regulatory Matters and Approvals....................................................................9
5.4 Operation of Business...............................................................................9
5.5 Further Acts and Assurances.........................................................................9
5.6 Full Access.........................................................................................9
5.7 Notice of Developments..............................................................................9
5.8 Collection of Accounts Receivable...................................................................9
5.9 Corporate Authorization............................................................................10
5.10 Employee Benefit Plans............................................................................10
ARTICLE VI
CONDITIONS TO OBLIGATIONS TO CLOSE...............................................................................10
6.1 Conditions to Obligation of DDD and the Physician Owners...........................................10
6.2 Conditions to Obligation of SCN....................................................................11
ARTICLE VII
PRE-CLOSING AND CLOSING DELIVERIES...............................................................................12
7.1 By SCN.............................................................................................12
7.2 By DDD and the Physician Owners....................................................................12
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VIII
TERMINATION......................................................................................................13
8.1 Termination of Agreement...........................................................................13
8.2 Effect of Termination..............................................................................13
ARTICLE IX
INDEMNIFICATION..................................................................................................13
9.1 Indemnification by DDD and the Physician Owners....................................................13
9.2 Notice to DDD and the Physician Owners; Opportunity to Defend......................................13
9.3 General Indemnification by SCN.....................................................................14
9.4 Notice to SCN; Opportunity to Defend...............................................................14
ARTICLE X
MISCELLANEOUS....................................................................................................14
10.1 Survival..........................................................................................14
10.2 No Third-Party Beneficiaries......................................................................14
10.3 Entire Agreement..................................................................................14
10.4 Succession and Assignment.........................................................................14
10.5 Counterparts......................................................................................14
10.6 Headings..........................................................................................14
10.7 Notices...........................................................................................14
10.8 Governing Law; Venue..............................................................................15
10.9 Amendments and Waivers............................................................................15
10.10 Severability.....................................................................................15
10.11 Expenses.........................................................................................15
10.12 Construction.....................................................................................16
10.13 No Referrals Required............................................................................16
10.14 Incorporation of Exhibits and Schedules..........................................................16
10.15 Transactions with Affiliated Practices............................................................16
SCHEDULE 1.1.........................................................................................Schedule 1.1-1
EXCLUDED ASSETS......................................................................................Schedule 1.1-1
SCHEDULE 1.2
PHYSICIAN OWNERS.....................................................................................Schedule 1.2-1
SCHEDULE 1.3
TERM DEBT............................................................................................Schedule 1.3-1
SCHEDULE 2.4
ASSUMED LIABILITIES..................................................................................Schedule 2.4-1
SCHEDULE 3.3
CONSENTS.............................................................................................Schedule 3.3-1
EXHIBIT 2.1
PURCHASE PRICE ALLOCATION AGREEMENT...................................................................Exhibit 2.1-1
EXHIBIT 7.1(b)
BILL OF SALE.......................................................................................Exhibit 7.1(b)-1
EXHIBIT 7.1(c)
ASSIGNMENT AND ASSUMPTION AGREEMENT................................................................Exhibit 7.1(c)-1
EXHIBIT 7.1(d)
MANAGEMENT SERVICES AGREEMENT......................................................................Exhibit 7.1(d)-1
EXHIBIT 7.2(c)
RELEASE............................................................................................Exhibit 7.2(c)-1
</TABLE>
ii
<PAGE> 4
RESTRUCTURE AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of XXX,
by and among AAA, a BBB ccc ("DDD") and the undersigned Physician Owners (as
defined herein) of DDD, on the one hand, and SPECIALTY CARE NETWORK, INC., a
Delaware corporation ("SCN"), on the other hand. DDD, the Physician Owners, and
SCN are referred to individually herein as a "Party" or collectively herein as
the "Parties."
R E C I T A L S:
WHEREAS, DDD is engaged in the practice of medicine at its offices in
_______________, BBB;
WHEREAS, the Parties entered into an EEE Agreement dated FFF, pursuant
to which SCN acquired certain assets of DDD, or DDD's predecessor entity that
was engaged in the practice of medicine (the "EEE"), and, in connection
therewith, the Parties entered into that certain Service Agreement dated GGG[,
AND SUBSEQUENTLY AMENDED _____________, 199_____] (the"Service Agreement");
WHEREAS, DDD has been managed by SCN pursuant to the Service Agreement;
WHEREAS, the Parties intend to amend and restate the Service Agreement
as a Management Services Agreement;
WHEREAS, the Parties intend that DDD, through the Physician Owners,
purchase, or repurchase, as the case may be, certain assets heretofore utilized
by SCN in its management of DDD's medical practice; and
WHEREAS, the Parties intend that DDD assume certain liabilities of SCN
which were generated or incurred by SCN in connection with its management of
DDD's medical practice, and to make certain other agreements among themselves,
all on the terms and conditions as set forth herein.
NOW, THEREFORE, for and in consideration of the premises above, the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following definitions shall apply:
"Accounts Receivable" shall mean the Purchased A/R (as defined in the
Service Agreement) of DDD, including collections on Purchased A/R which have not
been transferred to SCN as of the Closing Date that have been purchased by SCN
prior to the Closing Date.
"Affected Participants" has the meaning set forth in SECTION 5.10(b).
"Affiliated Practice" has the meaning set forth in SECTION 10.15.
"Agreement" has the meaning set forth in the preface above.
"Ancillary Services" has the meaning set forth in the Management
Services Agreement.
1
<PAGE> 5
"Applicable Law" means all federal, state, county, municipal or other
local laws, constitutions, ordinances, statutes, rules, regulations, and orders
applicable thereto.
"Arbitration Notice" shall have the meaning as defined in SECTION
2.3(b).
"Asset Purchase Price" shall have the meaning as defined in SECTION
2.1.
"Assumed Liabilities" shall have the meaning as defined in SECTION 2.4.
"Book Value" shall mean the book value of the Purchased Assets as
carried on SCN's books in accordance with GAAP, as determined by SCN or SCN's
independent accountants.
"Closing" has the meaning set forth in SECTION 2.5.
"Closing Date" has the meaning set forth in SECTION 2.5.
"Closing Date Balance Sheet" has the meaning set forth in SECTION
2.3(a).
"Closing Price" has the meaning set forth in SECTION 2.2.
"Code" means the Internal Revenue Code of 1986, as amended.
"DDD" has the meaning set forth in the preface above.
"DDD Health Plan" has the meaning set forth in SECTION 5.10(a).
"DDD Ownership Interests" has the meaning set forth in SECTION 4.2.
"Delaware General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended.
["EEE" MEANS THE ACQUISITION OF THE ASSETS OF DDD, OR ITS PREDECESSOR
PERSON IN THE PRACTICE OF MEDICINE, PURSUANT TO THE EEE AGREEMENT.
"EEE AGREEMENT" MEANS THAT CERTAIN EEE AGREEMENT, DATED FFF, BY AND
AMONG THE PARTIES.]
"Excluded Assets" means certain assets specifically set forth on
SCHEDULE 1.1 used in the provision of [ANCILLARY SERVICES] at DDD and all assets
of SCN not used specifically and exclusively in connection with the management
of DDD's medical practice.
"GAAP" means generally accepted accounting principles as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices or procedures as may be
approved or adopted by a significant segment of the accounting profession. For
purposes of this Agreement, GAAP shall be applied in a manner consistent with
the historic practices used by SCN with respect to DDD, as applicable.
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, board, body, agency, bureau or entity or any arbitrator with
authority to bind a party at law.
"Independent Accounting Firm" shall have the meaning as defined in
SECTION 2.3(b).
2
<PAGE> 6
"Knowledge" means actual knowledge after reasonable investigation.
"Lender" means any lender to SCN that has a Security Interest in any of
the Purchased Assets, or whose consent would otherwise be required under any
loan agreement or similar agreement with SCN.
"Loss" has the meaning set forth in SECTION 9.1.
"Management Services Agreement" shall mean that certain Management
Service Agreement by and among SCN, DDD and the Physician Owners dated as of
ZZZ.
"Most Recent Balance Sheet" has the meaning set forth in SECTION
2.3(a).
"Order" means any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other governmental body or by any arbitrator.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, corporation, partnership, association,
limited liability company, limited liability partnership, joint stock company,
joint venture, trust, unincorporated organization, or governmental entity (or
any department, agency or political subdivision thereof, including without
limitation Third-Party Payors).
"Physician Owners" means the Persons set forth on SCHEDULE 1.2.
"Practice Offices" has the meaning set forth in the Management Services
Agreement.
"Prepaid Expenses" means those expenses incurred and paid by SCN in
connection with SCN's management of DDD's medical practice which confer a
benefit on SCN, DDD or the Physician Owners, including but not limited to
professional liability insurance, and for which DDD has not paid or reimbursed
SCN pursuant to the Service Agreement or otherwise as of the Closing Date.
"Proceedings" means any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any governmental body or arbitrator
"Purchased Assets" means all of SCN's right, title, and interest in and
to the following assets of SCN owned as of the Closing Date:
(a) Accounts Receivable;
(b) assets purchased or acquired in the EEE other than those assets
disposed of in the Ordinary Course of Business;
(c) Prepaid Expenses;
(d) inventory used directly and exclusively in connection with SCN's
management of DDD's medical practice which has not been previously purchased by
DDD pursuant to the Service Agreement or otherwise; and
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(e) all other assets, tangible and intangible, acquired by SCN and used
directly and exclusively in connection with the SCN's management of DDD's
medical practice, other than the Excluded Assets.
"Requisite DDD Approval" means the affirmative vote of the holders of
the requisite percentage of the [DIRECTORS AND/OR SHAREHOLDER / PARTNERSHIP]
interests of DDD which is required by the [STATE BUSINESS CORPORATION ACT] to
approve the transactions contemplated by this Agreement.
"Requisite SCN Approval" means (i) approval by the requisite vote of
the directors of SCN, (ii) such vote of the stockholders of SCN specified in the
proxy statement to be filed with the Securities and Exchange Commission and sent
to SCN's stockholders as required to approve this Agreement and the transactions
contemplated hereby, and (iii) the approval of any Lender, in order to approve
this Agreement and carry out the terms and conditions hereof.
"Restructuring Transaction" shall have the meaning set forth in SECTION
10.15.
"SCN" means Specialty Care Network, Inc., a Delaware corporation,
together with its affiliates, successors and assigns.
"SCN Share" means any share of the common stock, $.001 par value per
share, of SCN.
"Savings Plan" has the meaning set forth in SECTION 5.10(b).
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, or any conditional sales agreement, option,
or right of first refusal other than (a) mechanic's, materialmen's or similar
lien, (b) liens for taxes not yet due and payable or for taxes that the taxpayer
is contesting in good faith through appropriate proceedings, (c) purchase money
liens and liens securing rental payments under capital lease arrangements, and
(d) other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
"Service Agreement" shall have the meaning set forth in the Recitals of
this Agreement.
"Service Fee" means any reimbursable expense or Service Fee owed, or
payable to, SCN by DDD or the Physician Owners pursuant to the Service
Agreement.
"Successor Plan" has the meaning set forth in Section 5.10(b).
"Term Debt" means the debt and obligations set forth on SCHEDULE 1.3.
"Third-Party Payor" has the meaning set forth in the Management
Services Agreement.
"Transferred Employee" means the terminated employees of SCN described
in Section 2.8 and all other individuals employed at the Practice Offices on the
Closing Date.
ARTICLE II
BASIC TRANSACTION
II.1 Purchase and Sale of Assets. At the Closing, on and subject to the
terms and conditions of this Agreement, SCN shall transfer, sell, assign, convey
and deliver to DDD, and DDD shall purchase and otherwise assume, all of the
Purchased Assets. The purchase price for the Purchased Assets (the "Asset
Purchase Price") shall equal (a) the Book Value of the Accounts Receivable as of
the Closing Date, plus (b) the Book Value of all furniture, fixtures, office
furnishings, tools
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and similar property, equipment and other capital assets of SCN, not including
the Excluded Assets, used directly and exclusively in connection with SCN's
management of DDD's medical practice as of the Closing Date, plus (c) the Book
Value of all Prepaid Expenses as of the Closing Date, plus (d) the Book Value of
all notes and other receivables owed to SCN by DDD and/or the Physician Owners,
including but not limited to any accrued but unpaid Service Fees owed by DDD to
SCN as of the Closing Date, plus (e) the cash balance in the DDD deposit
account, less (f) the Book Value of the Assumed Liabilities. DDD and the
Physician Owners shall satisfy the Asset Purchase Price at Closing in cash
(payable by wire transfer or cashier's check) based on the Most Recent Balance
Sheet; provided, however, the Asset Purchase Price shall be subject to
adjustment with respect to the cash amounts paid at Closing in accordance with
SECTION 2.3. The Parties agree to allocate the Purchase Price among the
Purchased Assets (and all other capitalizable costs) for all purposes (including
financial accounting and tax purposes) in accordance with the Purchase Price
Allocation Agreement attached hereto as EXHIBIT 2.1.
II.2 Amendment and Restatement of Service Agreement. At the Closing, on
and subject to the terms and conditions of this Agreement, the Parties shall
amend and restate the Service Agreement in substantially the form of the
Management Services Agreement attached hereto as EXHIBIT 7.1(d), and such
Management Services Agreement shall control the rights, obligations and duties
of the Parties with respect to SCN's management of DDD's medical practice from
and after the Closing Date; provided, however, that the Service Agreement shall
be effective and shall control the relationship of the Parties prior to the
Closing Date. If, after the Closing Date, DDD intends to have SCN continue to
provide any service set forth in the Service Agreement which is not provided for
in the Management Services Agreement, DDD shall notify SCN of such intention in
writing not less than ten (10) days prior to Closing. DDD shall reimburse SCN
for any cost or expense associated with any such service incurred on or after
the Closing Date. As consideration for SCN's agreeing to amend and restate the
Service Agreement, DDD and the Physician Owners shall deliver to SCN at Closing
[PPP DOLLARS ($QQQ) IN CASH.] OR [(a) PPP DOLLARS ($QQQ) IN CASH, AND (b) SSS
SCN SHARES, FREE AND CLEAR OF ALL LIENS AND ENCUMBRANCES.] OR [SSS SCN SHARES,
FREE AND CLEAR OF ALL LIENS AND ENCUMBRANCES.] [DDD and the Physician Owners
agree that any SCN Shares delivered pursuant to this SECTION 2.2 shall be
properly endorsed for transfer by DDD or the Physician Owners, together with
appropriate signature guarantees, and shall be delivered by DDD and/or the
Physician Owners.-DELETE IF PAYING ALL CASH]
II.3 Accounting; True-Up; Dispute Resolution.
(a) No less than five (5) business days prior to Closing, SCN
shall deliver to DDD the most recently prepared month-end balance sheet
(the "Most Recent Balance Sheet") stating the Book Value of the
Purchased Assets and Assumed Liabilities. Within sixty (60) days from
the Closing Date, SCN shall prepare a balance sheet (the "Closing Date
Balance Sheet") stating the Book Value of the Purchased Assets and
Assumed Liabilities as of the Closing Date. In the event SCN determines
that the Asset Purchase Price (as determined in accordance with the
Closing Date Balance Sheet) is greater than the amount paid by DDD and
the Physician Owners at Closing in accordance with the provisions of
SECTION 2.1 of this Agreement, then DDD and the Physician Owners shall
pay to SCN such excess in cash within two (2) days of the date SCN
furnishes to DDD and the Physician Owners the Asset Purchase Price
computation. In the event that SCN determines that the Asset Purchase
Price (as determined in accordance with the Closing Date Balance Sheet)
is less than the amount paid by DDD and the Physician Owners to SCN at
Closing in accordance with the provisions of SECTION 2.1 of this
Agreement, then SCN shall pay to DDD and the Physician Owners such
excess in cash within two (2) days of the date SCN furnishes to DDD and
the Physician Owners the Asset Purchase Price computation.
(b) If SCN and DDD are unable to resolve any disagreement
within twenty (20) days after SCN's receipt of such notice of
disagreement, either SCN or DDD may give notice (an "Arbitration
Notice") to the other Party of an intent to submit such disagreement to
a certified independent public accounting firm that is nationally
recognized (the "Independent Accounting Firm") and mutually agreeable
to SCN and DDD. If SCN and DDD cannot agree upon such election within
twenty (20) days after delivery of the Arbitration Notice, the
Independent Accounting Firm shall be selected by lot from among the
five largest independent public accounting firms in the United States,
excluding SCN's principal auditors. The dispute shall be immediately
submitted by DDD and SCN
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to the Independent Accounting Firm for resolution of such dispute
within twenty (20) days after submission to the Independent Accounting
Firm. At the time of the submission of such dispute to the Independent
Accounting Firm for resolution, SCN shall file with the Independent
Accounting Firm a written statement of its position with regard to any
matters in dispute, at which time DDD shall have ten (10) days to
respond in writing to SCN's position. Upon receipt of written position
statements by each of SCN and DDD, the Independent Accounting Firm
shall resolve the dispute in accordance with GAAP. The decision of the
Independent Accounting Firm shall be final and binding upon all Parties
hereto. Each Party shall bear its own expenses, including expenses of
its accountants and attorneys in connection with the resolution of any
such dispute; provided, however, the fees and expenses of the
Independent Accounting Firm shall be paid by DDD.
II.4 Assumption of Term Debt and Assumed Liabilities. Except as
otherwise provided herein, DDD shall assume at the Closing Date, and shall
perform or discharge on or after the Closing Date, (i) the Term Debt set forth
on SCHEDULE 1.3, and (ii) the commitments, obligations and liabilities of SCN
which are listed on SCHEDULE 2.4 attached hereto (collectively the "Assumed
Liabilities") with respect to DDD and the Physician Owners, including without
limitation, any and all accounts payable, payroll, accrued employee vacation
time and sick leave and any employee benefits.
II.5 The Closing. The closing of the transaction (the "Closing") shall
take place at the offices of SCN, 44 Union Boulevard, Suite 600, Lakewood,
Colorado 80118, commencing at 9:00 a.m. local time on the second business day
following the satisfaction or waiver of all conditions to the obligations of the
Parties to consummate the transactions contemplated hereby or such other date as
the Parties may mutually determine (the "Closing Date"); provided, however, that
the Closing Date shall be no later than YYY, unless it is determined by SCN's
legal counsel that shareholder approval is required, in which event the Closing
Date shall be no later than June 15, 1999. Time is of the essence for this
Agreement. The Parties may agree to close the transactions contemplated by the
Agreement via facsimile, with executed original agreements, instruments, or
other documents to be sent to the appropriate party via FedEx (or other
nationally recognized delivery company that guarantees delivery of such
documents on the following day) the next day; provided, however, the Parties
shall execute a written agreement governing the terms and conditions of a
Closing via facsimile.
II.6 Reduction of Service Fee. In the event that this Agreement is
executed by all of the Parties no later than February 5, 1999, and the Closing
Date occurs after April 1, 1999, but no later than June 15, 1999, then the
Service Fee payable to SCN under the Service Agreement shall be reduced to
_________________ Dollars ($_________) per month for the period beginning April
1, 1999, and ending on the earlier of June 15, 1999, or the Closing Date;
provided, however, that during said time period, SCN shall not be required to
provide the same level of services it provided under the Service Agreement prior
to April 1, 1999, except with respect to providing billing and collection
services, personnel and the furniture, fixtures and equipment necessary for DDD
to operate the Practice Offices. DDD and the Physician Owners hereby waive any
rights they may have against SCN with respect to SCN's provision of services
under the Service Agreement during the period the Service Fee is reduced
pursuant to this SECTION 2.6. As of the Closing Date, and at all times
thereafter, the Management Services Agreement shall control the relationship
among the Parties, and the Management Services Fee provided for thereunder shall
replace the Service Fee. In the event that (i) the Closing does not occur on or
before June 15, 1999, or (ii) SCN does not receive the Requisite SCN Approval,
then the Service Fee shall be determined and payable without regard to this
SECTION 2.6 from the earlier of (a) June 15, 1999, or (b) the date SCN fails to
obtain such Requisite SCN Approval.
II.7 Deliveries at Closing. At the Closing, (i) SCN will deliver to DDD
the various certificates, instruments, and documents referred to in SECTION 7.1
below; (ii) DDD and the Physician Owners, as applicable, will deliver to SCN the
various certificates, instruments, and documents referred to in SECTION 7.2
below.
II.8 Taxes and Expenses. SCN and DDD shall be responsible for any
business, occupation, withholding or similar tax or taxes of any kind related to
SCN's or DDD's business, respectively, for any period prior to the Closing Date.
All applicable sales, use and tangible taxes, documentary stamp taxes, filing
and recording costs and other transfer taxes, costs and fees relating to the
transfer of title to the Purchased Assets, and the consummation of the
transactions described herein, shall be paid by DDD.
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II.9 Employees. As of the Closing Date and subject to Applicable Law,
SCN shall terminate all the employees of SCN utilized at the Practice Offices.
DDD shall hire such terminated employees and pay to such terminated employees
substantially the same compensation and benefits as SCN had paid such terminated
employees prior to the Closing Date. DDD shall assume responsibility under any
and all employment agreements with respect to such terminated employees.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SCN
SCN represents and warrants to DDD and the Physician Owners that the
statements contained in this ARTICLE III are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this ARTICLE III).
III.1 Organization, Qualification, and Power. SCN is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction in
which the character or location of the properties owned or the business
conducted by SCN makes such qualifications necessary. SCN has the full power and
authority to carry on the business in which it is engaged and to own and use the
properties owned, leased and used by it. SCN is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Delaware.
III.2 Authorization of Transaction. SCN has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder; subject, however, to SCN
obtaining the Requisite SCN Approval. Upon receiving the Requisite SCN Approval,
this Agreement will constitute the valid and legally binding obligation of SCN,
enforceable in accordance with its terms and conditions.
III.3 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or other restriction of any government,
governmental agency, professional regulatory organization or court to which SCN
is subject or any provision of the Delaware General Corporation Law or bylaws of
SCN or (ii) upon receipt of all consents set forth on SCHEDULE 3.3, conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice (other than such notice as may be required by a
Lender) under any agreement, contract, lease, license, instrument or other
arrangement to which SCN is a party or by which it is bound or to which any of
its assets is subject (or result in the imposition of any Security Interest upon
any of its assets). SCN is not required to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement, other than any proxy solicitation notice
required under state or federal law.
III.4 Title; Condition. SCN has, or will have at the Closing Date, and
will convey to DDD good and marketable title to all of the Purchased Assets
subject to no Security Interest. SCN agrees to remove all Security Interests on
the Purchased Assets reflected on any search of public records, if any, prior to
the Closing Date and to remove any other Security Interest on the Purchased
Assets created with respect to the Purchased Assets between the date of such
search of public records and the Closing Date.
III.5 Tax Matters. All federal and state tax returns required by law to
filed with respect to payroll taxes have been filed and SCN has paid or
adequately provided for all such taxes. SCN has withheld from each payment made
to employees of SCN the amount of all taxes (including, but not limited to,
federal, state and local income taxes and Federal Insurance Contribution Act
taxes) required to be withheld therefrom and all amounts customarily withheld
therefrom, and has set aside all other employee contributions or payments
customarily set aside with respect to such wages and has paid or will pay the
same to, or has deposited or will deposit such payment with, the proper tax
receiving officers or other appropriate authorities. There are no tax liens on
any of Purchased Assets except those with respect to taxes not yet due and
payable.
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III.6 Brokers' Fees. SCN does not have any liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which DDD or the Physician
Owners may be obligated.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DDD AND THE PHYSICIAN OWNERS
DDD and the Physician Owners, jointly and severally, represent and
warrant to SCN that the statements contained in this ARTICLE IV are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this ARTICLE IV).
IV.1 Organization. DDD is a ccc duly organized, validly existing, and
in good standing under the laws of the State of BBB. DDD is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction in
which the character or location of the properties owned or the business
conducted by DDD makes such qualification necessary. DDD has the full power and
authority to carry on the business in which it is engaged and to own and use the
properties owned, leased and used by it.
IV.2 Ownership Interest of DDD. DDD is owned solely by the Physician
Owners. Except for the [SHARES OF COMMON STOCK/MEMBERSHIP INTERESTS/PARTNERSHIP
INTERESTS] (the "DDD Ownership Interests") owned by the Physician Owners, there
are no other DDD Ownership Interests or any other interest convertible into a
DDD Ownership Interest authorized or outstanding.
IV.3 Authorization of Transaction. DDD has the full power and authority
to execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of DDD and
the Physician Owners, enforceable in accordance with its terms and conditions.
As of the date of this Agreement, DDD has received the Requisite DDD Approval.
IV.4 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge or other restriction of any government,
governmental agency, professional regulatory organization or court to which DDD
is subject or any provision of the BBB [PRACTICE STATE BUS. CORP. ACT] or bylaws
of DDD or (ii) conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, lease, license, instrument or other arrangement to which DDD is a
party or by which it is bound or to which any of its assets is subject (or
result in the imposition of any Security Interest upon any of its assets). DDD
is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement.
IV.5 Brokers' Fees. Neither DDD nor the Physician Owners have any
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement for which
SCN could become liable or obligated.
[IV.6 Title to SCN Shares. DDD or the Physician Owners have, or will
have at the Closing Date, good and marketable title to all of the SCN Shares
delivered pursuant to SECTION 2.2 subject to no mortgage, pledge, lien, lease,
conditional sales agreement, option, right of first refusal or any other
encumbrance or charge, including taxes. DDD and the Physician Owners agree to
remove all Security Interests reflected on any search of public records, if any,
prior to the Closing Date and to remove any other Security Interest created with
respect to such SCN Shares between the date of such search of public records and
the Closing Date.-DELETE IF PAYING ALL CASH]
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ARTICLE V
COVENANTS
The Parties agree as follows with respect to the period from and after
the execution of this Agreement:
V.1 General. Each of the Parties will use its or his best efforts to
take all action and to do all things necessary in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction of the closing conditions set forth in ARTICLE VI below) to be
satisfied by him or it, subject to the exercise of the SCN directors' fiduciary
duties under Delaware law. This SECTION 5.1 shall not be construed to obligate
any of the Parties to waive any condition precedent to his or its obligations to
perform hereunder.
V.2 Notices and Consents. DDD and SCN will give any notices to third
parties, and will use their best efforts to obtain any third party consents,
necessary or required to consummate the transaction contemplated hereby.
V.3 Regulatory Matters and Approvals. Each of the Parties will give any
notices to, make any filings with, and use its reasonable best efforts to obtain
any authorizations, consents, and approvals of governments and governmental
agencies required in connection with the transactions contemplated by this
Agreement.
V.4 Operation of Business. From the date of this Agreement through the
Closing Date, SCN and DDD will not (and will not commit to) engage in any
practice, take any action, or enter into any transaction outside the Ordinary
Course of Business. Without limiting the generality of the foregoing:
(a) Neither SCN nor DDD will authorize or effect any change in
its charter, or equivalent thereof, or bylaws that would delay or
prevent consummation of the transactions contemplated by this
Agreement; and
(b) SCN will not impose any Security Interest upon any of the
Purchased Assets outside the Ordinary Course of Business.
V.5 Further Acts and Assurances. SCN, and DDD and the Physician Owners
shall, at any time and from time to time at and after the Closing, upon request
of the other, (a) take any and all steps necessary to (i) place DDD in
possession and operating control of the Purchased Assets, (ii) transfer the [SCN
SHARES] OR [CASH] OR [SCN SHARES AND CASH] to be delivered pursuant to SECTION
2.2, (iii) enter into the Management Services Agreement, and (iv) enter into any
agreement or arrangement contemplated hereby; and (b) will do, execute,
acknowledge and deliver, or will cause to be done, executed, acknowledged and
delivered, all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney and assurances as may be required for the better transferring
and confirming to DDD or SCN, as applicable, or their respective successors or
assigns, or for reducing to possession, any or all of (x) the Purchased Assets,
and (y) the SCN Shares to be delivered pursuant to SECTION 2.2.
V.6 Full Access. Upon five (5) business days prior notice, SCN will
permit representatives of DDD to have full access to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to SCN during normal business hours; provided, however, such
access shall be limited to such premises, properties, personnel, books, records,
contracts or documents as are directly pertinent to the operations of DDD and
the Physician Owners as such are relevant to the transactions contemplated by
this Agreement.
V.7 Notice of Developments. Each Party will give prompt written notice
to the other Parties of any material adverse development causing a breach of any
of its own representations and warranties in ARTICLE III or ARTICLE IV above. No
disclosure by any Party pursuant to this SECTION 5.7, however, shall be deemed
to prevent or cure any misrepresentation, breach of warranty, or breach of
covenant.
V.8 Collection of Accounts Receivable. SCN agrees to cooperate with
Physician Owners in the collection of Accounts Receivable owned by SCN as of the
Closing Date and acquired by DDD pursuant to this Agreement. In
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connection therewith, SCN agrees to execute the necessary documents to
accommodate the collection of the Accounts Receivable in such manner.
V.9 Corporate Authorization. By execution of this Agreement, DDD and
the Physician Owners have taken any and all steps necessary and have done,
executed, acknowledged and delivered, or have caused to be done, executed,
acknowledged and delivered, all such acts, deeds and assurances required in
order to consummate the transactions contemplated by this Agreement, including
the Physician Owners voting as directors of DDD in favor of the transactions
contemplated by this Agreement and voting as an owner of DDD in favor of the
transactions contemplated by this Agreement at any meeting (or in any action by
written consent) required by the BBB [PRACTICE STATE BUS. CORP. LAW].
V.10 Employee Benefit Plans.
(a) Welfare Plans. As of the Closing Date, the Transferred
Employees shall cease participating in all SCN welfare benefit plans,
including, but not limited to, the Specialty Care Network
Medical/Dental Plan, the Specialty Care Network Life Insurance Plan,
the Speciality Care Network Disability Plan, and the Specialty Care
Network Flexible Spending Plan. As of the Closing Date, DDD shall, with
respect to Transferred Employees, designate one or more plans ("DDD
Health Plan") to provide health benefits substantially similar to the
Specialty Care Network Medical/Dental Plan to Transferred Employees and
their eligible dependents, and DDD shall allow all Transferred
Employees and their eligible dependents to enroll, without any waiting
period, in the DDD Health Plan. With respect to Transferred Employees,
the DDD Health Plan shall waive any restrictions and limitations for
pre-existing conditions. Any service of Transferred Employees
recognized by SCN under the Specialty Care Network welfare plan shall
be recognized by the DDD welfare plans. SCN and the Specialty Care
Network Medical/Dental Plan shall only be responsible for health
expenses of Transferred Employees and their dependents to the extent
such expenses are covered under the terms of the Specialty Care Network
Medical/Dental Plan and are incurred prior to the Closing Date. The DDD
Health Plan shall take into account expenses incurred under the
Specialty Care Network Medical/Dental Plan on or after January 1, 1999,
and up to the Closing Date, for purposes of determining deductibles and
out-of-pocket limits under the DDD Health Plan.
(b) Specialty Care Network Retirement Savings Plan. As of the
Closing Date, the Transferred Employees shall cease participating in
the Specialty Care Network Retirement Savings Plan ("Savings Plan"). As
of the Closing Date, DDD shall establish, at its sole expense, a
defined contribution retirement plan that is qualified under sections
401(a) and 501(a) of the Code ("Successor Plan"). Within 90 days after
the Closing Date, SCN shall cause the assets and liabilities of the
Savings Plan attributable to the accounts of the Transferred Employees
and individuals formerly employed at the Practice Offices (the
"Affected Participants") to be transferred to the Successor Plan.
Effective upon the completion of the transfer of assets in accordance
with this Section, DDD shall cause Successor Plan to assume the
liabilities of the Savings Plan applicable to such Affected
Participants. With respect to Transferred Employees, the Successor Plan
shall waive all requirements for eligibility to participate. Service of
a Transferred Employee which is recognized by the Savings Plan shall be
recognized as service under the Successor Plan.
(c) Amendments and Termination. The SCN employees benefit
plans described in this SECTION 5.10 are hereby amended, effective as
of the Closing Date, by making any changes necessary or appropriate to
effectuate the provisions of this SECTION 5.10. SCN reserves the right
to terminate any of the employee benefit plans described in this
SECTION 5.10 at any time before or after the Closing Date.
ARTICLE VI
CONDITIONS TO OBLIGATIONS TO CLOSE
VI.1 Conditions to Obligation of DDD and the Physician Owners. The
obligation of DDD and the Physician Owners to consummate the transactions
contemplated by this Agreement is subject to satisfaction of the following
conditions:
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(a) the representations and warranties set forth in ARTICLE
III above shall be true and correct in all material respects at and as
of the Closing Date;
(b) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) affect adversely the rights of DDD or the
Physician Owners to own the Purchased Assets;
(c) all actions to be taken by SCN in connection with the
consummation of the transactions contemplated hereby and all
certificates, instruments, agreements and other documents required to
effect the transactions contemplated hereby, have been taken or
delivered to DDD and the Physician Owners and are satisfactory in form
and substance;
(d) SCN shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing; and
[(e) the surrender of the SCN Shares by DDD and/or the
Physician Owners will not violate federal securities laws or the
securities laws of any state of the United States.-DELETE IF PAYING ALL
CASH]
DDD and the Physician Owners may waive any condition specified in this SECTION
6.1 by executing a writing so stating at or prior to the Closing.
VI.2 Conditions to Obligation of SCN. The obligation of SCN to
consummate the transactions contemplated by this Agreement is subject to
satisfaction of the following conditions:
(a) SCN shall have procured all of the third party consents
necessary to transfer the Assumed Liabilities or shall have made for
adequate provision thereof;
(b) the Requisite SCN Approval shall have been obtained;
(c) the representations and warranties set forth in ARTICLE IV
above shall be true and correct in all material respects at and as of
the Closing Date;
(d) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) affect adversely the right of SCN to own the
Purchased Assets.
(e) all actions to be taken by DDD and/or the Physician Owners
in connection with the consummation of the transactions contemplated
hereby and all certificates, instruments, agreements and other
documents required to effect the transactions contemplated hereby, have
been taken or delivered to SCN and are satisfactory in form and
substance; and
(f) DDD and the Physician Owners shall have performed and
complied with all of their covenants hereunder in all material respects
through the Closing.
SCN may waive any condition specified in this SECTION 6.2 by executing a writing
so stating at or prior to the Closing.
11
<PAGE> 15
ARTICLE VII
PRE-CLOSING AND CLOSING DELIVERIES
VII.1 By SCN. SCN shall execute and deliver to DDD and the Physician
Owners prior to or at the Closing:
(a) Certified resolutions of SCN authorizing the execution of
all documents and the consummation of all transactions contemplated
hereby;
(b) A Bill of Sale in substantially the form attached hereto
as EXHIBIT 7.1(b);
(c) An Assignment and Assumption Agreement in substantially
the form attached hereto as EXHIBIT 7.1(c);
(d) A Management Services Agreement in substantially the form
attached hereto as EXHIBIT 7.1(d);
(e) A certificate duly executed by the President, or other
duly authorized executive officer, of SCN that as of the Closing Date,
all representations and warranties of SCN are true and correct in all
material respects, all covenants and agreements contained in the
Agreement to be performed by SCN have been performed or complied with,
and all conditions to Closing have been satisfied;
(f) The Most Recent Balance Sheet pursuant to SECTION 2.3(a);
and
(g) Such other instruments as may be reasonably requested by
DDD in order to effect to or carry out the intent of this Agreement.
VII.2 By DDD and the Physician Owners. DDD and the Physician Owners
shall deliver to SCN at or prior to the Closing:
(a) The Asset Purchase Price and [STOCK CERTIFICATES
REPRESENTING THE SCN SHARES BEING SURRENDERED BY DDD OR EACH OF THE
PHYSICIAN OWNERS REQUIRED PURSUANT TO SECTION 2.2] OR [CASH REQUIRED
PURSUANT TO SECTION 2.2] OR [CASH AND STOCK CERTIFICATES REPRESENTING
THE SCN SHARES BEING SURRENDERED BY DDD OR EACH OF THE PHYSICIAN OWNERS
REQUIRED PURSUANT TO SECTION 2.2];
(b) An Assignment and Assumption Agreement in substantially
the form of EXHIBIT 7.1(c);
(c) A Release in substantially the form attached hereto as
EXHIBIT 7.2(c);
(d) Certified resolutions of DDD authorizing the execution of
all documents and the consummation of all transactions contemplated
hereby;
(e) A Management Services Agreement in substantially the form
attached hereto as EXHIBIT 7.1(d);
(f) A certificate, duly executed by the President of DDD,
stating as of the Closing Date, all representations and warranties of
DDD are true and correct in all material aspects, all covenants and
agreements contained in the Agreement to be performed by DDD have been
performed or complied with and all conditions to Closing have been
satisfied; and
(g) Such other instruments as may be reasonably requested by
SCN in order to effect to or carry out the intent of this Agreement.
12
<PAGE> 16
ARTICLE VIII
TERMINATION
VIII.1 Termination of Agreement. Either of the Parties may terminate
this Agreement with the prior authorization of its board of directors (whether
before or after SCN board of directors or stockholder approval) as provided
below:
(a) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Closing Date;
(b) DDD and the Physician Owners may terminate this Agreement
by giving written notice to SCN at any time prior to the Closing Date
(A) in the event SCN has breached any representation, warranty, or
covenant contained in this Agreement in any material respect, DDD and
the Physician Owners have notified SCN of the breach, and the breach
has continued without cure for a period of ninety (90) days after the
notice of breach or (B) if the Closing shall not have occurred on or
before the dates specified in SECTION 2.5, by reason of the failure of
any condition precedent under SECTION 6.1 hereof (unless the failure
results primarily from DDD's or the Physician Owners' breaching any
representation, warranty, or covenant contained in this Agreement); or
(c) SCN may terminate this Agreement by giving written notice
to DDD or the Physician Owners at any time prior to the Closing Date
(A) in the event DDD or the Physician Owners has breached any
representation, warranty, or covenant contained in this Agreement in
any material respect, SCN has notified DDD or the Physician Owners of
the breach, and the breach has continued without cure for a period of
ninety (90) days after the notice of breach or (B) if the Closing shall
not have occurred on or before the dates specified in SECTION 2.5, by
reason of the failure of any condition precedent under SECTION 6.2
hereof (unless the failure results primarily from SCN's breaching any
representation, warranty, or covenant contained in this Agreement).
VIII.2 Effect of Termination. If any Party terminates this Agreement
pursuant to SECTION 8.1 above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach). Notwithstanding the
foregoing, in the event the transaction contemplated by this Agreement is not
consummated due to the fault, or failure to perform hereunder by DDD or the
Physician Owners then DDD and the Physician Owners agree to reimburse SCN for
SCN's out-of-pocket expenses, including but not limited to professional fees.
ARTICLE IX
INDEMNIFICATION
IX.1 Indemnification by DDD and the Physician Owners. DDD and the
Physician Owners agree to and shall, jointly and severally, defend, indemnify
and hold harmless SCN, its successors and assigns, officers and directors from
or against any and all losses, liabilities, claims, damages, actions, suits,
costs, deficiencies, penalties, and expenses (including without limitation
reasonable attorney's fees) (collectively referred to herein as "Loss") (i)
resulting from or arising out of the breach, untruth or inaccuracy of any
representation, warranty or covenant of DDD or the Physician Owners set forth in
this Agreement, or (ii) resulting from or arising out of any of the Assumed
Liabilities. In addition to any indemnification rights granted to SCN under this
Agreement, SCN shall continue to be entitled to any indemnification under any
prior agreements between or among SCN, DDD, or the Physician Owners, including
without limitation any SCN rights to indemnification under the Service Agreement
or the EEE Agreement made by a third party (a "third party" being defined as any
Person other than SCN and its corporate affiliates).
IX.2 Notice to DDD and the Physician Owners; Opportunity to Defend. SCN
agrees to give prompt notice to DDD and the Physician Owners of the assertion of
any claim, or the commencement of any suit, action or proceeding, in respect of
which indemnity may be sought under SECTION 9.1. DDD and the Physician Owners
may participate in and at their election, or at the request of SCN, assume the
defense of any such suit, action or proceeding at DDD or the Physician Owners'
expense. Neither DDD nor the Physician Owners shall be liable under SECTION 9.1
for any settlement effected without their consent of any claim, litigation or
proceeding in respect of which indemnity may be sought under SECTION 9.1, which
consent shall not be unreasonably withheld.
13
<PAGE> 17
IX.3 General Indemnification by SCN. SCN agrees to and shall defend,
indemnify and hold harmless DDD, its successors and assigns, officers and
managers, from or against any Loss resulting from or arising out of the breach,
untruth or inaccuracy of any representation, warranty or covenant of SCN set
forth in this Agreement.
IX.4 Notice to SCN; Opportunity to Defend. The Physician Owners agree
to give prompt notice to SCN of the assertion of any claim, or the commencement
of any suit, action or proceeding in respect of which indemnity may be sought
under SECTION 9.3. SCN may participate in and at its election, or at the request
of the Physician Owners, assume the defense of any such suit, action or
proceeding at SCN's expense. SCN shall not be liable under SECTION 9.3 for any
settlement effected without its consent of any claim, litigation or proceeding
in respect of which indemnity may be sought hereunder, which consent shall not
be unreasonably withheld.
ARTICLE X
MISCELLANEOUS
X.1 Survival. The representations, warranties, and covenants of the
Physician Owners, DDD and SCN contained in this Agreement and the
indemnifications contained herein shall survive the Closing. Except as provided
in this SECTION 10.1 below, no claim for indemnification with respect to any
alleged misrepresentation or breach of warranty may be made after three (3)
years following the Closing Date. SCN shall be entitled to indemnification for
(i) claims for breaches of representations, warranties or covenants relating to
matters involving the payment of taxes (including interest and/or penalties
thereon), (ii) claims arising from reimbursement of any amounts to Third Party
Payors (including interest and penalties thereon), and (iii) claims relating to
a matter involving compliance with Applicable Laws as described in ARTICLE IV
and ARTICLE V above and such right of indemnification shall survive for the
applicable statute of limitations for the underlying claim asserted. In
addition, any matter to which indemnification pertains and with respect to which
a claim has been asserted or threatened following the Closing Date and prior to
termination of the applicable survival period shall, notwithstanding the
expiration of the applicable survival period, continue to be subject to the
indemnification under this Agreement.
X.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
X.3 Entire Agreement. Except as otherwise set forth herein, this
Agreement (including the documents referred to herein) constitutes the entire
agreement between the Parties and supersedes any prior understandings,
agreements, or representations by or between the Parties, written or oral, to
the extent they related in any way to the subject matter hereof.
X.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties.
X.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
X.6 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
X.7 Notices. All notices required or permitted by this Agreement shall
be in writing and shall be deemed to have been given (i) when received if given
in person, (ii) on the date of acknowledgment of receipt if sent by telex,
facsimile or other wire transmission, (iii) one business day after being sent by
overnight delivery service, or (iv) three days after being deposited in the
United States mail, certified or registered mail, postage prepaid, addressed as
follows:
14
<PAGE> 18
If to DDD: Copy to:
AAA KKK
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
- ----------------------------- -----------------------------
Attention: Attention:
------------------- -------------------
Facsimile: ( ) Facsimile: ( )
----- ----------- ----- -----------
If to SCN: Copy to:
Specialty Care Network, Inc. Baker, Donelson, Bearman & Caldwell, P.C.
44 Union Boulevard, Suite 600 700 North State Street, Suite 500
Lakewood, Colorado 80228 Jackson, Mississippi 39225
Attention: Kerry R. Hicks, President Attention: William S. Painter, Esq.
Facsimile: (303) 716-1298 Facsimile: (601) 351-2424
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
X.8 Governing Law; Venue. This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of Colorado without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Colorado or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Colorado. Each of the
parties submits to the jurisdiction of any state or federal court sitting in
Denver, Colorado, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court. Each party also agrees not to bring
any action or proceeding arising out of or relating to this Agreement in any
other court. Each of the parties waives any defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond, surety,
or other security that might be required of any other party with respect
thereto.
X.9 Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Closing Date with the prior
authorization of their respective boards of directors; provided, however, that
any amendment effected subsequent to SCN stockholder approval will be subject to
the restrictions contained in the Delaware General Corporation Law. No amendment
of any provision of this Agreement shall be valid unless the same shall be in
writing and signed by each of the Parties. No waiver by any party of any
default, misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
X.10 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
X.11 Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
15
<PAGE> 19
X.12 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation.
X.13 No Referrals Required. The Parties agree that no part of this
Agreement shall be construed to induce or encourage the referral of patients or
the purchase of health care services or supplies. The Parties acknowledge that
there is no requirement under this Agreement or any other agreement between DDD
and SCN that any party refer any patients to any health care provider or
purchase any health care goods or services from any source. Additionally, no
payment under this Agreement is in return for the referral of patients, if any,
or in return for purchasing, leasing or ordering services from SCN or any of
SCN's affiliates. The Parties may refer patients to any company or person
providing services and will make such referrals, if any, consistent with
professional medical judgment and the needs and wishes of the relevant patients.
X.14 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
X.15 Transactions with Affiliated Practices. In the event that SCN
shall within a period commencing on the Closing Date and ending December 31,
1999, close a transaction with an Affiliated Practice which is substantially
similar to the restructuring transaction contemplated by this Agreement (a
"Restructuring Transaction"), and, taken as a whole, the financial terms of such
other Restructuring Transaction are materially more favorable to any Affiliated
Practice (and its Physician Owners) than the financial terms, taken as a whole,
of the restructuring transaction contemplated by this Agreement, then in such
event SCN shall modify the financial terms of this Agreement in such manner as
SCN shall reasonably determine so that the financial terms of the restructuring
transaction contemplated by this Agreement for DDD and the Physician Owners
shall be no less favorable, when taken as a whole, than the Restructuring
Transaction undertaken with respect to any other Affiliated Practice. For these
purposes, the term "Affiliated Practice" shall refer to any physician medical
practice (other than DDD) which, as of December 1, 1998, had in effect with SCN
an agreement substantially similar to the Service Agreement.
16
<PAGE> 20
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
SPECIALTY CARE NETWORK, INC.
By:
------------------------------------
Title:
----------------------------------
AAA
By:
------------------------------------
Title:
----------------------------------
PHYSICIAN OWNERS:
----------------------------------------
[name]
----------------------------------------
[name]
----------------------------------------
[name]
----------------------------------------
[name]
----------------------------------------
[name]
----------------------------------------
[name]
17
<PAGE> 21
SCHEDULE 1.1
EXCLUDED ASSETS
See attached.
<PAGE> 22
SCHEDULE 1.2
PHYSICIAN OWNERS
<PAGE> 23
SCHEDULE 1.3
TERM DEBT
See attached.
<PAGE> 24
SCHEDULE 2.4
ASSUMED LIABILITIES
See attached.
<PAGE> 25
SCHEDULE 3.3
CONSENTS
See attached.
<PAGE> 26
EXHIBIT 2.1
PURCHASE PRICE ALLOCATION AGREEMENT
THIS AGREEMENT is made and entered into as of ____________________,
1999, by and between SPECIALTY CARE NETWORK, INC., a Delaware corporation (the
"Purchaser") and AAA, a BBB ccc (the "Seller").
W I T N E S S E T H:
WHEREAS, Seller and Purchaser have entered into a Restructure Agreement
dated as of XXX, pursuant to which Seller has agreed to sell and Purchaser has
agreed to buy certain of the assets (the "Purchased Assets") of Seller (the
"Restructure Agreement");
WHEREAS, the Restructure Agreement provides that the parties shall
allocate the price to be paid for the Purchased Assets (the "Purchase Price") in
a manner which shall conform with and include the information required by
Section 1060 of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the parties hereto desire to set forth herein with
particularity the allocation of the Purchase Price.
NOW, THEREFORE, in consideration of the foregoing recitals, the
covenants, conditions, representations, warranties, stipulations and agreements
contained herein, and other good and valuable consideration, the full receipt
and sufficiency of which are hereby acknowledged, the parties hereto do hereby
agree as follows:
1 Allocation of Asset Purchase Price. The Asset Purchase Price set
forth in the Restructure Agreement is hereby allocated among the Purchased
Assets as follows:
<TABLE>
<CAPTION>
Description Fair Market Value Allocation
----------- ----------------- ----------
<S> <C> <C>
Class I
Class II
Class III
Class IV
Class V
</TABLE>
2 Asset Acquisition Statement. The parties agree that they will
allocate the Purchase Price as set forth herein on the Asset Acquisition
Statement reported to the Internal Revenue Service on Internal Revenue Form
8594.
3 Purchaser and Seller Acknowledgment. The Purchaser and Seller
acknowledge that they have inspected the Purchased Assets and that the amounts
set forth herein as the fair market values of such Purchased Assets are true and
accurate as of the date hereof.
<PAGE> 27
4 Entire Agreement; Modifications. This Agreement contains the entire
agreement between the parties hereto with respect to the subject matter and
supersedes all negotiations, prior discussions, agreements and understandings
relating to the subject matter of this Agreement. Any modifications to this
Agreement must be approved in writing by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Purchase
Price Allocation Agreement as of the day and date first written above.
AAA
By:
------------------------------------
Title:
---------------------------------
SPECIALTY CARE NETWORK, INC.
By:
------------------------------------
Title:
---------------------------------
<PAGE> 28
EXHIBIT 7.1(b)
BILL OF SALE
THIS BILL OF SALE is made and delivered by and from SPECIALTY CARE
NETWORK, INC., a Delaware Corporation ("Seller"), to AAA, a BBB ccc
("Purchaser"), pursuant to and in accordance with the terms and provisions of
that certain Restructure Agreement dated as of XXX (the "Restructure
Agreement"), by and between Seller and Purchaser. Capitalized terms, unless
otherwise defined herein, shall have the meanings ascribed to them in the
Restructure Agreement.
In connection therewith, for good and valuable consideration, the
adequacy and sufficiency of which are hereby acknowledged, Seller does hereby
grant, bargain, sell, transfer, convey and deliver unto Purchaser, its
successors and assigns, all legal and beneficial right, title and interest in
and to the Purchased Assets; to have and to hold the same unto Purchaser and its
successors and assigns from and after the date hereof, subject to the
representations and warranties of Seller and other terms and conditions
contained in the Restructure Agreement. The foregoing expressly does not include
any of the Excluded Assets set forth in the Restructure Agreement.
Subject to the terms and conditions of the Restructure Agreement, each
of the parties hereto will use its best efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, all things necessary to consummate
and make effective the purchase of the Purchased Assets and the other
transactions contemplated by the Restructure Agreement. From time to time after
the date hereof, Seller will, at Seller's expense, execute and deliver such
instruments and documents to Purchaser, as Purchaser may reasonably request, in
order to more effectively vest in Purchaser good title to the Purchased Assets
and to more effectively consummate the transactions contemplated by the
Restructure Agreement.
All of the representations and warranties of Seller set forth in the
Restructure Agreement regarding the Purchased Assets are incorporated herein by
reference in their entirety, to the same extent and with the same limitations as
set forth in the Restructure Agreement. Seller represents and warrants that the
title conveyed is good and marketable, its transfer rightfully made; that the
Purchased Assets are delivered free and clear of all Security Interests; and
that Seller will warrant and defend same against the lawful claims and demands
of all persons whomsoever.
This instrument shall be binding upon Seller, its successors and
assigns, and shall inure to the benefit of Purchaser, its successors and
assigns. This instrument shall be effective as to the transfer of all of the
Purchased Assets as of the Closing Date.
Nothing herein contained shall be deemed or construed as an assumption
by Purchaser of, or to impose upon Purchaser, any liabilities or obligations of
Seller, except as otherwise provided in that certain Assignment and Assumption
Agreement of even date herewith.
This Bill of Sale shall be governed by and construed in accordance with
the laws of the State of BBB.
<PAGE> 29
IN WITNESS WHEREOF, Seller has caused its duly authorized
representative to execute and deliver this Bill of Sale as of the ____ day of
____________________, 1999.
SPECIALTY CARE NETWORK, INC.
By:
------------------------------------
Title:
---------------------------------
<PAGE> 30
EXHIBIT 7.1(c)
ASSIGNMENT AND ASSUMPTION AGREEMENT
FOR THE SUM OF $10.00 CASH IN HAND, and other good and valuable
consideration, including the assumption by AAA, a BBB ccc ("DDD"), of
liabilities as hereinbelow set forth, SPECIALTY CARE NETWORK, INC., a Delaware
corporation ("SCN") hereby assigns, transfers, conveys, and delivers to DDD, all
of its legal and beneficial right, title and interest in and to the Purchased
Assets not otherwise transferred by that certain Bill of Sale of even date
herewith. All capitalized terms not otherwise defined herein having the meanings
ascribed to those terms in that certain Restructure Agreement ("Restructure
Agreement") by and among SCN, DDD, and the Physician Owners of DDD, dated as of
XXX, and said terms are incorporated herein by this reference.
In partial consideration of the foregoing, DDD and the Physician
Owners, jointly and severally, hereby assume and agree to perform, pay and
discharge all Assumed Liabilities.
This Assignment and Assumption Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective successors and
assigns, but no assignment shall relieve any party of its obligations hereunder.
This Assignment and Assumption Agreement shall be governed by and
construed in accordance with the laws of the State of BBB.
IN WITNESS WHEREOF, DDD, the Physician Owners and SCN, by their
duly-authorized officers, have signed and delivered this Assignment and
Assumption Agreement as of _______________, 1999.
SPECIALTY CARE NETWORK, INC.
By:
------------------------------------
Its:
-----------------------------------
AAA
By:
------------------------------------
Its:
-----------------------------------
PHYSICIAN OWNERS:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
<PAGE> 31
EXHIBIT 7.1(d)
MANAGEMENT SERVICES AGREEMENT
See attached.
<PAGE> 32
EXHIBIT 7.2(c)
RELEASE
THIS RELEASE is being executed and delivered in accordance with SECTION
7.2(c) of the Restructure Agreement dated XXX (the "Agreement") by and among
SPECIALTY CARE NETWORK, INC., a Delaware corporation ("SCN"), AAA, a BBB ccc
("DDD") and the Physician Owners. Capitalized terms used in this Release without
definition have the respective meanings given to them in the Agreement.
DDD and the Physician Owners acknowledge that execution and delivery of
this Release is a condition to SCN's obligation to consummate the transaction
contemplated by the Agreement and to amend and restate the Service Agreement as
the Management Services Agreement, and that SCN is relying on this Release in
connection with the foregoing.
DDD and the Physician Owners, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged and intending to be
legally bound, in order to induce SCN to consummate all transactions
contemplated by the Agreement, hereby agree as follows:
DDD and the Physician Owners on behalf of DDD and themselves
individually and each of their Related Persons, hereby releases and forever
discharges SCN and each of its respective individual, joint or mutual, past,
present and future representatives, affiliates, stockholders, controlling
persons, subsidiaries, employees, agents, successors and directors assigns
(individually, a "Releasee" and collectively, "Releasees") from any and all
claims, demands, Proceedings, causes of action, Orders, obligations, contracts,
agreements, debts and liabilities whatsoever, whether known or unknown,
suspected or unsuspected, both at law and in equity, which each of DDD and the
Physician Owners or any of their respective Related Persons now has, have ever
had or may hereafter have against the respective Releasees arising
contemporaneously with or prior to the Closing Date or on account of or arising
out of any matter, cause or event occurring contemporaneously with or prior to
the Closing Date, including, but not limited to, any rights to indemnification
or reimbursement from SCN, whether pursuant to the EEE Agreement, Service
Agreement, and any other agreement entered into prior to the date of the
Agreement, and whether or not relating to claims pending on, or asserted after,
the Closing Date; provided, however, that nothing contained herein shall operate
to release any obligations of SCN accruing after the Closing Date under the
Agreement or the Management Services Agreement, which are to remain in effect
after Closing.
DDD and the Physician Owners hereby irrevocably covenants to refrain
from, directly or indirectly, asserting any claim or demand, or commencing,
instituting or causing to be commenced, any proceeding of any kind against any
Releasee, based upon any matter purported to be released hereby.
Without in any way limiting any of the rights and remedies otherwise
available to any Releasee, each DDD and the Physician Owners, jointly and
severally, shall indemnify and hold harmless each Releasee from and against all
loss, liability, claim, damage (including incidental and consequential damages)
or expense (including costs of investigation and defense and reasonable
attorney's fees) whether or not involving third party claims, arising directly
or indirectly from or in connection with (i) the assertion by or on behalf of
DDD or the Physician Owners or any of their Related Persons of any claim or
other matter purported to be released pursuant to this Release, and (ii) the
assertion by any third party of any claim or demand against any Releasee which
claim or demand arises directly or indirectly from, or in connection with, any
assertion by or on behalf of DDD or the Physician Owners or any of their Related
Persons against such third party of any claims or other matters purported to be
released pursuant to this Release.
If any provision of this Release is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this Release will
remain in full force and effect. Any provision of this Release held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
<PAGE> 33
This Release may not be changed except in a writing signed by the
person(s) against whose interest such change shall operate. This Release shall
be governed by and construed under the laws of the State of BBB without regard
to principles of conflicts of law.
All words used in this Release will be construed to be of such gender
or number as the circumstances require.
IN WITNESS WHEREOF, each of the undersigned have executed and delivered
this Release as of this ___ day of ________, 1999.
DDD:
AAA
By:
------------------------------------
Its:
-----------------------------------
PHYSICIAN OWNERS:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
<PAGE> 1
MANAGEMENT SERVICES AGREEMENT
BY AND AMONG
SPECIALTY CARE NETWORK, INC.,
AAA,
_______________________,
_______________________,
_______________________,
_______________________,
AND
_______________________
DATED AS OF ZZZ
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I.
DEFINITIONS...................................................................................................- 1 -
ARTICLE II.
RELATIONSHIP OF THE PARTIES...................................................................................- 4 -
2.1. Independent Relationship.......................................................................- 4 -
2.2. Responsibilities of the Parties................................................................- 4 -
2.3. DDD Matters....................................................................................- 4 -
2.4. Patient Referrals..............................................................................- 4 -
2.5. Professional Judgment..........................................................................- 5 -
ARTICLE III.
MANAGEMENT AND FINANCIAL ADVISORY SERVICES TO BE PROVIDED BY SCN..............................................- 5 -
3.1. Performance of Limited Management Functions....................................................- 5 -
3.2. Practice Assessment............................................................................- 5 -
3.3. Third-Party Payor Matters......................................................................- 5 -
3.4. Malpractice Insurance..........................................................................- 5 -
3.5. Financial Reporting............................................................................- 5 -
3.6. Data/Information...............................................................................- 5 -
3.7. Billing and Coding Analysis....................................................................- 6 -
3.8. Financial Review and Audits....................................................................- 6 -
3.9. Events Excusing Performance....................................................................- 6 -
3.10. Compliance with Law............................................................................- 6 -
ARTICLE IV.
OBLIGATIONS OF DDD AND PHYSICIAN OWNERS.......................................................................- 6 -
4.1. Professional Services..........................................................................- 6 -
4.2. Employment of Physician Employees and Other Employees..........................................- 6 -
4.3. Professional Insurance Eligibility.............................................................- 6 -
4.4. Fees for Professional Services.................................................................- 6 -
4.5. Events Excusing Performance....................................................................- 7 -
ARTICLE V.
EXCLUSIVE ARRANGEMENTS........................................................................................- 7 -
5.1. Exclusive Arrangement..........................................................................- 7 -
5.2. Enforcement....................................................................................- 7 -
5.3. Modification of Covenants and Agreements.......................................................- 7 -
5.4. Rights of SCN..................................................................................- 7 -
5.5. Excluded Activities............................................................................- 7 -
ARTICLE VI.
FINANCIAL ARRANGEMENTS........................................................................................- 8 -
ARTICLE VII.
INTELLECTUAL PROPERTY AND RECORDS.............................................................................- 8 -
7.1. Ownership of SCN's Business Records and Systems................................................- 8 -
7.2. Maintenance of Records.........................................................................- 8 -
7.3. Access to Records..............................................................................- 8 -
7.4. Patient Records................................................................................- 8 -
</TABLE>
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<TABLE>
<S> <C>
ARTICLE VIII.
INDEMNITY.....................................................................................................- 8 -
8.1. Indemnification by DDD and the Physician Owners................................................- 8 -
8.2. Indemnification by SCN.........................................................................- 9 -
8.3. Escrow Pending Indemnification Determination...................................................- 9 -
ARTICLE IX.
TERM, TERMINATION AND RETIREMENT..............................................................................- 9 -
9.1. Term of Agreement..............................................................................- 9 -
9.2. Extended Term..................................................................................- 9 -
9.3. SCN Events of Default..........................................................................- 9 -
9.4. DDD Events of Default..........................................................................- 9 -
9.5. DDD's Remedies................................................................................- 10 -
9.6. SCN's Remedies................................................................................- 10 -
ARTICLE X.
REPRESENTATIONS AND WARRANTIES OF DDD AND PHYSICIAN OWNERS...................................................- 10 -
10.1. Validity.....................................................................................- 10 -
10.2. Authority....................................................................................- 10 -
ARTICLE XI.
REPRESENTATIONS AND WARRANTIES OF SCN........................................................................- 11 -
11.1. Organization.................................................................................- 11 -
11.2. Authority....................................................................................- 11 -
11.3. Absence of Litigation........................................................................- 11 -
ARTICLE XII.
COVENANTS OF DDD AND PHYSICIAN OWNERS........................................................................- 11 -
12.1. Merger, Consolidation and Other Arrangements.................................................- 11 -
12.2. Necessary Authorizations/Assignment of Licenses and Permit...................................- 11 -
12.3. Compliance with All Laws.....................................................................- 11 -
12.4. Third-Party Payor Programs...................................................................- 11 -
12.5. Change in Business or Credit and Collection Policy...........................................- 11 -
ARTICLE XIII.
GENERAL PROVISIONS...........................................................................................- 12 -
13.1. Assignment...................................................................................- 12 -
13.2. Whole Agreement; Modification................................................................- 12 -
13.3. Notices......................................................................................- 12 -
13.4. Binding on Successors........................................................................- 13 -
13.5. Waiver of Provisions.........................................................................- 13 -
13.6. Governing Law; Venue.........................................................................- 13 -
13.7. No Practice of Medicine......................................................................- 13 -
13.8. Severability.................................................................................- 13 -
13.9. Additional Documents.........................................................................- 13 -
13.10. Attorneys' Fees.............................................................................- 13 -
13.11. Time is of the Essence......................................................................- 13 -
13.12. Confidentiality.............................................................................- 13 -
13.13. Contract Modifications for Prospective Legal Events.........................................- 14 -
13.14. Remedies Cumulative.........................................................................- 14 -
13.15. Language Construction.......................................................................- 14 -
13.16. No Obligation to Third Parties..............................................................- 14 -
13.17. Communications..............................................................................- 14 -
SCHEDULE 5.5
EXCLUDED ASSETS..............................................................................................5.5- 1
EXHIBIT 6
FINANCIAL MATTERS...............................................................................................6-1
</TABLE>
ii
<PAGE> 4
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT ("Agreement") dated as of ZZZ, by
and among SPECIALTY CARE NETWORK, INC., a Delaware corporation ("SCN"), AAA, a
BBB ccc ("DDD"), and ________________________________________, _______, ______,
________________________________________ and _________________________________
("Physician Owners"), residents of BBB. SCN, DDD, and the Physician Owners are
sometimes referred to individually herein as a "Party" and collectively herein
as the "Parties."
W I T N E S S E T H:
WHEREAS, SCN is in the business of assisting in the management of
orthopaedic and musculoskeletal medical practices and providing certain support
services to such practices;
WHEREAS, DDD and Physician Owners desire to obtain the services of SCN
in performing such management and support services functions so as to assist DDD
and its Physician Owners and Physician Employees;
WHEREAS, the Parties have entered into that certain Service Agreement
dated GGG (the "Service Agreement"); and
WHEREAS, the Parties intend and agree to amend and restate the Service
Agreement in accordance with the terms of this Agreement, and intend and agree
for this Agreement to govern their relationship from ZZZ, forward.
NOW, THEREFORE, for and in consideration of the premises above, the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Parties hereto, intending to be legally bound, agree as follows:
ARTICLE I.
DEFINITIONS
For the purpose of this Agreement, the following definitions shall
apply:
"Affiliate" means, with respect to any Person, any entity which
directly or indirectly controls, is controlled by, or is under common control
with, such Person or any Subsidiary of such Person or any Person who is a
director, officer or partner of such Person or any Subsidiary of such Person.
For purposes of this definition, "control" means the possession, directly or
indirectly, of the power to (a) vote ten percent (10%) or more of the securities
having ordinary voting power for the election of directors (or Persons serving
in a similar capacity for entities other than corporations) of such Person, or
(b) direct or cause the direction of management and policies of a business,
whether through the ownership of voting securities, by contract or otherwise and
either alone or in conjunction with others or any group.
"Agent" has the meaning set forth in SECTION 13.1.
"Ancillary Services" means ambulatory surgery centers, imaging centers,
physical therapy, rehabilitation or occupational therapy centers, orthotics
centers, or any other equipment or facility utilized in providing medical
services in connection with any of the foregoing or that are ancillary to an
orthopaedic and musculoskeletal medical practice.
<PAGE> 5
"Applicable Law" means all applicable provisions of constitutions,
statutes, rules, regulations, ordinances and orders of all Governmental
Authorities and all orders and decrees of all courts, tribunals and arbitrators,
and shall include, without limitation, Health Care Law and any Governmental
Rules and Regulations.
"Banks" has the meaning set forth in SECTION 13.1.
"CHAMPUS" means the Civilian Health and Medical Program of the
Uniformed Services.
"Code" means the Internal Revenue Code of 1986, as amended.
"DHS" means a "designated health service," as defined under 42 U.S.C.
Section 1395nn (and federal regulations promulgated thereunder).
"Disabled" means that a Physician Owner suffers from a mental or
physical condition resulting in such Physician Owner's inability to perform the
essential functions of his or her job without significant risk to the health or
safety of others, even with such reasonable accommodation as may be available
under the circumstances, and SCN or DDD may reasonably anticipate that such
Physician Owner will remain disabled for at least two (2) years following the
commencement of such disability.
"GAAP" means generally accepted accounting principles as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved or adopted by a significant segment of the accounting profession. For
purposes of this Agreement, GAAP shall be applied in a manner consistent with
the historic practices used by SCN or DDD as applicable.
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, board, body, agency, bureau or entity or any arbitrator with
authority to bind a Party at law.
"Governmental Rules and Regulations" means 42 U.S.C. Section 1320a-7b,
or the rules, regulations, policies, contracts or laws pertaining to any
Third-Party Payor Program, or which are prohibited by rules of professional
conduct, including but not limited to the following: (a) knowingly and willfully
making or causing to be made a false statement or representation of a material
fact in any application for any benefit or payment; (b) knowingly and willfully
making or causing to be made any false statement or representation of a material
fact for use in determining rights to any benefit or payment; (c) failing to
disclose knowledge by a claimant of the occurrence of any event affecting the
initial or continued right to any benefit or payment on DDD's own behalf or on
behalf of another, with intent to fraudulently secure such benefit or payment;
or (d) knowingly and willfully soliciting or receiving any remuneration
(including any kickback, bribe, or rebate), directly or indirectly, overtly or
covertly, in cash or in kind or offering to pay or receive such remuneration (i)
in return for referring an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may be
made in whole or in part by Medicare or Medicaid, or (ii) in return for
purchasing, leasing, or ordering or arranging for or recommending purchasing,
leasing, or ordering any good, facility, service or item for which payment may
be made in whole or in part by Medicare or Medicaid.
"Health Care Law" means any and all applicable federal or state law
regulating the acquisition, construction, operation, maintenance, certification
or management of a health care practice, facility, provider or payor, including,
without limitation, the following: 18 U.S.C. Section 287 (relating to false,
fictitious or fraudulent claims); 18 U.S.C. Section 669 (relating to theft or
embezzlement in connection with health care); 18 U.S.C. Section 1001 et seq.
(relating to fraud and false statements); 18 U.S.C. Section 1035 (relating to
false statements relating to health care matters); 18 U.S.C. Section 1347
(relating to health care fraud); 42 U.S.C. Section 1320a-7b(a)(1)-(5) (relating
to making and causing to be made false statements or representations); 42 U.S.C.
Section 1320a-7b(d) (relating to illegal patient admittance and retention
practices); 42 U.S.C. Section 1320a-7b(e) (relating to violation of assignment
terms); 42 U.S.C. Section 1320a-7b(b) (relating to illegal remuneration); 31
U.S.C. Section 3729 (relating to false claims);
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<PAGE> 6
31 U.S.C. Section 3730(h) (relating to relief for retaliation against false
claims relator); 42 U.S.C. Section 1395nn (relating to limitation of certain
physician referrals); 42 U.S.C. Section 1320a-3 (relating to disclosure of
ownership and related information); and 42 U.S.C. Section 1320a-3(a) (relating
to disclosure requirements for other providers under Part B Medicare) and any
similar or analogous BBB laws.
"Lender" means any lender to SCN that has a security interest in any of
the following assets of SCN: accounts receivable including any and all rights to
payment of money or other forms of consideration of any kind (whether classified
under the Uniform Commercial Code as accounts, chattel paper, general
intangibles, or otherwise) for goods sold or leased or for services rendered by
SCN, including, but not limited to, accounts receivable, proceeds of any letters
of credit naming SCN as beneficiary, chattel paper, insurance proceeds, contract
rights, notes, drafts, instruments, documents, acceptances, and all other debts,
obligations and liabilities in whatever form from any other Person.
"Management Services Fee" has the meaning set forth in EXHIBIT 6.
"Medicaid" means any state program pursuant to which health care
providers are paid or reimbursed for care given or goods afforded to indigent
persons and administered pursuant to a plan approved by the Health Care
Financing Administration under Title XIX of the Social Security Act.
"Medicare" means any medical program established under Title XVIII of
the Social Security Act and administered by the Health Care Financing
Administration.
"Necessary Authorizations" means with respect to DDD, all certificates
of need, authorization, certifications, consents, approvals, permits, licenses,
notices, accreditations and exemptions, filings and registrations, and reports
required by Applicable Law, which are required, necessary or reasonably useful
to the lawful ownership and operation of DDD's business.
"Non-DHS" means any health services not included in the meaning of
"designated health services," as defined under 42 U.S.C. Section 1395nn (and
federal regulations promulgated thereunder).
"Person" means an individual, corporation, partnership, association,
limited liability company, limited liability partnership, joint stock company,
joint venture, trust, unincorporated organization, or governmental entity (or
any department, agency or political subdivision thereof).
"Physician Employees" means only those individuals who are doctors of
medicine (including Physician Owners) and who are employed by DDD, or are
otherwise under contract with DDD, to provide professional services to patients
seen in the Practice Offices and are duly licensed to provide professional
medical services in the state or states in which such individuals render
professional services.
"Physician Extender Employees" means physician assistants, nurse
practitioners who do not provide billable services, and other such persons, but
expressly excluding any Technical Employees.
"Physician Owners" means those Physician Employees who own an interest,
directly or indirectly, in the equity of DDD, including those Persons set forth
in the preface above.
"Practice Offices" means any office location under the control of DDD
or the Physician Owners at which DDD or the Physician Owners provide medical
services or any Ancillary Services.
"Professional Services Revenue" means all fees actually collected each
month by or on behalf of DDD, or any of the Physician Owners (as the case may
be) as a result of professional medical services personally furnished to
patients and other fees or income generated by Physician Employees and Technical
Employees, and any revenue from the sale of any goods or the provision of any
Ancillary Services.
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<PAGE> 7
"SCN" means Specialty Care Network, Inc., a Delaware corporation,
together with its successors and assigns.
"Service Agreement" has the meaning set forth in the recitals.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Technical Employees" means individuals who provide billable services
on behalf of DDD and are employees of DDD.
"Third-Party Payors" means Medicare, Medicaid, CHAMPUS, Blue Cross
and/or Blue Shield, managed care plans and any other private healthcare
insurance program or company as well as any future payor of a Third-Party Payor
Program.
"Third-Party Payor Programs" means Medicare, Medicaid, CHAMPUS,
insurance provided by Blue Cross and/or Blue Shield, managed care plans, and any
other private health care insurance programs and employee assistance programs as
well as any future similar programs.
ARTICLE II.
RELATIONSHIP OF THE PARTIES
II.1. Independent Relationship. DDD, Physician Owners and SCN intend to
act and perform as independent contractors, and, except as may be provided under
a separate agreement for the development and operation of an ambulatory surgery
center or other Non-DHS, the provisions hereof are not intended to create any
partnership, joint venture, agency or employment relationship between the
Parties. Notwithstanding the authority granted to SCN herein, SCN, DDD, and
Physician Owners agree that DDD and Physician Owners shall retain all authority
to direct the medical, professional, ethical, administrative, and managerial
(other than as provided by SCN under this Agreement) aspects of DDD's and
Physician Owners' medical practice. Each Party shall be solely responsible for
and shall comply with all state and federal laws pertaining to employment taxes,
income withholding, unemployment compensation contributions and other employment
related statutes applicable to that Party; it being understood that SCN shall
provide certain services, as set forth herein, to DDD to assist DDD in
satisfying its obligations described above.
II.2. Responsibilities of the Parties. As more specifically set forth
herein, SCN shall provide DDD with certain limited management and financial
advisory services as provided under ARTICLE III. As more specifically set forth
herein, DDD shall be responsible for day-to-day operation and management of the
medical practice, including without limitation all matters related to the
professional practice of medicine, medical practice patterns and documentation
thereof. Notwithstanding anything herein to the contrary, no DHS shall be
provided by SCN under this Agreement. SCN shall neither exercise control over
nor interfere with the physician-patient relationship, which shall be maintained
strictly between the physicians of DDD and their patients.
II.3. DDD Matters. Except for the services provided by SCN pursuant to
ARTICLE III, DDD shall be solely responsible for all matters relating to DDD,
operational or otherwise.
II.4. Patient Referrals. The Parties agree that the benefits to DDD and
Physician Owners hereunder do not require, are not payment for, and are not in
any way contingent upon the admission, referral or any other arrangement for the
provision of any item or service offered by SCN to any of DDD's patients in any
facility operated by SCN.
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<PAGE> 8
II.5. Professional Judgment. Each of the Parties acknowledges and
agrees that the terms and conditions of this Agreement pertain to and control
solely the business and financial relationship between and among the Parties and
do not pertain to and do not control the professional and clinical relationship
between and among DDD, Physician Owners, Physician Employees, DDD Employees and
DDD's patients. Nothing in this Agreement shall be construed to alter or in any
way affect the legal, ethical, and professional relationship between and among
DDD, Physician Owners, Physician Employees and DDD's patients, nor shall
anything contained in this Agreement abrogate any right, privilege, or
obligation arising out of or applicable to the physician-patient relationship.
ARTICLE III
MANAGEMENT AND FINANCIAL ADVISORY SERVICES TO BE PROVIDED BY SCN
III.1. Performance of Limited Management Functions. SCN shall provide
or arrange for the services set forth in this ARTICLE III. SCN is hereby
expressly authorized to perform its services hereunder in whatever manner it
deems reasonably appropriate. DDD will not act in a manner which would prevent
SCN from carrying out its duties under this Agreement. DDD and the Physician
Owners acknowledge and agree that, except as set forth in this ARTICLE III, SCN
shall not be responsible for providing any other services to DDD or the
Physician Owners, unless otherwise agreed to between or among the Parties in a
separate written agreement. In connection with the foregoing sentence, SCN shall
not provide any equipment, facilities, supplies or employee staffing for DDD and
shall not perform the following services: personnel evaluations, billing and
collection services, computer hardware/software support, payroll services,
accounts payable processing/management, on-site procurement, or other types of
day-to-day practice management or assessment services. In the event that DDD
desires SCN to provide any of the foregoing services, SCN and DDD shall contract
separately for such services. In connection with the services provided by SCN
under this ARTICLE III, DDD shall give SCN a written request for specific
services to be performed and direction with respect to the performance of such
services. SCN shall provide, or communicate, the services to be provided under
this ARTICLE III in writing (including via Internet transmission) or
telephonically where appropriate; provided, however, upon thirty (30) days
written notice DDD shall be entitled to one (1) onsite visit per calendar
quarter by one (1) SCN employee at SCN's expense, with the cost and expense of
any further onsite visits by any other SCN employees to be reimbursed to SCN by
DDD.
III.2. Practice Assessment. Within one hundred-twenty (120) days
following the date of this Agreement, to the extent not already provided by SCN
to DDD, and within one hundred-twenty (120) days following the third (3rd)
anniversary of this Agreement (provided this Agreement shall be in effect after
the third (3rd) anniversary hereof), SCN shall perform an assessment of DDD's
operations and shall provide DDD with a written report of SCN's findings. The
written report shall include the following reports: (a) financial performance
review, (b) functional area assessment, (c) organizational structure review, (d)
wage rate analysis, and (e) strategic plan.
III.3. Third-Party Payor Matters. SCN shall advise DDD with respect to
marketing and Third-Party Payor and managed care matters. SCN shall provide (a)
analysis and recommendations regarding Third-Party Payor contracting and
reimbursement arrangements and (b) advice regarding negotiating strategies with
respect to Third-Party Payors. DDD shall identify for SCN specific Third-Party
Payor contract and reimbursement issues that will be the basis of such analysis
and advice.
III.4. Malpractice Insurance. Upon written request of DDD, SCN, for and
on behalf of DDD, shall negotiate for the purchase of medical malpractice
insurance for DDD and its Physician Owners and Physician Employees. Upon the
mutual agreement of the Parties, DDD shall be allowed to participate in any
captive malpractice insurance plan maintained by SCN from time to time.
III.5. Financial Reporting. If DDD currently has an electronic data
interface with SCN, SCN shall provide DDD with monthly reports on charges,
receipts and adjustments and a review of DDD's accounts receivable. Except as
specifically set forth in this ARTICLE III, SCN shall not provide any other
financial or accounting reporting services to DDD. SCN's
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<PAGE> 9
obligations under this SECTION 3.5 are subject to and dependent upon DDD
providing accurate financial information to SCN no later than the fourth (4th)
business day of each month.
III.6. Data/Information. SCN shall provide DDD with access to patient
demographics, clinical and financial data bases (excluding outcomes data) and
information related to SCN affiliated practices' "best practices." SCN shall
perform an annual benchmarking analysis of DDD's practice data. Inclusion of
DDD's practice data in the comparative data analysis is subject to and dependent
upon DDD providing accurate financial information to SCN no later than the
fourth (4th) business day of each month.
III.7. Billing and Coding Analysis. Upon the request of DDD, SCN shall
perform an analysis of DDD's coding and billing practices on a fiscal year
basis. The purpose of this analysis will be to make recommendations with respect
to coding and billing practices.
III.8. Financial Review and Audits. SCN shall have the right, upon five
(5) business days written notice, to have its employees or agents review the
financial books and records of DDD or the Physician Owners for the purpose of
confirming Professional Services Revenue, and other financial matters relevant
to this Agreement, and shall have the right, in its sole discretion, to cause
the annual financial statements of DDD or the Physician Owners, as the case may
be, to be audited by a certified public accountant selected by SCN. SCN shall
determine the scope of any such audit. DDD and the Physician Owners shall
cooperate fully in such audit. The cost of such audit shall be paid by SCN. If
SCN elects to have the financial statements audited by a certified public
accountant with a "big five" accounting firm, the resulting audited financial
statements shall be binding on DDD, the Physician Owners and SCN. All Parties
shall be entitled to copies of any information provided to or by the auditors by
or to any Party.
III.9. Events Excusing Performance. SCN shall not be liable to DDD or
Physician Owners for failure to perform any of the services required herein in
the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which SCN has no control for so long as such
events continue, and for a reasonable period of time thereafter.
III.10. Compliance with Law. SCN shall comply with Applicable Law. In
the event that any change in Applicable Law shall occur that necessitates
modification of SCN's manner of operation, then SCN shall make such modification
that may be necessary and appropriate to comply with Applicable Law.
ARTICLE IV
OBLIGATIONS OF DDD AND PHYSICIAN OWNERS
IV.1. Professional Services. DDD, its Physician Owners and Physician
Employees shall provide professional services to patients in compliance at all
times with ethical standards, laws and regulations applying to DDD's
professional practice. DDD shall use its best efforts to determine that each
Physician Employee and Technical Employee associated with DDD who provides
medical care to patients of DDD is licensed by the state or states in which he
or she renders professional services.
IV.2. Employment of Physician Employees and Other Employees. DDD shall
have complete control of and responsibility for the hiring, compensation,
supervision, evaluation and termination of Physician Employees. DDD shall be
responsible for the payment of DDD employees' salaries and wages, payroll taxes,
employee benefits and all other taxes and charges now or hereafter applicable to
them.
IV.3. Professional Insurance Eligibility. DDD shall cooperate with SCN
in the obtaining and retaining of professional liability insurance by assuring
that all Physician Owners and Physician Employees are insurable and
participating in an on-going risk management program.
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<PAGE> 10
IV.4. Fees for Professional Services. DDD shall be solely responsible
for all costs and fees incurred by DDD, and its employees, including without
limitation Physician Owners, or any officers, directors, partners, member,
employees or agents of DDD, including without limitation legal, accounting and
other professional services costs and fees.
IV.5. Events Excusing Performance. DDD and Physician Owners shall not
be liable to SCN for failure to perform any of the services required herein in
the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which DDD has no control for so long as such
events continue, and for a reasonable period of time thereafter.
ARTICLE V
EXCLUSIVE ARRANGEMENTS
The Parties recognize that the services to be provided by SCN shall be
feasible only if DDD operates an active medical practice to which both DDD and
the physicians associated with DDD devote their full time and attention. To that
end:
V.1. Exclusive Arrangement. During the term of this Agreement, SCN
shall be DDD's and Physician Owners' sole provider of the management services
described in this Agreement and neither DDD, Physician Owners nor any of DDD's
or Physician Owners' employees shall provide such management services during the
term of this Agreement.
V.2. Enforcement. DDD and the Physician Owners acknowledge and agree
that the covenants and agreements contained in this Article V are necessary to
protect the business and goodwill of the SCN and that a breach of these
covenants and agreements will result in irreparable harm and continuing damage
to SCN. As a result, DDD and the Physician Owners acknowledge and agree that
since a remedy at law for any breach or attempted breach of the provisions of
this Article V shall be inadequate, SCN shall be entitled to specific
performance and injunctive or other equitable relief in case of any such breach
or attempted breach in addition to whatever other remedies may exist by law. All
Parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief. The Parties hereby agree that in the event any provision, section, or
subsection of this Article V is adjudged by any court of competent jurisdiction
to be void or unenforceable, in whole or part, such court shall modify and
enforce any such provision, section or subsection to the extent that it believes
to be reasonable under the circumstances. DDD and the Physician Owner(s)
acknowledge and agree that if DDD and/or the Physician Owners breach the
covenants and agreements contained in Section 5.1 and SCN is unable for any
reason to obtain a restraining order from a court of competent jurisdiction
within thirty (30) days after application to enjoin the breach by DDD and/or the
Physician Owners, it will be difficult to calculate the precise amount of SCN's
damages. As a result, the Parties have determined that, in the event of such a
breach, SCN's damages shall equal to (i) the average monthly Management Services
during the twelve (12) months prior to such breach, multiplied by (ii) the
number of months remaining in the term of this Agreement. In the event that this
Agreement has not been in effect for twelve (12) months prior to a breach under
this Section 5.2, the average monthly Management Service Fee shall be determined
for such shorter period.
V.3. Modification of Covenants and Agreements. SCN shall have the
authority to release or reduce in whole or in part the terms of the restrictive
covenants and agreements.
V.4. Rights of SCN. SCN shall at all times during the term of this
Agreement and thereafter have the right to enter into additional service
agreements with other physicians and practices regardless of where such
physicians and/or practices are located providing for management services and
facilities to such physicians and/or practices.
V.5. Excluded Activities. The restrictive covenants contained in this
Article V shall not apply to or restrict Excluded Activities defined in Schedule
5.5.
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<PAGE> 11
ARTICLE VI
FINANCIAL ARRANGEMENTS
[SEE EXHIBIT 6]
ARTICLE VII.
INTELLECTUAL PROPERTY AND RECORDS
VII.1. Ownership of SCN's Business Records and Systems. All business
records, information, software and systems of SCN relating to the provision of
its services under this Agreement shall remain the property of SCN and may be
removed by SCN from supporting DDD upon any termination of this Agreement;
provided, however, that DDD shall be entitled, upon reasonable written request,
to access such records and make copies or extracts thereof to the extent
necessary to prosecute or defend against any liabilities imposed on DDD by any
governmental authority or other Party.
VII.2. Maintenance of Records. Except as otherwise provided in this
Agreement, the Parties shall safeguard all records maintained by them pursuant
to this Agreement for a period of time specified by the Party holding such
records, which such period must be noticed in writing to the other Parties, from
the date of the last activity recorded in such records and, prior to destruction
of any such records, shall give the other Party notice of such destruction and,
if the other Party so elects and applicable law so permits, shall deliver such
records to the other Party in lieu of destroying them. In particular, the
Parties agree, to the extent necessary to permit receipt of reimbursement for
services by DDD, to make available to the Secretary of the United States
Department of Health and Human Services, the Comptroller General at the General
Accounting Office, or their authorized representatives, any books, documents and
records in their possession relating to the nature and extent of the costs of
services hereunder for a period of four (4) years after the provision of such
services. Each Party further agrees that, if it contracts with any third party
to provide services that are valued in excess of $10,000, it shall require such
contract party to comply with the requirements of the previous sentence. Nothing
in this SECTION 7.2 constitutes the waiver of any attorney-client privilege, and
neither Party shall be required hereunder to give the other Party documents if,
as a result, an existing attorney-client privilege would be waived.
VII.3. Access to Records. Each Party shall at all reasonable times
during the term of this Agreement and thereafter permit the other Party to have
reasonable access at reasonable times to its documents, books and records
relating to this Agreement.
VII.4. Patient Records. All patient records shall remain the property
of DDD, provided that SCN shall have the right to analyze and obtain information
from such records to the extent necessary to perform the services described in
ARTICLE III and subject to Applicable Law. Upon termination of this Agreement,
DDD shall retain such records, but SCN shall be entitled to retain any
information it has acquired from such records; provided, however, that SCN shall
take all action reasonably necessary to ensure the confidentiality of the
patient records in accordance with Applicable Law and shall indemnify DDD and
any of its Physician Employees (who are deemed hereby to be third party
beneficiaries for this purpose) for breach of any applicable confidentiality
requirements.
ARTICLE VIII.
INDEMNITY
VIII.1. Indemnification by DDD and the Physician Owners. DDD and the
Physician Owners, jointly and severally, shall indemnify, hold harmless and
defend SCN, its officers, directors and employees, from and against any direct,
out-of-pocket losses, damages, claims, costs and expenses (including reasonable
attorneys' fees), caused by or as a result of the performance of any negligent
acts or negligent omissions by DDD and/or DDD's Physician Owners, agents,
employees
-8-
<PAGE> 12
and/or subcontractors (other than SCN) during the term hereof or as a result of
a breach of the representations and warranties contained in ARTICLE X of this
Agreement or the breach of any covenant contained in ARTICLE XII of this
Agreement.
VIII.2. Indemnification by SCN. SCN shall indemnify, hold harmless and
defend DDD, the Physician Owners, DDD's officers, directors and employees, from
and against any direct, out-of-pocket losses, damages, claims, costs and
expenses (including reasonable attorneys' fees), caused by or as a result of the
performance of any negligent acts or negligent omissions by SCN and/or its
shareholders, agents, employees and/or subcontractors (other than DDD and the
Physician Owners) during the term of this Agreement or as a result of a breach
of the representations or warranties set forth in ARTICLE XI of this Agreement.
VIII.3. Escrow Pending Indemnification Determination. In the event that
either Party makes a claim for indemnification under this Agreement, then the
claiming Party shall have the right, to the extent it is owed indemnifications,
to pay amounts owed to the other Party under this Agreement into an escrow
account (established pursuant to an escrow agreement to be agreed upon by the
Parties) to be held by the escrow agent in an interest bearing account until a
determination by either (i) the Parties, (ii) a court of proper jurisdiction or
(iii) agreed upon panel of arbitrators, has been made regarding the claiming
Party's right to indemnification. In the event that the claiming Party is
entitled to indemnification, then such escrowed funds shall be paid to the
claiming Party in partial or complete satisfaction of such indemnification
obligation. In the event the escrowed funds are insufficient to satisfy the
indemnification obligation, the indemnifying Party shall nevertheless be
obligated to pay the indemnified Party the full amount of such indemnification
obligation. Any excess funds remaining in the escrow account after the payment
of the indemnification obligation or any funds held in the escrow account if it
is determined that no indemnification obligation is owed shall be paid to the
nonclaiming Party.
ARTICLE IX
TERM, TERMINATION AND RETIREMENT
IX.1. Term of Agreement. This Agreement shall be effective as of ZZZ,
and shall expire on the fifth (5th) anniversary of the Service Agreement, unless
earlier terminated pursuant to the terms hereof.
IX.2. Extended Term. The term of this Agreement shall be extended for
additional terms only upon mutual written agreement of the Parties hereto, which
agreement shall be made not less than one hundred eighty (180) days prior to the
expiration of the then current term.
IX.3. SCN Events of Default. SCN shall be in default under this
Agreement upon the occurrence of any of the following:
IX.3.1. In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by SCN, or upon other
action taken or suffered, voluntarily or involuntarily, under any federal or
state law for the benefit of debtors by SCN, except for the filing of a petition
in involuntary bankruptcy against SCN which is dismissed within thirty (30) days
thereafter.
IX.3.2. In the event that SCN shall intentionally or in bad faith
violate Applicable Law resulting in a direct, continuing material adverse effect
on the operations, earnings and cash flow of DDD.
IX.4. DDD Events of Default. DDD shall be in default under this
Agreement upon the occurrence of any of the following:
IX.4.1. In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by DDD, or upon other
action taken or suffered, voluntarily or involuntarily, under any federal or
state law for the benefit
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<PAGE> 13
of debtors by DDD, except for the filing of a petition in involuntary bankruptcy
against DDD which is dismissed within thirty (30) days thereafter.
IX.4.2. In the event DDD's Medicare or Medicaid Number shall be
terminated or suspended as a result of the action or inaction of DDD or a
Physician Employee, and such termination or suspension shall continue for thirty
(30) days, unless DDD shall at that time be acting in good faith (and shall
provide reasonable evidence of the action being taken) to reverse such
termination or suspension; provided, however, that in no event may such
termination or suspension continue for more than ninety (90) days.
IX.4.3. In the event DDD fails to pay (i) the Management Services Fee
provided for hereunder or (ii) any expenses incurred by SCN on behalf of DDD
when due, and such failure is not cured within fifteen (15) days of written
notice from SCN to DDD.
IX.5. DDD's Remedies. Notwithstanding any other provision in this
Agreement, in the event SCN is in default under this Agreement, SCN shall
compensate DDD for any actual damages suffered by DDD as a result of such
default; provided, however, that such damages shall not include incidental,
consequential or speculative damages suffered by DDD as a result of such
default.
IX.6. SCN's Remedies. In the event DDD is in default under this
Agreement, DDD shall pay SCN, as liquidated damages, an amount equal to (i) the
average monthly Management Services during the twelve (12) months immediately
prior to such default, multiplied by (ii) the number of months remaining in the
term of this Agreement. In the event that this Agreement has not been in effect
for twelve (12) months prior to DDD's default, the average monthly Management
Service Fee shall be determined for such shorter period.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF DDD AND PHYSICIAN OWNERS
DDD and Physician Owners jointly and severally represent, warrant,
covenant and agree with SCN that:
X.1. Validity. DDD is a BBB ccc. DDD has the full power and authority
to own DDD's property, to carry on DDD's business as presently being conducted,
to enter into this Agreement, and to consummate the transactions contemplated
hereby. Each Physician Owner is an adult citizen and resident of the State of
BBB. Each Physician Owner has the full power and authority to own his or her
property, to practice medicine in the state(s) where the Practice Offices are
located and where he or she is presently practicing medicine, to carry on his or
her business as presently being conducted, to enter into this Agreement, and to
consummate the transactions contemplated hereby.
X.2. Authority. The execution of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
action, and this Agreement is a valid and binding Agreement of DDD and each
Physician Owner, enforceable in accordance with its terms. DDD and each
Physician Owner have obtained all third-party consents necessary to enter into
and consummate the transactions contemplated by this Agreement. Neither the
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby, nor compliance by DDD or any Physician Owner with any of
the provisions hereof, will (a) violate or conflict with, or result in a breach
of any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under any license, agreement
or other instrument or obligation to which either DDD or any Physician Owner is
a Party, except for such defaults which in the aggregate do not result in a
material adverse effect on the business of DDD or the Physician Owners (taken as
a whole) or (b) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to either DDD or any Physician Owner.
-10-
<PAGE> 14
ARTICLE XI
REPRESENTATIONS AND WARRANTIES OF SCN
SCN represents, warrants, covenants and agrees with DDD as follows:
XI.1. Organization. SCN is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. SCN has
the full power to own its property, to carry on its business as presently
conducted, to enter into this Agreement and to consummate the transactions
contemplated hereby.
XI.2. Authority. SCN has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, as well as the
consummation of the transactions contemplated hereby. The execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
hereby will not, violate any provisions of the charter or the bylaws of SCN or
any indenture, mortgage, deed of trust, lien, lease, agreement, arrangement,
contract, instrument, license, order, judgment or decree or result in the
acceleration of any obligation thereunder to which SCN is a Party or by which it
is bound.
XI.3. Absence of Litigation. No action or proceeding by or before any
court or other Governmental Authority has been instituted or is, to the best of
SCN's knowledge, threatened with respect to the transactions contemplated by
this Agreement.
ARTICLE XII.
COVENANTS OF DDD AND PHYSICIAN OWNERS
DDD and the Physician Owners covenant and agree with SCN that:
XII.1. Merger, Consolidation and Other Arrangements. DDD shall not
incorporate, merge or consolidate with any other entity or individual or
liquidate or dissolve or wind-up DDD's affairs or enter into any partnerships,
joint ventures or sale-leaseback transactions or purchase or otherwise acquire
(in one or a series of related transactions) any part of the property or assets
(other than purchases or other acquisitions of inventory, materials and
equipment in the ordinary course of business) of any other person or entity
without the prior written consent of SCN.
XII.2. Necessary Authorizations/Assignment of Licenses and Permits. DDD
and each Physician Owner shall maintain all licenses, permits, certifications,
or other Necessary Authorizations (the absence of which would have a material
adverse effect on DDD) and shall not assign or transfer any interest in any
license, permit, certificate or other Necessary Authorization granted to it by
any Governmental Authority (the absence of which would have a material adverse
effect on DDD).
XII.3. Compliance with All Laws. DDD and each Physician Owner shall
comply in all material respects with any Applicable Law relating to DDD's
practice and the operation of any facility.
XII.4. Third-Party Payor Programs. DDD shall maintain DDD's material
compliance with the requirements of all Third-Party Payor Programs in which DDD
will be participating or authorized to participate.
XII.5. Change in Business or Credit and Collection Policy. DDD shall
not make any changes in the character of DDD's business or in the credit and
collection policy, which change would, in either case, impair the collectibility
of any of the accounts receivable of DDD, and, thus, reduce the Professional
Services Revenues of DDD.
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<PAGE> 15
ARTICLE XIII.
GENERAL PROVISIONS
XIII.1. Assignment. SCN shall have the right to assign its rights
hereunder to any person, firm or corporation under common control with SCN and
to any lending institution from which SCN obtains financing, including but not
limited to the restrictive covenant included in ARTICLE V, for security purposes
or as collateral. DDD agrees to, and acknowledges, SCN's right to assign SCN's
rights under this Agreement to any Lender and further agrees that upon receipt
of written notice from such Lender, DDD shall pay to Lender or cause to be paid
to Lender all amounts which are otherwise payable to SCN pursuant to the terms
of this Agreement, including without limitation all Management Service Fees, and
until such amounts are delivered to Lender, hold payments in trust for Lender.
Except as set forth above, neither SCN nor DDD shall have the right to assign
their respective rights and obligations hereunder without the written consent of
the other Party. Without limiting the foregoing, DDD acknowledges that, as
collateral for certain obligations, SCN has assigned all of its rights hereunder
to NationsBank of Tennessee, N.A. as Agent (the "Agent") for itself and other
banks and institutional lenders from time to time (collectively the "Banks"). As
an inducement for the Banks to extend or continue the extension of credit to
SCN, DDD (i) acknowledges that the collateral assignment to the Agent covers all
rights of SCN hereunder, including, but not limited to, rights arising from
warranties and representations made by DDD, rights to enforce covenants made by
DDD, and rights to receive all payments due SCN; (ii) agrees to regard the Agent
as the owner of any or all of the assigned rights upon written notice to DDD of
this election from the Agent; (iii) agrees that neither the Agent nor any of the
Banks has any obligation for the performance of the duties of SCN hereunder, and
shall not assume any such duty by the exercise of rights as a secured lender;
(iv) agrees to give the Agent written notice of any material default hereunder
on SCN's part at the address of 1 NationsBank Plaza, Nashville, Tennessee 37239,
Attn: Walker Choppin, and to allow at least thirty (30) days thereafter for the
cure of such default before DDD terminates this Agreement; (v) agrees that the
rights of DDD under this Agreement are and shall be junior to any security
interest that the Agent and the Banks, their successors or assigns may have at
any time; (vi) agrees that the benefits of the above undertakings in favor of
the Agent and Banks shall further extend to all successors and assigns of the
Agent and Banks, provided that any notices given by DDD under this Section shall
be given to the Agent at the foregoing address unless DDD has received written
notice of a change thereof; and (vii) agrees that this SECTION 13.1 may not be
modified, and no provision of this SECTION 13.1 may be waived, absent the
written approval of the Agent.
XIII.2. Whole Agreement; Modification. Except as otherwise set forth
herein, this Agreement supersedes all prior agreements between the Parties with
respect to the subject matter hereto and there are no other agreements or
understandings, written or oral, between the Parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
Parties to this Agreement.
XIII.3. Notices. All notices required or permitted by this Agreement
shall be in writing and shall be deemed to have been given (i) when received if
given in person, (ii) on the date of acknowledgment of receipt if sent by telex,
facsimile or other wire transmission, (iii) one business day after being sent by
overnight delivery service, or (iv) three days after being deposited in the
United States mail, certified or registered mail, postage prepaid, addressed as
follows:
To SCN: Specialty Care Network, Inc.
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
Attention: Kerry Hicks
With a copy to: Baker, Donelson, Bearman & Caldwell, P.C.
700 North State Street, Suite 500
Jackson, Mississippi 39225
Attention: William S. Painter, Esq.
To DDD: AAA
----------------------------------------
----------------------------------------
Attention:
-----------------------------
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<PAGE> 16
With a copy to:
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
Attention:
-----------------------------
or to such other address as either Party shall notify the other. In the event
that either Party gives notice of an event of default under this Agreement, as
described under ARTICLE IX of this Agreement, then the Party giving such notice
must state in specific detail the factual circumstance causing the event of
default or justifying a determination of an event of default. In addition
thereto, any notice of default shall include a written description of the
actions necessary, in the opinion of the Party giving notice, to cure the
default.
XIII.4. Binding on Successors. Subject to SECTION 13.1, this Agreement
shall be binding upon the Parties hereto, and their successors, assigns, heirs
and beneficiaries.
XIII.5. Waiver of Provisions. Any waiver of any terms and conditions
hereof must be in writing, and signed by the Parties hereto. The waiver of any
of the terms and conditions of this Agreement shall not be construed as a waiver
of any other terms and conditions hereof.
XIII.6. Governing Law; Venue. The validity, interpretation and
performance of this Agreement shall be governed by and construed in accordance
with the laws of the State of Colorado. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in Denver, Colorado, in any
action or proceeding for injunctive relief arising out of this Agreement. Except
as set forth in SECTION 13.13 below, each Party also agrees not to bring any
action or proceeding arising out of or relating to this Agreement in any other
court. Each of the Parties waives any defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond, surety,
or other security that might be required of any other Party with respect
thereto.
XIII.7. No Practice of Medicine. The Parties acknowledge that SCN is
not authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or service
required of SCN in this Agreement should be construed or deemed by any
Governmental Authority or court to constitute the practice of medicine, the
performance of said act or service by SCN shall be deemed waived and
unenforceable to the minimum extent required to comply with Applicable Law.
XIII.8. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the Parties.
XIII.9. Additional Documents. Each of the Parties hereto agrees to
execute any document or documents that may be requested from time to time by any
other Party to implement or complete such Party's obligations pursuant to this
Agreement.
XIII.10. Attorneys' Fees. If legal action is commenced by any Party to
enforce or defend its rights under this Agreement, the prevailing Party in such
action shall be entitled to recover its costs and attorneys' fees in addition to
any other relief granted.
XIII.11. Time is of the Essence. Time is hereby expressly declared to
be of the essence in this Agreement.
XIII.12. Confidentiality. No Party hereto shall disseminate or release
to any third party any information regarding any provision of this Agreement, or
any financial information regarding the other (past, present or future) that was
obtained by the such Party in the course of the negotiations of this Agreement
or in the course of the performance of this Agreement,
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<PAGE> 17
including, but not limited to, any information relating to the internal
operations of DDD, DDD fees or the terms of any of the managed care contracts,
without the written consent of SCN and DDD; provided, however, the foregoing
shall not apply to information which (i) is generally available to the public
other than as a result of a breach of confidentiality provisions; (ii) becomes
available on a non-confidential basis from a source other than the other Party
or its affiliates or agents, which source was not itself bound by a
confidentiality agreement; (iii) which is required to be disclosed by law or
pursuant to a court order (SCN shall provide DDD with copies of any information
regarding DDD provided by SCN to any third party);(iv) is disclosed to its
investment bankers, banks, underwriters or lenders, or its advisors (who shall
be advised that they must keep such information in confidence to the extent
required by this SECTION 13.12); or (v) is required to be disclosed to the
Securities and Exchange Commission or other government agencies.
XIII.13. Contract Modifications for Prospective Legal Events. In the
event any applicable federal, state or local law or any regulation, order or
policy issued under any such law is changed (or any judicial or administrative
interpretation thereof is developed or changed) in a way which could reasonably
be expected to have a material adverse effect on the practical realization of
the benefits anticipated by one or more Parties to this agreement, the adversely
affected Party or Parties shall notify the other Party or Parties in writing of
such change and the effect of the change. The Parties shall enter into good
faith negotiations to modify this Agreement to compensate for such change. If an
agreement on a method for modifying this Agreement is not reached within thirty
(30) days of such written notice, the matter shall be submitted to a single
arbitrator for arbitration in Washington, D.C. pursuant to the rules and
procedures of the American Health Lawyers Association Alternative Dispute
Resolution Service Rules of Procedure for Arbitration. The arbitrator shall (i)
structure an amendment to this Agreement which will leave the Parties as nearly
as possible in the same economic positions in which they would have been under
the original terms of this Agreement, had the change in the law, regulation,
order or policy (or change or development of the judicial or administrative
interpretation thereof) not occurred; or (ii) if the arbitrator determines that
the change is so fundamental that revision and continuation of this Agreement is
not feasible, structure a termination of this Agreement that will return the
Parties as nearly as possible to the economic positions in which they would have
been had they not entered into this Agreement, without altering in a material
way the economic obligations or benefits derived from the payment or receipt of
Service Fees realized during the period this Agreement was in effect.
XIII.14. Remedies Cumulative. Except as limited under SECTION 8.1,
SECTION 8.2, and SECTION 9.5, no remedy set forth in this Agreement or otherwise
conferred upon or reserved to any Party shall be considered exclusive of any
other remedy available to any Party, but the same shall be distinct, separate
and cumulative and may be exercised from time to time as often as occasion may
arise or as may be deemed expedient.
XIII.15. Language Construction. The Parties have participated jointly
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement.
XIII.16. No Obligation to Third Parties. Except as provided in SECTION
13.1, none of the obligations and duties of SCN or DDD under this Agreement
shall in any way or in any manner be deemed to create any obligation of SCN or
of DDD to, or any rights in, any person or entity not a Party to this Agreement.
XIII.17. Communications. DDD and SCN agree that good communication
between the Parties is essential to the successful performance of this
Agreement, and each pledges to communicate fully and clearly with the other on
matters relating to the successful operation of DDD's practice at the Practice
Offices.
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<PAGE> 18
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first written above.
SCN:
SPECIALTY CARE NETWORK, INC.
By:
--------------------------------------
Title:
-----------------------------------
DDD:
AAA
By:
--------------------------------------
Title:
-----------------------------------
PHYSICIAN OWNERS:
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
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<PAGE> 19
SCHEDULE 5.5
EXCLUDED ASSETS
See attached.
5.5-1
<PAGE> 20
EXHIBIT 6
FINANCIAL MATTERS
6.1. Management Services Fee. During the term of this Agreement, DDD,
or any of the Physician Owners (as the case may be) shall pay to SCN a monthly
Management Services Fee (the "Management Services Fee") equal to
[__________________________________ DOLLARS ($________________)] [______________
PERCENT (_____%) OF PROFESSIONAL SERVICES REVENUE FOR SUCH MONTH]. In addition,
DDD shall reimburse SCN for any expenses incurred and paid by SCN in connection
with services provided by SCN to DDD which (i) are not covered by ARTICLE III of
this Agreement, and (ii) are requested by DDD in writing.
6.2. Payment of Management Services Fee.
6.2.1 The amounts to be paid to SCN under this EXHIBIT 6 shall be
payable monthly, on the fifteenth (15th) day of each month. [THE AMOUNT PAYABLE
SHALL BE BASED UPON THE PREVIOUS MONTH'S PROFESSIONAL SERVICES REVENUE OF DDD.]
6.2.2 The Physician Owners acknowledge and agree that they are Parties,
individually, to this Agreement and that if DDD fails to pay the Management
Services Fee herein described, SCN shall have the right to collect said
Management Services Fee from the Physician Owners. SCN shall establish the
allocable share of the Management Services Fee applicable to each Physician
Owner. In the event that any Management Services Fees are owed by DDD but unpaid
because of a breach of this Agreement by one (1) Physician Owner, SCN agrees to
look to the breaching Physician Owner, after exhausting its remedies against
DDD, and not the other Physician Owners for collection of the unpaid Management
Service Fees.
6.3 Physician Owner Change in Practice/Group Affiliation. In the event
that a Physician Owner leaves the employment of or terminates his or her
affiliation with DDD, then the terminating Physician Owner may join or establish
another group/practice which has or will enter into a Management Services
Agreement with SCN upon such terminating Physician Owner's affiliation with such
new group/practice. In the event that (i) DDD consents to SCN entering into the
new Management Services Agreement, (ii) entering into the new Management
Services Agreement will not adversely affect the operations and earnings of SCN,
and (iii) the new group/practice can satisfy the representations and warranties
set forth in ARTICLE X of this Agreement, then SCN will not unreasonably
withhold or refrain from entering into a new Management Services Agreement with
the terminating Physician Owner's new group/practice. Except as set forth
herein, in the event that the Physician Owner affiliates with a new
group/practice that is not a Party to a Management Services Agreement with SCN,
then SCN, at its option, may terminate this Agreement solely with respect to the
terminating Physician Owner. In the event that SCN does not enter into a new
Management Services Agreement, then SCN shall terminate this Agreement with
respect to such Physician Owner, and the terminating Physician Owner shall be
obligated as described in SECTION 6.2.2.
6.4 Death or Disability. In the event that a Physician Owner dies or
becomes Disabled, then the Physician Owner shall have no continuing obligations
under this Agreement.
6-1
<PAGE> 1
EXHIBIT 11
Specialty Care Network, Inc. and Subsidiaries
Computation of Per Share Earnings
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average
Shares outstanding 15,686,434 18,197,911 16,031,953 17,965,904
Effect of dilutive securities:
Employee stock options 702,114 381,815 351,149 461,288
----------- ----------- ----------- -----------
Weighted average number of
Common shares and common
Share equivalents used in
Computation 16,388,548 18,579,726 16,383,102 18,427,192
=========== =========== =========== ===========
Net income $ 2,169,073 $ 1,214,282 $ 1,876,249 $ 3,500,605
=========== =========== =========== ===========
Net income per common
Share (basic) $ 0.14 $ 0.07 $ 0.12 $ 0.19
=========== =========== =========== ===========
Net income per common
Share (diluted) $ 0.13 $ 0.07 $ 0.11 $ 0.19
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,004
<SECURITIES> 0
<RECEIVABLES> 14,980
<ALLOWANCES> (7,014)
<INVENTORY> 0
<CURRENT-ASSETS> 16,337
<PP&E> 5,863
<DEPRECIATION> (1,889)
<TOTAL-ASSETS> 26,822
<CURRENT-LIABILITIES> 24,741
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 720
<TOTAL-LIABILITY-AND-EQUITY> 26,822
<SALES> 22,346
<TOTAL-REVENUES> 22,346
<CGS> 0
<TOTAL-COSTS> 20,829
<OTHER-EXPENSES> 3,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,887
<INCOME-PRETAX> 180
<INCOME-TAX> (1,696)
<INCOME-CONTINUING> 1,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,876
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.11
</TABLE>
