<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO. 333-30205
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
AMERICAN PHYSICIAN PARTNERS, INC.
(Exact name of registrant as specified in charter)
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DELAWARE 8099 75-2648089
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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AMERICAN PHYSICIAN PARTNERS, INC.
2301 NATIONSBANK PLAZA
901 MAIN STREET
DALLAS, TX 75202-3721
(214) 761-3100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
PAUL M. JOLAS, ESQ.
GENERAL COUNSEL, SENIOR VICE PRESIDENT AND SECRETARY
AMERICAN PHYSICIAN PARTNERS, INC.
2301 NATIONSBANK PLAZA
901 MAIN STREET
DALLAS, TX 75202-3721
(214) 761-3100
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
---------------------
Copies to:
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RICHARD A. FINK, ESQ. FREDERICK W. KANNER, ESQ.
BROBECK, PHLEGER & HARRISON LLP DEWEY BALLANTINE LLP
4675 MACARTHUR COURT, SUITE 1000 1301 AVENUE OF THE AMERICAS
NEWPORT BEACH, CA 92660 NEW YORK, NY 10019-6092
(714) 752-7535 (212) 259-8000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 10, 1997
PROSPECTUS
5,000,000 SHARES
[AMERICAN PHYSICIAN PARTNERS, INC. LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold by American
Physician Partners, Inc. ("APPI" or the "Company").
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $14.00 and $16.00 per share. See "Underwriting" for information relating
to the factors to be considered in determining the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol "APPM."
The Underwriters have reserved $5.0 million of shares of the Common Stock
offered hereby to offer to GE Capital Corporation ("GE Capital") at the initial
public offering price. See "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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=============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
=============================================================================================================
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. The Underwriters will not receive any underwriting discounts or
commissions with respect to any shares sold to GE Capital. See
"Underwriting."
(2) Before deducting offering expenses estimated at $ payable by the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997 at the offices of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
------------------
SMITH BARNEY INC.
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY
PIPER JAFFRAY INC.
, 1997
<PAGE> 3
[INSERT MAP]
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Simultaneously with the closing of this offering,
American Physician Partners, Inc. ("APPI") will acquire certain tangible and
intangible assets, and assume certain liabilities, of seven radiology practices
located in California, Kansas, Maryland, New York and Texas (each radiology
practice, a "Founding Affiliated Practice" and, collectively, the "Founding
Affiliated Practices") in exchange for cash and shares of its Common Stock (each
a "Reorganization" and, collectively, the "Reorganizations"). As used herein,
"Affiliated Practices" refers to the Founding Affiliated Practices and such
additional radiology practices, management service organizations, diagnostic
imaging centers and other related businesses that the Company may acquire in the
future. Unless otherwise indicated, all references to "APPI" mean American
Physician Partners, Inc. prior to the consummation of the Reorganizations and
references herein to the "Company" include APPI and its subsidiaries.
THE COMPANY
The Company was formed in April 1996 to provide practice management
services to radiology practices with a focus on the development, consolidation
and management of integrated radiology and imaging center networks. Upon
completion of this offering, the Company will provide practice management
services to seven radiology practices consisting of 223 physicians practicing at
42 hospitals and 65 diagnostic imaging centers ("ICs") in California, Kansas,
Maryland, New York and Texas. The Company will derive its revenue from service
fees in exchange for the provision of management, administrative, technical and
other non-medical services to the Affiliated Practices.
Radiology services in the United States are delivered through a fragmented
system of local providers, including small to medium-sized groups of diagnostic
and interventional radiologists and radiation oncologists. According to a 1995
report prepared by SMG Marketing Group, total spending on diagnostic imaging
services is estimated at $56 to $70 billion annually. According to the American
College of Radiology, approximately 27,000 radiologists were actively involved
in patient care in the United States in 1996, practicing in more than 3,200
groups with a typical size of six radiologists per group.
Cost-containment pressures on health care providers have placed small to
medium-sized physician groups at a competitive disadvantage, since their
practices typically have relatively high operating costs and often lack the
capital, information systems and management expertise necessary to provide both
high-quality and cost-effective medical care. To remain competitive, physician
practices are seeking to affiliate with larger organizations that manage the
non-medical aspects of their practices and provide access to greater capital
resources, more efficient cost structures and more favorable relationships with
payors. The Company believes that an integrated network of radiologists and
facilities offering a comprehensive array of radiology services can provide
significant advantages to patients, physicians, hospitals and payors.
The Founding Affiliated Practices provide a wide range of diagnostic and
therapeutic services, including x-ray and fluoroscopy, magnetic resonance
imaging, computed tomography, mammography, ultrasound, nuclear medicine,
radiation oncology and interventional radiology. The Founding Affiliated
Practices were selected based on a variety of factors, including: physician and
practice credentials and reputation; competitive market position; subspecialty
mix of physicians; historical financial performance and growth potential; and
willingness to embrace the Company's vision and philosophy regarding the
provision of radiology services. The Company intends to provide Affiliated
Practices with the necessary capital resources and expertise to invest in new
technologies, complete consolidating acquisitions, implement sophisticated
management information systems, promote efficient practice patterns, develop
coordinated marketing efforts and realize purchasing economies of scale.
The Company's objective is to develop integrated networks of radiology
groups and ICs that can provide wide geographic coverage and subspecialty
expertise. The Company intends to provide the networks with sophisticated
management, state-of-the-art information systems and appropriate capital for
expansion. The Company's strategy is to (i) emphasize quality service, (ii)
expand within its selected markets, (iii) improve
3
<PAGE> 5
operating efficiencies within the Affiliated Practices and (iv) expand into new
regional markets through acquisitions of or affiliations with additional
radiology practices and ICs.
THE REORGANIZATIONS
Simultaneously with the closing of this offering, the Company will acquire
certain tangible and intangible non-medical assets (i.e., assets other than
patient records, payor contracts and provider contracts) and liabilities of the
Founding Affiliated Practices (including interests in imaging center joint
ventures with third-parties) in connection with the Reorganizations.
Substantially all of the proceeds of this offering will be used to fund the cash
portion of the consideration to be paid for the non-medical assets of the
Founding Affiliated Practices and to repay approximately $12.2 million of
indebtedness assumed in connection with the Reorganizations. See "Use of
Proceeds." Upon consummation of the Reorganizations, the Company will enter into
long-term service agreements (the "Service Agreements") with the Founding
Affiliated Practices pursuant to which the Company will provide management,
administrative, technical, and non-medical business services (including the
provision of facilities, equipment and non-medical personnel) to the Founding
Affiliated Practices in exchange for a service fee.
The Service Agreements have a 40-year term, subject to earlier termination
under certain circumstances. The service fees represent physician groups
revenue, net less amounts retained by physician groups. Physician groups
revenue, net consists of the revenue of the Affiliated Practices reported at the
estimated realizable amounts from patients, third-party payors and others for
services rendered, net of contractual and other adjustments. The service fees
payable to the Company by the Affiliated Practices under the Service Agreements
vary based on the fair market value, as determined in arms' length negotiations,
and the nature and extent of services provided. Where state law allows, the
service fees due under the Service Agreements are derived from two distinct
revenue streams: (i) the Affiliated Practice pays a service fee based on a
negotiated percentage (Founding Affiliated Practice service fees range from 20%
to 25%) of the adjusted professional revenues as defined in the Service
Agreement; and (ii) the Affiliated Practice pays a service fee based on 100% of
the adjusted technical revenues as defined in the Service Agreement, which
equals the fair value of the services provided. In states where the law requires
a flat fee structure, the Company has negotiated a base service fee, which is
equal to the fair market value of the services provided under the Service
Agreement and which is renegotiated each year to equal the fair market value of
the services provided under the Service Agreement. Adjusted professional
revenues and adjusted technical revenues are determined by deducting certain
contractually agreed-upon expenses (non-physician salaries and benefits, rent,
depreciation, insurance, interest and other non-physician costs) from physician
groups revenue of the Affiliated Practice. In addition, the Company receives
income from joint ventures in which the Affiliated Practices hold ownership
interests. Physician compensation is determined by the Affiliated Practices
pursuant to employment arrangements between the Affiliated Practice and the
individual physicians. See "Business -- Service Agreements." The Company does
not participate in the negotiation of physician employment arrangements.
Pursuant to the terms of the Service Agreements, the Founding Affiliated
Practices will continue to provide professional radiological services and will
maintain full control over the provision of professional radiological services.
The Company will not engage in the practice of medicine or provide professional
radiological services. As a result of the Reorganizations and upon completion of
this offering, the Founding Affiliated Practices and certain officers and
directors of the Company will own approximately 70.6% of the outstanding shares
of Common Stock. See "Certain Transactions -- Reorganizations" and "Principal
Stockholders."
------------------------------
The Underwriters have reserved $5.0 million of shares of the Common Stock
offered hereby to offer to GE Capital at the initial public offering price.
Prior to this offering and consummation of the Reorganizations, the Company
has not conducted any significant operations. The Company's principal offices
are located at 2301 NationsBank Plaza, 901 Main Street, Dallas, Texas 75202, and
its telephone number at that address is (214) 761-3100.
4
<PAGE> 6
THE OFFERING
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Common Stock being offered................... 5,000,000 shares(1)(2)
Common Stock outstanding after the 18,321,982 shares(1)(3)
offering...................................
Use of proceeds.............................. To fund the cash portion of the consideration
to be paid for the non-medical assets of the
Founding Affiliated Practices and to repay
certain indebtedness assumed in connection
with the Reorganizations. See "Use of
Proceeds" and "Certain
Transactions -- Reorganizations."
Nasdaq National Market symbol................ APPM
</TABLE>
- ---------------
(1) Excludes up to 750,000 shares that may be sold by the Company pursuant to
the Underwriters' over-allotment option. See "Underwriting."
(2) The Underwriters have reserved $5.0 million of shares of the Common Stock
offered hereby to offer to GE Capital at the initial public offering price.
(3) Based on the number of shares of Common Stock outstanding as of September
15, 1997. Includes 10,884,482 shares of Common Stock to be issued in
connection with the Reorganizations and 437,500 shares of Common Stock
issuable upon conversion of the outstanding $3,500,000 principal balance of
Convertible Promissory Notes bearing interest at 6% per annum (the
"Convertible Notes"). The Convertible Notes convert into Common Stock at a
conversion price of $8.00 per share (assuming an initial public offering
price of at least $14.00 per share). The Company intends to call the
Convertible Notes for redemption as soon as practicable after the date of
this Prospectus. Excludes 1,421,000 shares of Common Stock issuable upon
exercise of stock options outstanding as of September 12, 1997 having a
weighted average exercise price of $1.68 per share. The number of shares to
be outstanding on completion of this offering will increase if the initial
public offering price is lower than $14.00 per share. See "Description of
Capital Stock," "Shares Eligible for Future Sale," "Management -- Stock
Option Plan" and Note 4 of Notes to Financial Statements of APPI.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
---------------
Unless otherwise indicated, all information contained in this Prospectus:
(i) assumes no exercise of the Underwriters' option to purchase from the Company
up to 750,000 additional shares of Common Stock to cover over-allotments, if
any; (ii) has been adjusted to give effect to the conversion of the Convertible
Notes into Common Stock upon consummation of this offering; (iii) has been
adjusted to give effect to the Reorganizations; and (iv) assumes no exercise of
outstanding options to purchase 1,421,000 shares of Common Stock. The number of
shares of Common Stock to be issued in each Reorganization and upon conversion
of the Convertible Notes will depend on the initial public offering price of the
Common Stock. The disclosures herein relating to the shares of Common Stock to
be issued in connection with the Reorganizations and upon conversion of the
Convertible Notes are estimated, assuming an initial public offering price of
$15.00 per share. Four directors own an aggregate of $437,500 in principal
amount of the Convertible Notes. See "Certain Transactions." The Company intends
to call the Convertible Notes for redemption as soon as practicable after the
date of this Prospectus. There can be no assurance that holders of the
Convertible Notes will elect to convert the Convertible Notes into Common Stock
in connection with the redemption. The Convertible Notes convert into Common
Stock at a conversion price of $8.00 per share (assuming an initial public
offering price of at least $14.00 per share).
5
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT STATEMENT OF OPERATIONS DATA)
Upon the completion of this offering and pursuant to the Reorganizations,
the Company will acquire certain assets and liabilities of, and enter into the
Service Agreements with, the Founding Affiliated Practices. Due to the fact that
the Company has had no significant operations to date, no pro forma statement of
operations has been included in this Prospectus. The amount and composition of
costs to be incurred by the Company related to the provision of management
services to the Founding Affiliated Practices may differ from the costs
historically incurred by the Founding Affiliated Practices; therefore, the costs
presented in the individual financial statements of the Founding Affiliated
Practices may not be representative of the Company's costs on a pro forma basis.
The following pro forma as adjusted balance sheet data gives effect to the
Reorganizations, the conversion of the Convertible Notes, borrowings of
approximately $13.6 million under the Credit Facility to refinance substantially
all funded debt previously incurred by the Founding Affiliated Practices, the
completion of this offering and the application of the estimated net proceeds
therefrom as if they had occurred on June 30, 1997 (all assuming a public
offering price of $15.00 per share). Since APPI and the Founding Affiliated
Practices were not under common control or management as of June 30, 1997, the
pro forma as adjusted balance sheet data is not necessarily indicative of the
financial position that would have been achieved had these events actually
occurred on such date. The following financial data should be read in
conjunction with the information set forth under "Use of Proceeds," "American
Physician Partners, Inc. Unaudited Pro Forma Combined Balance Sheet" and
"Selected Financial Data" and in the historical financial statements of APPI and
the Founding Affiliated Practices included elsewhere herein.
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HISTORICAL
------------------------------------
PERIOD FROM
INCEPTION PERIOD FROM
(APRIL 30, 1996) JANUARY 1, 1997
TO TO
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ---------------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ --
----------- -----------
Costs and expenses:
Salaries and benefits..................................... 545,949 901,065
Rent and lease expense.................................... 57,015 114,134
General and administrative................................ 299,585 412,494
Depreciation.............................................. 2,612 12,691
Interest expense.......................................... 36,031 104,792
Professional services..................................... 607,482 143,859
Marketing expense......................................... 114,067 43,499
----------- -----------
Total costs and expenses.......................... 1,662,741 1,732,534
----------- -----------
Interest income............................................. 13,198 33,135
----------- -----------
Net loss.................................................... $(1,649,543) $(1,699,399)
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HISTORICAL PRO FORMA
--------------------------------- AS ADJUSTED
DECEMBER 31, 1996 JUNE 30, 1997 JUNE 30, 1997
----------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 2,491 $ 110 $ 2,935
Working capital....................................... 2,029 (5,337) 17,224
Total assets.......................................... 2,578 2,486 75,256
Long-term debt and capital leases, net of current
portion............................................. 3,500 -- 17,585
Stockholders' equity.................................. (1,400) (3,099) 34,575
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the factors listed below in
evaluating an investment in the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements that include risks and
uncertainties, and address, among other things, acquisition and expansion
strategy, use of proceeds, projected capital expenditures, liquidity, possible
third-party payor arrangements, cost reduction strategies, integration of the
Affiliated Practices, possible effects of changes in government regulation and
managed care and availability of insurance. These statements may be found under
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, without limitation, those discussed in the risk
factors set forth below and matters set forth elsewhere in this Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY; NO PRIOR OPERATING EXPERIENCE
APPI was incorporated in April 1996, has generated no revenue to date and
has conducted no significant operations other than in connection with this
offering and the pending Reorganizations. The Company will derive a substantial
portion of its revenue from service fees it receives from the Affiliated
Practices for managing certain non-medical aspects of their operations. The
service fees paid to the Company generally will be based on the revenue of the
Affiliated Practices. The Company's success will depend in large part on its
ability to apply its management experience and implement practices, systems and
marketing plans to enhance the revenue and profitability of the Affiliated
Practices. To date, the Founding Affiliated Practices have been operated as
independent entities without common management. Moreover, the Company has no
preexisting relationship with any of the Founding Affiliated Practices and has
not managed any physician groups in the past. Due to this lack of prior
operating experience, there can be no assurance that the Company will be able to
integrate successfully the assets and personnel of the Founding Affiliated
Practices or to successfully implement its operating strategies with and
profitably provide management and administrative services to the Founding
Affiliated Practices or any other Affiliated Practices. There can be no
assurance that the Company will be profitable on a quarterly or annual basis in
the future.
DEPENDENCE ON AFFILIATED RADIOLOGISTS; RISK OF TERMINATION OF SERVICE AGREEMENTS
The Company's operations are entirely dependent on its continued
affiliation through Service Agreements with the Founding Affiliated Practices
and any other practices with which it may affiliate in the future. There can be
no assurance that the Founding Affiliated Practices or any other Affiliated
Practices will operate profitably or that the Service Agreements will not be
terminated. Two of the Founding Affiliated Practices (Advanced Radiology, LLC
and The Ide Group, P.C.) are expected to contribute in the aggregate
approximately 50% of the service fees to be paid to the Company by the Founding
Affiliated Practices, based on their historical net patient revenue and
expenses. The Service Agreements with the Founding Affiliated Practices will
have terms of 40 years, but may be terminated by either party if (i) the other
party (a) files a petition in bankruptcy or other similar events occur or (b)
defaults in the performance of a material duty or obligation, which default
continues for a specified period after notice or (ii) an opinion is rendered by
a law firm of nationally-recognized expertise in health care law that a material
term of the Service Agreement is in violation of applicable law (or a court or
regulatory agency finds as such) and such violation cannot be cured. The Company
generates its revenue through the service fees it receives pursuant to the
Service Agreements. The termination of any of the Founding Affiliated Practices'
Service Agreements could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Service Agreements." The Company anticipates that, to the extent that it enters
into management relationships with additional practices, the Service Agreements
entered into with such Affiliated Practices will have provisions providing for
the terms, termination and repurchase of assets similar to those contained in
the Service Agreements with the Founding Affiliated Practices. Any termination
of the Service Agreements with such Affiliated Practices could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company has executed a $115 million credit facility
(the "Credit
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Facility") with GE Capital and other lenders and granted a security interest in
the Service Agreements to the lenders to secure the Company's payment and
performance obligations under the Credit Facility. The Credit Facility is
expected to become effective upon completion of this offering and consummation
of the Reorganizations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Service Agreements."
Each Founding Affiliated Practice will enter into employment agreements
with the key radiologists associated with each such Founding Affiliated
Practice. The employment agreements generally will be for a term of five years.
Although the Company, in conjunction with the Founding Affiliated Practices,
will endeavor to maintain and renew such contracts, in the event a significant
number of such radiologists terminate their relationships with the Company, the
Company's business could be adversely affected. The Company anticipates that, to
the extent it enters into Service Agreements with other Affiliated Practices,
similar employment agreements will be entered into between such Affiliated
Practices and the key radiologists associated with their respective practices;
as such, the Company will face similar risks if a significant number of such
radiologists terminate their relationships with the Affiliated Practices.
Further, if a significant number of radiologists or other medical service
providers become unable or unwilling to continue in their roles, the Company's
business could be adversely affected. Neither the Company nor the Founding
Affiliated Practices maintains insurance on the lives of any affiliated
physician for the benefit of the Company. See "Business -- Affiliation
Structure."
UNCERTAINTY REGARDING THE ENFORCEABILITY OF NONCOMPETITION PROVISIONS
The Service Agreements require the Founding Affiliated Practices to enter
into and enforce agreements with the stockholders and full-time radiologists at
each Founding Affiliated Practice (subject to certain exceptions) that include
covenants not to compete with the Company for a period of two years after
termination of employment. See "Business -- Service Agreements." The Company
anticipates that Service Agreements that may be entered into with Affiliated
Practices in the future will also contain similar covenants requiring such
Affiliated Practices to restrict the ability of the stockholders and full-time
radiologists at such Affiliated Practices to compete with the Company. In most
states, a covenant not to compete will be enforced only to the extent it is
necessary to protect a legitimate business interest of the party seeking
enforcement, does not unreasonably restrain the party against whom enforcement
is sought and is not contrary to public interest. This determination is made
based on all of the facts and circumstances of the specific case at the time
enforcement is sought. For this reason, it is not possible to predict with
certainty whether a court will enforce such a covenant in a given situation. In
addition, the Company is not aware of any judicial precedents which have
addressed whether a management company's interest under a management agreement
will be viewed as the type of protectable business interest that would permit it
to enforce such a covenant. The inability of the Company to enforce such
anti-competition covenants could have a material adverse effect on the Company's
business, financial condition and results of operations.
RELIANCE ON REFERRALS
The Company is dependent on referrals from third parties to its owned,
operated or managed ICs and to other ICs or hospitals to which the Affiliated
Practices provide professional services in each of the markets where the Company
conducts business. A substantial portion of these referrals are made by
physicians who have no contractual obligation or economic incentive to refer
patients to those ICs or hospitals. The Company's owned, operated or managed ICs
and the Founding Affiliated Practices compete with local radiologists and
technical imaging service providers, including non-profit and for profit
hospitals and health systems. The Company generates revenue from fees charged
for technical services provided at its owned, operated or managed ICs and from
service fees that it receives from the Affiliated Practices. Neither the Company
nor any Founding Affiliated Practice is dependent on any single referral source
for a material portion of its revenue. If a sufficiently large number of
physicians elected at any time to discontinue referring patients to the ICs
affiliated with the Company, the Company's business, financial condition and
results of operations would be materially adversely affected. In addition, there
is potential for disruption of relationships in connection with the acquisition
or assumption of control of a particular IC by the Company, and there can be
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no assurance that the Company will retain all of the business conducted by that
IC at the time of acquisition or assumption of control by the Company.
Further, in an effort to control costs, non-governmental health care payors
have implemented cost containment programs which could limit the ability of
physicians to refer patients to the Company's owned, operated or managed ICs.
For example, persons enrolled in prepaid health care plans, such as health
maintenance organizations ("HMOs"), often are not free to choose where they
obtain diagnostic imaging, interventional radiology or radiation oncology
services. Rather, the health plan provides these services directly or contracts
with providers and requires its enrollees to obtain such services only from such
providers. Some insurance companies and self-insured employers also limit such
services to contracted providers. Such "closed panel" systems are now common in
the managed care environment. Other systems create an economic disincentive for
referrals to providers outside of the plan's designated panel of providers.
Although the Company intends to seek managed care contracts for its owned,
operated or managed ICs and to assist the Affiliated Practices to obtain
contracts to provide professional and technical radiology services, there can be
no assurance that the Company will be able to compete successfully for managed
care contracts against larger companies with greater resources.
RISKS ASSOCIATED WITH ACQUISITIONS AND EXPANSION STRATEGY
General
The Company's business strategy includes growth through the acquisition of
radiology practice assets, management service organizations ("MSOs"), ICs and
related businesses and entry into and maintenance of agreements to provide
management and administrative services to radiology practices, including
services designed to improve operating efficiencies. There can be no assurance
that the Company will be able to acquire and retain the assets of, or provide
management and administrative services to, additional radiology practices, MSOs
or ICs, profitably provide such services or successfully integrate such
additional relationships, or successfully improve operating efficiencies of the
Affiliated Practices. In addition, there can be no assurance that the assets of
radiology practices acquired in the future, or the relationships entered into in
the future, will be beneficial to the successful implementation of the Company's
overall strategy or that such assets and relationships will ultimately produce
returns that justify their related investment or implementation by the Company.
See "Business -- Business Strategy." Affiliated Practices acquired in the future
may have disparate cultures, operating and information systems and
organizational structures. Failure of the Company to acquire additional
practices and to successfully integrate and profitably manage or improve the
operating efficiencies of the Affiliated Practices could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's ability to expand its operations is dependent upon factors
such as its ability to (i) identify attractive and willing candidates for
acquisition, (ii) adapt or amend the Company's structure to comply with present
or future federal and state legal requirements affecting the Company's
arrangements with physician practice groups, including state prohibitions on
fee-splitting, corporate practice of medicine and referrals to facilities in
which physicians have a financial interest (see "-- Government Regulation"),
(iii) obtain regulatory approvals and certificates of need, where necessary, and
comply with licensing requirements applicable to the Company, the Affiliated
Practices and the physicians associated with the Affiliated Practices, including
their respective facilities (see "-- Government Regulation"), and (iv) expand
the Company's infrastructure and management to accommodate expansion. There can
be no assurance that the Company will be able to achieve these objectives or its
planned growth, that the assets of radiology practices, MSOs or ICs will
continue to be available for acquisition by the Company or that the addition of
such assets or management relationships will be profitable. Further,
acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention
and resources, failure to retain key acquired personnel, amortization or
write-off of acquired intangible assets and risks associated with unanticipated
events or liabilities, some or all of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
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Potential Need for Additional Capital
The Company intends to finance future acquisitions by using shares of the
Common Stock for all or a portion of the consideration to be paid. In the event
that the Common Stock does not maintain a sufficient valuation, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of the assets of their businesses, the Company
may be required to utilize more of its cash resources in order to pursue its
acquisition program. The Company may also incur indebtedness to fund future
acquisitions. The Company has executed the Credit Facility; however, the
availability of the Credit Facility is subject to a number of closing
conditions, including the consummation of this offering and the Reorganizations
as well as other customary closing and borrowing conditions. The Company's
growth could be limited and its existing operations impaired unless it is able
to obtain additional capital through subsequent debt or equity financings. There
can be no assurance that borrowing capacity under the Credit Facility will be
available to the Company when needed or that the Company will be able to obtain
additional financing or that, if available, such financing will be on terms
acceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." As a result, there can be no assurance that the Company will be able
to implement its acquisition strategy successfully.
Risks Relating to Antitrust Laws
The Company intends to expand both in areas where the Founding Affiliated
Practices currently operate as well as in new markets. Although the Company will
continue to structure its operations in an effort to comply with applicable
antitrust laws, there can be no assurance that federal or state governmental
authorities would not view the Company as being dominant in a particular market
and, therefore, cause the Company to divest itself of any particular Affiliated
Practice or related assets. In addition, these laws could prevent acquisitions
of practices that would be integrated into existing Affiliated Practices if such
acquisitions substantially lessen competition or tend to create a monopoly.
GOVERNMENT REGULATION
State and Federal Fraud and Abuse, Anti-Kickback and Anti-Referral Laws
Various federal and state laws regulate the relationships between providers
of health care services, physicians and other clinicians. See
"Business -- Government Regulation and Supervision." These laws include the
fraud and abuse provisions of the Social Security Act, which include the federal
"anti-kickback" and Stark or anti-referral laws. The "anti-kickback" laws
prohibit the offering, payment, solicitation or receipt of any direct or
indirect remuneration for the referral of Medicare, Medicaid or other
governmental program patients or for the recommendation, leasing, arranging,
purchasing, ordering or providing of Medicare or Medicaid covered services,
items or equipment. Violations of the "anti-kickback" laws may result in
substantial civil or criminal penalties for individuals or entities, including
large civil monetary penalties and exclusion from participation in Medicare,
Medicaid and other governmental programs. The Balanced Budget Act of 1997
("BBA97") contains certain reform provisions relating to Medicare, Medicaid and
other governmental programs, that are intended to assist the government in its
efforts to enforce the "anti-kickback" laws, including adding a civil money
penalty and broadening the scope of circumstances under which mandatory or
permissive exclusion from the programs may apply. Such exclusion and penalties,
if applied to the Company's owned, operated or managed ICs, the Affiliated
Practices or physicians affiliated with the Affiliated Practices, could result
in significant loss of reimbursement to the affected individuals and entities. A
determination of liability under any such laws could have a material adverse
effect on the Company's business, financial condition and results of operations.
Certain provisions contained in the Omnibus Budget Reconciliation Act of
1989 ("Stark I") and the Omnibus Budget Reconciliation Act of 1993 ("Stark II"),
and subsequent amendments, prohibit physician referrals for certain "designated
health services," including, without limitation, radiology services to entities
with which a physician or an immediate family member has a financial
relationship (collectively, the "Stark Law"). The Stark Law also prohibits
entities from presenting or causing to be presented a claim or bill to any
individual, third-party payor, or other entity for designated health services
furnished under a prohibited
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referral. A violation of the Stark Law by the Company, an Affiliated Practice or
physicians affiliated with the Affiliated Practices, may result in significant
civil penalties, which may include exclusion or suspension of the physician or
entity from future participation in the Medicare and Medicaid programs and
substantial fines. A determination of violation under such law by any of these
persons or entities could have a material adverse effect on the Company's
business, financial condition and results of operations.
Several states have adopted laws similar to the federal "anti-kickback" and
Stark Law that cover patients in private programs as well as government
programs. All of the states in which the Founding Affiliated Practices are
located have adopted a form of "anti-kickback" law and almost all of those
states (California, Kansas, Maryland and New York) have also adopted a form of
anti-referral law. These laws and the interpretations thereof vary from state to
state and are enforced by the courts and regulatory authorities, each with broad
discretion. A determination of liability under any such laws could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Corporate Practice of Medicine; Fee Splitting
The laws of many states, including each of the states in which the Founding
Affiliated Practices are located, also prohibit business corporations, such as
the Company, from exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements, such as fee-
splitting, with physicians. These laws and their interpretations vary from state
to state and are enforced by both the courts and regulatory authorities, each
with broad discretion. The Company's strategy is to acquire certain assets and
assume certain liabilities of, and to enter into Service Agreements with,
Affiliated Practices. Pursuant to the Service Agreements, the Company will
provide management, administrative, technical and other non-medical services to
the Affiliated Practices in exchange for a service fee. The Company intends to
structure its relationships with the Affiliated Practices (including the
purchase of assets and the provision of services under the Service Agreements)
to keep the Company from engaging in the practice of medicine or exercising
control over the medical judgments or decisions of the Affiliated Practices or
their physicians. There can be no assurance that regulatory authorities or other
parties will not assert that the Company is engaged in the corporate practice of
medicine in such states or that the payment of service fees to the Company by
the Affiliated Practices pursuant to the Service Agreements constitutes
fee-splitting or the corporate practice of medicine. If such a claim was
successfully asserted, the Company could be subject to civil and criminal
penalties and could be required to restructure or terminate its contractual
arrangements. Such results or the inability of the Company to successfully
restructure its relationships to comply with such statutes could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Service Agreements."
Licensing and Certification Laws
The ownership, construction, operation, expansion and acquisition of ICs
are subject to various federal and state laws, regulations and approvals
concerning the licensing of facilities, personnel, certificates of need and
other required certificates for certain types of health care facilities and
major medical equipment. Although the laws of the five states in which the
Founding Affiliated Practices are located do not subject ICs to certificate of
need or separate licensing requirements as stand-alone imaging centers, the laws
of other states could limit the Company's ability to acquire new imaging
equipment or expand or replace its equipment at ICs in other states. No
assurances can be given that the required regulatory approvals for any future
acquisitions, expansions or replacements will be granted to the Company, and the
failure to obtain such approvals could materially and adversely affect the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation and Supervision."
Compliance
Although the Company intends to structure and conduct its proposed
operation so as to comply with applicable federal and state laws, neither the
Company's current or anticipated business operations nor the operations of the
Founding Affiliated Practices have been the subject of judicial or regulatory
interpretation. There can be no assurance that a review of the Company's
business by courts or regulatory authorities will not
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result in determinations that could adversely affect the operations of the
Company or that the health care regulatory environment will not change so as to
restrict the Company's operations. In addition, the regulatory framework of
certain jurisdictions may limit the Company's expansion into or ability to
continue operations within such jurisdictions, unless the Company is able to
modify its operational structure to conform with such regulatory framework. Any
limitation on the Company's ability to expand could have a material adverse
effect on the Company's business, financial condition and results of operations.
Reform Initiatives; Increased Enforcement
In addition to existing government health care regulations, there have been
numerous initiatives at the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The Company
believes that such initiatives will continue for the foreseeable future. Certain
aspects of these reforms as proposed in the past, such as further reductions in
Medicare and Medicaid payments, if adopted, could materially and adversely
affect the Company's business, financial condition and results of operations.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern the Company's activities. There can be no assurance that
the Company's activities will not be investigated, that claims will not be made
against the Company or that increased enforcement activities will not directly
or indirectly have an adverse effect on the Company's business, financial
condition and results of operations or the market price of the Common Stock.
Insurance Laws and Regulations
Certain states have enacted statutes or adopted regulations affecting risk
assumption in the health care industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based contracting to
applicable insurance laws and regulations, which may include, among other
things, laws and regulations providing for minimum capital requirements and
other safety and soundness requirements. Failure to comply with these statutes
and regulations could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, implementation of
additional regulations or compliance requirements could result in substantial
costs to the Company and the Affiliated Practices. The inability to enter into
capitated or other risk-sharing arrangements or the cost of complying with
certain applicable laws that would permit expansion of the Company's risk-based
contracting activities could have a material adverse effect on the Company's
business, financial condition and results of operations.
REIMBURSEMENT TRENDS AND COST CONTAINMENT
The Company's revenue will be derived from service fees paid to the Company
by the Affiliated Practices pursuant to the Service Agreements and through its
ownership, operation and management of ICs. Substantially all of the revenue of
the Affiliated Practices and such ICs is currently derived from government
sponsored health care programs (principally, Medicare and Medicaid) and private
third-party payors. During the six month period ended June 30, 1997,
approximately 21% of the combined medical service revenues, net of the Founding
Affiliated Practices was derived from government approved health care programs
and approximately 79% of the combined medical service revenues, net of the
Founding Affiliated Practices was derived from private third-party payors. The
health care industry is experiencing a trend toward cost containment as
government and private third-party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with service
providers. The Company believes that these trends will continue to result in a
reduction from historical levels in per-patient revenue for its Affiliated
Practices and ICs and that the results of operations of the Affiliated Practices
are likely to continue to be affected by lower reimbursement levels. Further
reductions in payments or other changes in reimbursement for health care
services could have a material adverse effect on the Company's business,
financial condition and results of operations unless the Company is otherwise
able to offset such payment reductions.
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Rates paid by private third-party payors are based on established physician
and hospital charges and are generally higher than Medicare reimbursement rates.
Any decrease in the relative number of patients covered by private insurance
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The federal government has implemented, through the Medicare program, a
resource-based relative value scale ("RBRVS") payment methodology for physician
services. The RBRVS is a fee schedule that, except for certain geographical and
other adjustments, pays similarly-situated physicians the same amount for the
same services. The RBRVS is adjusted each year and is subject to increases or
decreases at the discretion of Congress. To date, the implementation of the
RBRVS has reduced payment rates for certain of the procedures historically
provided by the Affiliated Practices. BBA 97 provides for reductions in the rate
of growth of payments for physician services, including services historically
provided by the Affiliated Practices, in the amount of $5.3 billion over a
five-year period ending in 2002. In addition, BBA 97 provides for the
implementation of a resource-based methodology for payment of physician practice
expenses under the physician fee schedule over a four-year period beginning in
fiscal year 1999. Adoption of this methodology is expected to reduce payments
for services historically provided by the Affiliated Practices.
RBRVS-type payment systems also have been adopted by certain private
third-party payors and the Company believes that it is likely that other private
third-party payors will adopt this payment methodology in the future.
Wider-spread implementation of such programs could reduce payments by private
third-party payors and could indirectly reduce the Company's operating margins
to the extent that the costs of providing management, administrative, technical
and non-medical services related to such procedures could not be proportionately
reduced. There can be no assurance that such cost reduction efforts by
governmental or private third-party payors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation and Supervision."
Private third-party payors and Medicare and Medicaid have increased their
use of managed care as a means of cost containment. Increasingly, private
third-party payors negotiate discounts from established physician and hospital
charges or require capitation or other risk sharing arrangements as a condition
of patient referral to physician groups such as the Affiliated Practices. BBA 97
also includes provisions designed to increase the enrollment of Medicare and
Medicaid participants in managed care programs. The inability of the Company to
negotiate satisfactory arrangements with managed care companies could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS AND CAPITATED FEE ARRANGEMENTS
During the six month period ended June 30, 1997, approximately 94% of the
combined medical service revenues, net of the Founding Affiliated Practices was
derived from payments made on a fee-for-service basis by patients and
third-party payors (including government programs) and approximately 6% of the
combined medical service revenues, net of the Founding Affiliated Practices was
derived from capitated arrangements. Under capitated or other risk-sharing
arrangements, the health care provider typically is paid a pre-determined amount
per-patient per-month from the payor in exchange for providing all necessary
covered services to patients covered under the arrangement. Such contracts pass
much of the financial risk of providing care, including the risk of
over-utilization, from the payor to the provider. The Company believes that its
success will, in part, depend on the Company's ability to negotiate, on behalf
of the Affiliated Practices and the Company's owned, operated or managed ICs,
contracts with HMOs, employer groups and other third-party payors pursuant to
which services will be provided on a risk-sharing or capitated basis by some or
all of such Affiliated Practices or ICs. Risk-sharing arrangements result in
greater predictability of revenue but greater unpredictability of expenses and,
consequently, profitability. There can be no assurance that the Company will be
able to negotiate, on behalf of its Affiliated Practices or the Company's owned,
operated or managed ICs, satisfactory arrangements on a capitated or other
risk-sharing basis. In addition, to the extent that patients or enrollees
covered by such contracts require more frequent or extensive care than is
anticipated, the Company would incur unanticipated costs not offset by
additional revenue, which would reduce operating margins. In the worst case, the
revenue derived from such contracts may be insufficient to cover the costs of
the services
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provided. Any such reduction or elimination of earnings could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Furthermore, various quality assurance programs and organizations have been
created to scrutinize managed care organizations and their providers. In
response to such programs, managed care organizations and providers have
developed their own quality assurance programs to address a variety of areas,
including patient access to services, patient satisfaction, outcomes and
performance measures and utilization of services. These quality assurance
measures involve various costs associated with their implementation and
operation and depend, in part, upon the sophistication and compatibility of
existing systems and operations of the Affiliated Practices as well as the
Company's ability to integrate those systems and operations. The Company's
inability to develop strong quality assurance measures in conjunction with its
Affiliated Practices could place the Company and its Affiliated Practices at a
competitive disadvantage and have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The Company is under competitive pressure to acquire and retain the assets
of, and to provide management and administrative services to, additional
radiology practices, MSOs and ICs. There are a number of publicly-traded
companies focused on owning or managing ICs, including U.S. Diagnostic, Inc.,
Medical Resources, Inc., TeamHealth (a subsidiary of MedPartners, Inc.) and
Health Images (a division of HEALTHSOUTH Corporation). The Company is aware of
at least two privately-held physician practice management companies focused on
professional and technical radiology services. Several companies, both publicly
and privately held, that have established operating histories and, in some
instances, greater resources than the Company are pursuing the acquisition of
general and specialty physician practices (including radiology in the case of
TeamHealth) and the management of such practices. Additionally, some hospitals,
clinics, health care companies, HMOs and insurance companies engage in
activities similar to those of the Company. There can be no assurance that the
Company will be able to compete effectively for the acquisition of, or
affiliation with, radiology practices, that additional competitors will not
enter the market, that such competition will not make it more difficult or
expensive to acquire the assets of, and provide management and administrative
services to, radiology practices on terms beneficial to the Company, or that
competitive pressures will not otherwise adversely affect the Company. See
"Business -- Competition."
The Affiliated Practices and the Company's owned, operated or managed ICs
compete with numerous local radiology and imaging service providers. The Company
believes that changes in governmental and private reimbursement policies and
other factors have resulted in increased competition among providers for the
provision of medical services to consumers. There can be no assurance that the
Affiliated Practices and the Company's owned, operated or managed ICs will be
able to compete effectively in the markets they serve, which inability to
compete could materially and adversely affect the Company's business, financial
condition and results of operations.
Further, the Affiliated Practices will compete with other providers for
managed care contracts. The Company believes that trends toward managed care
have resulted, and will continue to result, in increased competition for such
contracts. Other radiology practices and MSOs may have more experience than the
Affiliated Practices and the Company in obtaining such contracts. There can be
no assurance that the Affiliated Practices and the Company will be able to
obtain future business from managed care entities which will allow the Company
to compete effectively in the markets they serve, which inability to compete
could materially and adversely affect the Company's business, financial
condition and results of operations.
POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. Although the Company intends to structure
its relationships with the Affiliated Practices under the Service Agreements in
a manner that will not constitute the practice of medicine, there can be no
assurance that claims, suits or complaints relating to services and products
provided by Affiliated Practices will not be asserted against the Company in the
future. Additionally, the Company owns, operates and manages ICs,
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which exposes the Company to professional liability claims. The Company
maintains insurance policies with coverages that it believes are appropriate in
light of the risks attendant to its business. In addition, pursuant to the
Service Agreements, the Affiliated Practices are required to maintain
professional liability insurance. Nevertheless, there can be no assurance that
successful malpractice or other claims will not be asserted against the
Affiliated Practices or the Company that exceed the scope of coverage or
applicable policy limits or which could otherwise have a material adverse effect
on the Company's business, financial condition and results of operations.
The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of the Company
and the Affiliated Practices. There can be no assurance that adequate liability
insurance will be available to the Company and the Affiliated Practices in the
future at acceptable costs or that the future cost of such insurance to the
Company and the Affiliated Practices will not have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Corporate Liability and Insurance."
In connection with the Reorganizations, the Company will assume and succeed
to substantially all of the obligations of each Founding Affiliated Practice.
Further, in connection with the acquisition of the assets of other Affiliated
Practices in the future, the Company anticipates that it will typically succeed
to some or all of the liabilities of such Affiliated Practices. Therefore,
claims may be asserted against the Company for events that occurred prior to the
acquisition of the assets of the Affiliated Practices.
The physicians employed by the Founding Affiliated Practices are from time
to time subject to malpractice claims. Such malpractice claims, if successful,
could result in damages which may exceed applicable insurance coverage for such
malpractice claims. While each Founding Affiliated Practice and the Company
maintains insurance consistent with industry practice, there can be no assurance
that the amount of insurance currently maintained by them will satisfy all
claims made against them or that a Founding Affiliated Practice or the Company
will be able to obtain insurance in the future at satisfactory rates or in
adequate amounts. Further, there are certain claims against the Founding
Affiliated Practices which are not covered by insurance (see note 11 to the
Consolidated Financial Statements of Advanced Radiology, LLC and Subsidiary).
The Company cannot predict the effect that any such claims, regardless of their
outcome, might have on its business or reputation.
The Company has not been named in any of the lawsuits against a Founding
Affiliated Practice; however, there can be no assurance that the Company will
not subsequently be named as a defendant in one or more of these lawsuits
following consummation of the Reorganizations. Each Founding Affiliated Practice
has retained responsibility for, and agreed to indemnify the Company in full
against, the liabilities associated with these lawsuits. In the event the
Company is subsequently added as a party in any of these lawsuits, or a monetary
judgment is entered against the Company, and a Founding Affiliated Practice is
not required or is unable to satisfy its indemnification obligations to the
Company, the Company's business, results of operations and financial condition
could be materially adversely affected.
On September 1, 1997, a new law became effective in the state of Texas that
permits injured patients to sue health insurance carriers, HMOs and other
managed care entities for medical malpractice. There can be no assurance that
this law will not increase the cost of liability insurance to the Company for
services provided in Texas or any other states in which the Company does
business if similar legislation is adopted in those states.
In connection with the Reorganizations, the shareholders of the Founding
Affiliated Practices have agreed to indemnify the Company for certain claims.
There can be no assurance that the Company will be able to receive payment under
any such indemnity agreements or that the failure to fully recover such amounts
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
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DEPENDENCE ON INFORMATION SYSTEMS
The current information systems of the Founding Affiliated Practices
consist of disparate, non-integrated accounting, practice management and other
information systems. In order to facilitate the extensive information management
requirements necessary to effectively manage operations, compete for managed
care contracts and achieve standardization and economies of scale, the Company
intends to create a network infrastructure and deploy two company-wide
information systems. The design, selection and implementation of the various
components of these systems and the integration throughout the Company and the
Affiliated Practices will entail an aggregate estimated expenditure of
approximately $3.0 million and significant management resources. The Company
intends to implement such systems within the first 12 months following this
offering, but may experience unanticipated delays, complications and expenses in
implementing, integrating and operating such systems. Furthermore, such systems
may require modifications, improvements or replacements as the Company expands
or if new technologies become available. Such modifications, improvements or
replacements may require substantial expenditures and may require interruptions
in operations during periods of implementation. There can be no assurance that
the Company will be able to implement and operate these information systems
effectively or that these systems will produce the expected benefits. The
failure to successfully implement and maintain operational and financial
information systems could prevent the Company from efficiently accumulating data
from disparate systems maintained by the Affiliated Practices and generating
operational data necessary to more effectively manage the Affiliated Practices
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Operations and
Development -- Information Management."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the ability and experience of its executive
officers and key personnel for the management of the Company and the
implementation of its business strategy. The Company currently has employment
contracts with four of its executive officers and a consulting agreement (which
will become effective immediately following this offering) with one other
executive officer. Because of the difficulty in finding adequate replacements
for such personnel, the loss of the services of any such personnel or the
Company's inability in the future to attract and retain management and other key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain key
man insurance for any of its executive officers. See "Management -- Employment
Agreements; Covenants-Not-to-Compete" and "Certain Transactions."
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market following this
offering. Upon the completion of the Reorganizations, the conversion of the
Convertible Notes and completion of this offering, the Company will have
outstanding 18,321,982 shares of Common Stock, assuming an initial public
offering price of $15.00 per share. The 5,000,000 shares of Common Stock to be
sold in this offering will be freely tradable without restriction under the
Securities Act of 1993, as amended (the "Securities Act"), unless acquired by
"affiliates" of the Company, as that term is defined under the Securities Act or
contractually restricted.
Simultaneously with the closing of this offering, security holders of the
Founding Affiliated Practices will receive, in the aggregate, 10,884,482 shares
of Common Stock as a portion of the consideration for their practices, which
shares will have been registered under the Securities Act. Certain other
stockholders of the Company will hold, in the aggregate, an additional 2,000,000
shares of Common Stock, none of which are being offered by this Prospectus and
none of which were acquired in transactions registered under the Securities Act.
Such unregistered shares may not be sold except in transactions registered under
the Securities Act or pursuant to an exemption from registration. The holders of
these 12,884,482 shares of Common Stock have entered into agreements with the
Company pursuant to which such holders have agreed not to sell any shares of
Common Stock owned by them at the time of consummation of the Reorganizations
for a period of 12 months following this offering, and to thereafter limit the
sale of such Common Stock to 25% of such
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shares upon expiration of such 12-month period following this offering; up to an
additional 25% of such shares upon expiration of the 18-month period following
this offering, and the remaining 50% of such shares upon expiration of a
24-month period following this offering. Further, each of the holders of the
Convertible Notes have entered into agreements with the Company pursuant to
which each holder has agreed not to sell any portion of the Convertible Notes or
any shares of the Common Stock issued or issuable upon conversion thereof for a
period of the 24 months following the date the Convertible Notes were issued to
such holder (which Notes were issued between September 30, 1996 and December 31,
1996). The Company has agreed with the Underwriters not to waive the restrictive
provisions of those agreements for 180 days after the date of this Prospectus
without the prior written consent of Smith Barney Inc. Upon expiration of these
agreements, the registered shares of Common Stock will be eligible for resale in
the public market and the unregistered shares of Common Stock, the Convertible
Notes and the shares of Common Stock issued or issuable upon conversion of the
Convertible Notes will become eligible for sale in the public market, subject to
the provisions of Rule 144 of the Securities Act. See "Shares Eligible for
Future Sale."
In addition, the Company and its officers and directors and substantially
all other holders of Common Stock and securities convertible into or exercisable
or exchangeable for Common Stock have agreed that for a period of 180 days after
the date of this Prospectus they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock except, in the case of the Company, in certain limited
circumstances. See "Shares Eligible for Future Sale."
CONTROL BY EXISTING STOCKHOLDERS
Following the completion of the Reorganizations, the conversion of the
Convertible Notes and completion of this offering, members of the Board of
Directors and the executive officers of the Company will own approximately 12.3%
of the outstanding shares of Common Stock and the security holders of the
Founding Affiliated Practices will own approximately 59.4% of the outstanding
shares of Common Stock (including shares received by Directors of the Company
who are also security holders of Founding Affiliated Practices). The Company's
Amended and Restated Bylaws do not provide for cumulative voting. The Company's
Amended and Restated Bylaws provide that, following the consummation of this
offering, the Board of Directors must nominate two physicians licensed to
practice medicine from the Affiliated Practices for election to the Board of
Directors at each annual meeting of the Company's stockholders (three physicians
licensed to practice medicine from the Affiliated Practices if the size of the
Board of Directors increases to nine). Although to the knowledge of the Company
such directors and other persons do not have any arrangements or understandings
among themselves with respect to the voting of the shares of Common Stock
beneficially owned by such persons, following the completion of this offering,
such persons will be able to control the affairs of the Company. See "Principal
Stockholders."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Restated Certificate of Incorporation,
the Company's Amended and Restated Bylaws and Delaware law could discourage
potential acquisition proposals, delay or prevent a change in control of the
Company and, consequently, limit the price that investors might be willing to
pay in the future for shares of the Common Stock. These provisions include the
inability to remove directors except for cause and the Company's ability to
issue, without further stockholder approval, shares of preferred stock with
rights and privileges senior to the Common Stock. The Company also is subject to
Section 203 of the Delaware General Corporation Law which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with an "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder. See "Description of Capital Stock."
The Company has entered into employment agreements with four of its
executive officers which contain provisions that require the Company to pay
certain amounts to such employees upon their termination following certain
events, including a change of control of the Company. Such agreements may delay
or prevent
17
<PAGE> 19
a change of control of the Company. See "Management -- Employment Agreements;
Covenants-Not-to-Compete."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or continue after this offering. The initial public offering
price has been determined by negotiations among the Company and the several
Underwriters named herein, and may not be indicative of the market price for the
Common Stock after this offering. See "Underwriting" for factors considered in
determining the initial public offering price. There can be no assurance that
the market price for the Common Stock will not decline below the initial market
price. From time to time after this offering, there may be significant
volatility in the market price for the Common Stock. The trading price of the
Common Stock could be subject to significant fluctuations in response to
variations in the Company's quarterly operating results, general trends in the
Company's industry, regulatory and reimbursement developments, changes in
earnings estimates by securities analysts and other factors affecting the
Company's industry or the securities market as a whole. Any such fluctuations
may adversely affect the market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $13.17 per share (based on an assumed
public offering price of $15.00 per share and after giving effect to the
Reorganizations and conversion of the Convertible Notes). See "Dilution." In the
event the Company issues additional Common Stock in the future, including shares
that may be issued in connection with future acquisitions, or upon the exercise
of options, purchasers of Common Stock in this offering may experience further
dilution in the net tangible book value per share of Common Stock.
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, based upon an assumed initial public offering price of $15.00
per share and after deducting the estimated offering expenses payable by the
Company and the underwriting discounts and commissions ("Net Proceeds"), are
estimated to be approximately $66.7 million ($77.1 million if the Underwriters'
over-allotment option is exercised in full). Of this amount, approximately $54.4
million will be used to pay the cash portion of the consideration for the assets
of the Founding Affiliated Practices and approximately $12.2 million will be
used to repay certain indebtedness previously incurred by the Founding
Affiliated Practices. The indebtedness to be repaid from the Net Proceeds bears
interest at annual rates ranging from 5.35% to 10.36% with a weighted average
interest rate of 8.20% and would otherwise mature at various dates through the
year 2001. The indebtedness incurred by the Founding Affiliated Practices within
the last year that is to be repaid with portions of the Net Proceeds was
incurred for capital expenditures, acquisitions and working capital.
DIVIDEND POLICY
APPI has not paid any cash dividends since its inception. The Company
currently intends to retain all future earnings for the operation and expansion
of its business and, accordingly, the Company does not anticipate that any cash
dividends will be declared or paid on its Common Stock in the foreseeable
future. In addition, the Credit Facility prohibits the payment of dividends on
the Common Stock. Any payment of such dividends in the future will be at the
discretion of the Board of Directors and will depend upon the earnings and
financial position of the Company, its results of operations, its capital needs,
plans for expansion, contractual restrictions to which the Company may be
subject (including pursuant to the Credit Facility) and such other factors as
the Board of Directors may deem appropriate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, (ii) on a pro forma basis giving effect to the Reorganizations
and the distribution to the Founding Affiliated Practices and (iii) on a pro
forma basis as adjusted to give effect to (a) the sale of the 5,000,000 shares
of Common Stock offered hereby (assuming an initial public offering price of
$15.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses) and the application of the estimated Net Proceeds
therefrom as described under "Use of Proceeds," (b) the conversion of the
Convertible Notes and (c) borrowings of approximately $13.6 million under the
Credit Facility to occur upon the consummation of this offering to refinance
substantially all funded debt previously incurred by the Founding Affiliated
Practices other than capital leases and a note payable to a bank. This table
should be read in conjunction with "American Physician Partners, Inc. Unaudited
Pro Forma Combined Balance Sheet," "Selected Financial Data," and the financial
statements of APPI and the Founding Affiliated Practices included elsewhere
herein.
The Reorganizations include (a) the issuance of 10,884,482 shares of Common
Stock to the Founding Affiliated Practices, (b) the payment of $54.4 million,
all of which is to be paid to the Founding Affiliated Practices in cash at
closing and (c) the receipt of assets used by the Founding Affiliated Practices,
and the assumption of related debt, with a net book value of $22.2 million at
June 30, 1997.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------
PRO FORMA
ADJUSTED FOR PRO FORMA
ACTUAL DISTRIBUTION AS ADJUSTED
----------- ------------ ------------
<S> <C> <C> <C>
Current portion of notes payable and capital
leases.......................................... $ 3,500,000 $ 16,412,387 $ 1,347,442
=========== ============ ============
Distribution payable.............................. $ -- $ 54,422,419 $ --
GE Capital Revolving Credit Facility.............. -- -- 13,590,488
Other long-term debt and capital leases, net of
current portion................................. -- 16,253,933 3,994,842
Stockholders' equity (deficit):
Preferred Stock, $.0001 par value; 10,000,000
shares authorized; no shares outstanding..... -- -- --
Common Stock, $.0001 par value, 50,000,000
shares authorized; 2,000,000 shares issued
and outstanding, actual; 12,884,482 shares
issued and outstanding pro forma adjusted for
distribution and 18,321,982 shares issued and
outstanding, pro forma as adjusted(1)........ 200 1,288 1,831
Additional paid-in capital...................... 249,800 21,821,500 91,685,190
Accumulated deficit............................. (3,348,942) (57,111,543)(2) (57,111,543)(2)
----------- ------------ ------------
Total stockholders' equity (deficit).... (3,098,942) (35,288,755) 34,575,478
----------- ------------ ------------
Total capitalization.................... $(3,098,942) $ 35,387,597 $ 52,160,808
=========== ============ ============
</TABLE>
- ---------------
(1) Excludes 1,421,000 shares issuable upon exercise of options outstanding as
of September 12, 1997, at a weighted average exercise price of $1.68 per
share. The number of shares issuable in connection with the Reorganizations
and upon conversion of the Convertible Notes will increase if the initial
public offering price is lower than $14.00 per share. See "Certain
Transactions -- Reorganizations," "Shares Eligible for Future Sale,"
"Description of Capital Stock" and Note 4 of Notes to Financial Statements
of APPI.
(2) Adjusted to reflect the Reorganizations and distribution of $54.4 million to
the Founding Affiliated Practices, all of which is to be paid out of
proceeds from this offering.
20
<PAGE> 22
DILUTION
The net tangible book value of the Company at June 30, 1997 was
approximately $(3.1 million) or $(1.55) per share. Giving effect to the
Reorganizations and the conversion of the Convertible Notes (but not this
offering), the pro forma net tangible book value of the Company at June 30, 1997
would have been approximately $21.8 million or $1.63 per share. Therefore, the
increase in pro forma net tangible book value per share due to the
Reorganizations is $3.18 per share. After giving effect to the sale of the
shares of Common Stock offered hereby (assuming a public offering price of
$15.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses), the adjusted pro forma net tangible book value of
the Company at June 30, 1997 would have been approximately $33.6 million or
$1.83 per share, representing an immediate increase in net tangible book value
of $.20 per share to existing stockholders and an immediate dilution of $13.17
per share to the investors purchasing shares in this offering ("New Investors").
The following table illustrates this per share dilution to New Investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 15.00
Historical net tangible book value........................ $(1.55)
Increase due to the Reorganizations and conversion of the
Convertible Notes...................................... 3.18
Increase attributable to New Investors.................... .20
------
Pro forma adjusted net tangible book value after this
offering.................................................. 1.83
--------
Dilution to New Investors................................... $ 13.17
========
</TABLE>
The following table sets forth at the date of this Prospectus the number of
shares of Common Stock purchased from the Company, the total consideration to
the Company and the average price per share paid by existing stockholders (after
giving effect to the Reorganizations and conversion of the Convertible Notes)
and by the New Investors (assuming a public offering price of $15.00 per share
and before deducting underwriting discounts and commissions and estimated
offering expenses):
<TABLE>
<CAPTION>
SHARES ACQUIRED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)......... 13,321,982 72.7% $(31,790,000) (73.6)% $(2.39)
New Investors............. 5,000,000 27.3 75,000,000 173.6 15.00
---------- ----- ------------ -----
Total........... 18,321,982 100.0% $ 43,210,000 100.0%
========== ===== ============ =====
</TABLE>
- ---------------
(1) Consists of management, the holders of the Convertible Notes, John
Pappajohn, Derace L. Schaffer, M.D., and persons receiving Common Stock in
connection with the Reorganizations. Total consideration for existing
stockholders represents the combined stockholders' equity before this
offering adjusted to reflect the payment of approximately $54.4 million in
cash by the Company in connection with the Reorganizations and the
conversion of the Convertible Notes. The tangible assets received in
exchange for this consideration includes the net book value of the Founding
Affiliated Practices of approximately $22.2 million. See "Capitalization."
As of September 12, 1997, there were 1,421,000 shares issuable upon the
exercise of stock options having a weighted average exercise price of $1.68
per share. To the extent these options are exercised, there will be further
dilution to New Investors.
21
<PAGE> 23
AMERICAN PHYSICIAN PARTNERS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following unaudited pro forma combined balance sheet gives effect to
the Reorganizations as a combination of promoter interests, at historical costs,
and is based upon the historical financial statements of APPI and each of the
Founding Affiliated Practices. In addition, the unaudited pro forma combined
balance sheet gives effect to this offering (assuming an initial public offering
price of $15.00 per share), the conversion of the Convertible Notes and
borrowings of approximately $13.6 million under the Credit Facility to refinance
certain indebtedness previously incurred by the Founding Affiliated Practices.
The unaudited pro forma combined balance sheet gives effect to the completion of
such transactions as if they had occurred on June 30, 1997. Due to the fact that
the Company has had no significant operations to date, no pro forma statement of
operations has been included in this Prospectus. The amount and composition of
costs to be incurred by the Company related to the provision of management
services to the Founding Affiliated Practices may differ from the costs
historically incurred by the Founding Affiliated Practices; therefore, the costs
presented in the individual financial statements of the Founding Affiliated
Practices may not be representative of the Company's costs on a pro forma basis.
The unaudited pro forma combined balance sheet and notes thereto should be read
in connection with the other financial information, including the audited
financial statements of APPI and each of the Founding Affiliated Practices and
notes thereto, included elsewhere in this Prospectus.
The unaudited pro forma combined balance sheet is presented for
illustrative purposes only and is not necessarily indicative of the financial
position that would have been achieved if the Reorganizations, the conversion of
the Convertible Notes and this offering had been consummated on June 30, 1997.
22
<PAGE> 24
AMERICAN PHYSICIAN PARTNERS, INC.
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PACIFIC RADIOLOGY ROCKLAND
ADVANCED THE IDE M&S X-RAY IMAGING AND NUCLEAR RADIOLOGICAL
APPI RADIOLOGY GROUP PRACTICES CONSULTANTS MEDICINE GROUP
------- --------- ------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 110 $ 185 $ 238 $ 760 $ -- $ 887 $ 369
Accounts receivable, net................... -- 15,042 5,262 3,702 1,934 2,022 2,843
Other receivables.......................... 43 375 -- 192 -- -- --
Other current assets....................... 95 669 125 73 2,296 221 410
------- ------- ------ ------ ------ ------ -------
Total current assets................. 248 16,271 5,625 4,727 4,230 3,130 3,622
Property and equipment, net................. 167 14,860 997 758 1,862 662 5,269
Investments in joint ventures............... -- 1,101 -- 1,420 -- 1,322 --
Deferred income taxes....................... -- -- -- -- -- -- 1,203
Notes receivable............................ -- -- -- -- -- -- --
Intangible assets, net...................... -- -- -- 678 133 -- --
Other assets, net........................... 2,072 7,065 397 46 107 88 2,144
------- ------- ------ ------ ------ ------ -------
Total assets......................... $ 2,487 $39,297 $7,019 $7,629 $6,332 $5,202 $12,238
======= ======= ====== ====== ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings...................... $ -- $ 2,900 $ -- $ -- $ -- $1,000 $ --
Accounts payable and accrued expenses...... 2,086 2,007 2,022 257 1,278 209 189
Accrued salaries and benefits.............. -- 1,606 562 153 288 419 541
Due to joint ventures...................... -- 693 -- -- -- -- --
Deferred income taxes...................... -- -- -- -- 855 1,006 573
Current portion of deferred compensation... -- -- -- 83 -- -- --
Current portion of long-term debt.......... 3,500 3,909 436 231 844 119 1,675
Current portion of capital lease
obligations.............................. -- -- -- 13 -- -- 546
Distribution payable....................... -- -- -- -- -- -- --
Other current liabilities.................. -- 749 -- -- -- -- --
------- ------- ------ ------ ------ ------ -------
Total current liabilities............ 5,586 11,864 3,020 737 3,265 2,753 3,524
Deferred income taxes....................... -- -- 1,042 -- 11 -- --
Deferred compensation, net of current
portion.................................... -- -- -- 1,346 -- -- 3,600
Long-term debt, net of current portion...... -- 4,813 1,422 178 2,801 -- 5,563
Capital lease obligations, net of current
portion.................................... -- -- -- 37 -- -- 1,378
Long-term debt -- GE Capital revolving
credit facility............................ -- -- -- -- -- -- --
Other liabilities........................... -- 359 -- -- -- -- --
------- ------- ------ ------ ------ ------ -------
Total liabilities.................... 5,586 17,036 5,484 2,298 6,077 2,753 14,065
------- ------- ------ ------ ------ ------ -------
Minority interests in consolidated
subsidiaries............................... -- 408 -- 506 -- -- --
Stockholders' equity:
Common stock............................... -- -- -- -- -- -- --
Additional paid-in capital................. 250 -- -- -- -- -- --
Accumulated earnings (deficit)............. (3,349) 21,853 1,535 4,825 255 2,449 (1,827)
------- ------- ------ ------ ------ ------ -------
Total stockholders' equity........... (3,099) 21,853 1,535 4,825 255 2,449 (1,827)
------- ------- ------ ------ ------ ------ -------
Total liabilities and stockholders'
equity.............................. $ 2,487 $39,297 $7,019 $7,629 $6,332 $5,202 $12,238
======= ======= ====== ====== ====== ====== =======
<CAPTION>
VALLEY PRO FORMA
RADIOLOGY UNADJUSTED PRO FORMA PRO FORMA DISTRIBUTION ADJUSTED FOR
GROUP TOTAL ADJUSTMENTS COMBINED ADJUSTMENT DISTRIBUTION
--------- ---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 386 $ 2,935 $ -- $ 2,935 $ -- $ 2,935
Accounts receivable, net................... 2,076 32,881 -- 32,881 -- 32,881
Other receivables.......................... -- 610 (219)(a) 391 -- 391
Other current assets....................... 8 3,897 (2,182)(a) 1,715 -- 1,715
------ ------- -------- ------- -------- --------
Total current assets................. 2,470 40,323 (2,401) 37,922 -- 37,922
Property and equipment, net................. 1,220 25,795 (88)(a) 25,707 -- 25,707
Investments in joint ventures............... 27 3,870 88(a) 3,958 -- 3,958
Deferred income taxes....................... -- 1,203 (1,111)(b) 92 -- 92
Notes receivable............................ 403 403 -- 403 -- 403
Intangible assets, net...................... -- 811 -- 811 -- 811
Other assets, net........................... 36 11,955 (5,536) 6,419 -- 6,419
------ ------- -------- ------- -------- --------
Total assets......................... $4,156 $84,360 $ (9,048) $75,312 $ -- $ 75,312
====== ======= ======== ======= ======== ========
Current liabilities:
Short-term borrowings...................... $ 678 $ 4,578 $ -- $ 4,578 $ -- $ 4,578
Accounts payable and accrued expenses...... 97 8,145 -- 8,145 -- 8,145
Accrued salaries and benefits.............. 257 3,826 (996)(a) 2,830 -- 2,830
Due to joint ventures...................... -- 693 -- 693 -- 693
Deferred income taxes...................... 372 2,806 5,892(b) 8,698 -- 8,698
Current portion of deferred compensation... -- 83 (83)(a) -- -- --
Current portion of long-term debt.......... 561 11,275 -- 11,275 -- 11,275
Current portion of capital lease
obligations.............................. -- 559 -- 559 559
Distribution payable....................... -- -- -- -- 54,422(a) 54,422
Other current liabilities.................. -- 749 -- 749 -- 749
------ ------- -------- ------- -------- --------
Total current liabilities............ 1,965 32,714 4,813 37,527 54,422 91,949
Deferred income taxes....................... 37 1,090 35(b) 1,125 -- 1,125
Deferred compensation, net of current
portion.................................... -- 4,946 (4,946)(a) -- -- --
Long-term debt, net of current portion...... 167 14,944 (105)(a) 14,839 -- 14,839
Capital lease obligations, net of current
portion.................................... -- 1,415 -- 1,415 -- 1,415
Long-term debt -- GE Capital revolving
credit facility............................ -- -- -- -- -- --
Other liabilities........................... -- 359 -- 359 -- 359
------ ------- -------- ------- -------- --------
Total liabilities.................... 2,169 55,468 (203) 55,265 54,422 109,687
------ ------- -------- ------- -------- --------
Minority interests in consolidated
subsidiaries............................... -- 914 -- 914 -- 914
Stockholders' equity:
Common stock............................... -- -- 1(c) 1 -- 1
Additional paid-in capital................. -- 250 21,573(d) 21,822 -- 21,822
(1)(c)
Accumulated earnings (deficit)............. 1,987 27,728 (8,845)(a)(b) (2,690) (54,422)(a) (57,112)
(21,573)(d)
------ ------- -------- ------- -------- --------
Total stockholders' equity........... 1,987 27,978 (8,845) 19,133 (54,422) (35,289)
------ ------- -------- ------- -------- --------
Total liabilities and stockholders'
equity.............................. $4,156 $84,360 $ (9,048) $75,312 $ -- $ 75,312
====== ======= ======== ======= ======== ========
<CAPTION>
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 66,656(e) $ 2,935
(54,422)(e)
(12,234)(e)
Accounts receivable, net................... -- 32,881
Other receivables.......................... -- 391
Other current assets....................... -- 1,715
-------- --------
Total current assets................. -- 37,922
Property and equipment, net................. -- 25,707
Investments in joint ventures............... -- 3,958
Deferred income taxes....................... -- 92
Notes receivable............................ -- 403
Intangible assets, net...................... 2,000(g) 2,811
Other assets, net........................... (2,056)(e) 4,363
-------- --------
Total assets......................... $ (56) $ 75,256
======== ========
Current liabilities:
Short-term borrowings...................... $ (4,578)(f) --
Accounts payable and accrued expenses...... (1,764)(e) 6,381
Accrued salaries and benefits.............. -- 2,830
Due to joint ventures...................... -- 693
Deferred income taxes...................... -- 8,698
Current portion of deferred compensation... -- --
Current portion of long-term debt.......... (6,987)(f) 788
(3,500)(h)
Current portion of capital lease
obligations.............................. -- 559
Distribution payable....................... (54,422)(e) --
Other current liabilities.................. -- 749
-------- --------
Total current liabilities............ (71,251) 20,698
Deferred income taxes....................... -- 1,125
Deferred compensation, net of current
portion.................................... -- --
Long-term debt, net of current portion...... (12,234)(e) 2,580
(25)(f)
Capital lease obligations, net of current
portion.................................... -- 1,415
Long-term debt -- GE Capital revolving
credit facility............................ 13,590 (f)(g 13,590
Other liabilities........................... -- 359
-------- --------
Total liabilities.................... (69,920) 39,767
-------- --------
Minority interests in consolidated
subsidiaries............................... -- 914
Stockholders' equity:
Common stock............................... 1(e) 2
Additional paid-in capital................. 66,363(e) 91,685
3,500(h)
Accumulated earnings (deficit)............. -- (57,112)
-------- --------
Total stockholders' equity........... 69,864 34,575
-------- --------
Total liabilities and stockholders'
equity.............................. $ (56) $ 75,256
======== ========
</TABLE>
23
<PAGE> 25
AMERICAN PHYSICIAN PARTNERS, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEET
APPI was incorporated in April 1996 and has conducted no significant
operations and generated no revenue to date other than in connection with this
offering and the Reorganizations. The following is a summary of the adjustments
reflected in the Unaudited Pro Forma Combined Balance Sheet assuming the
Reorganizations, this offering and conversion of the Convertible Notes. The
Reorganizations will be accounted for as a combination of promoter interests, at
historical costs, under generally accepted accounting principles. APPI will not
be acquiring equity interests in the Founding Affiliated Practices, but will be
acquiring substantially all of the assets of the Founding Affiliated Practices.
Upon completion of the Reorganizations, the Company will not consolidate
the financial position of the Founding Affiliated Practices.
The adjustments reflected in the unaudited pro forma combined balance sheet
are as follows:
(a) To eliminate assets not acquired and liabilities not assumed by the
Company and to reflect the $54.4 million distribution to the
Founding Affiliated Practices. The Company will not be assuming any
physician related assets and liabilities, such as notes receivable
from physicians, accrued physician compensation, deferred physician
compensation, and assets and liabilities related to other physician
benefit plans.
(b) To record the establishment of deferred income taxes for the
Company after the Reorganizations.
(c) To record the issuance of Common Stock to the Founding Affiliated
Practices.
(d) To record the reclassification of the Founding Affiliated
Practices's earnings (deficit) accumulated prior to this offering
to additional paid-in capital.
(e) To reflect the effects of this offering, including the use of
estimated Net Proceeds from the issuance of Common Stock, to pay
the $54.4 million distribution to the Founding Affiliated Practices
and to reduce debt.
(f) To reflect borrowings under the $115,000,000 credit facility (the
"Credit Facility") with GE Capital Corporation ("GE Capital") which
will occur contemporaneously with this offering. The proceeds from
these borrowings will be used to refinance all remaining funded
debt, except capital leases and one note payable.
(g) To reflect estimated deferred financing costs related to the Credit
Facility.
(h) To reflect the conversion of all $3,500,000 of Convertible Notes
issued by the Company into 437,500 shares of Common Stock.
24
<PAGE> 26
SELECTED FINANCIAL DATA
(IN THOUSANDS)
The following information for APPI has been derived from the Company's
financial statements included elsewhere in this Prospectus. APPI was
incorporated in April 1996 and has conducted no significant operations and
generated no revenue to date other than in connection with this offering and the
pending Reorganizations. The selected financial data presented below for the six
months ended June 30, 1997 have been prepared on the same basis as the audited
financial statements included herein and, in the opinion of management of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
Results for the six months ended June 30, 1997 are not necessarily indicative of
those to be expected for a full fiscal year. The selected financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited financial
statements of APPI and notes thereto included elsewhere in this Prospectus.
AMERICAN PHYSICIAN PARTNERS, INC.
<TABLE>
<CAPTION>
FROM INCEPTION
(APRIL 30, 1996) SIX MONTHS
THROUGH ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $ -- $ --
Expenses:
Salaries, wages and benefits.............................. 546 901
Depreciation and amortization............................. 3 13
Other expenses............................................ 1,101 785
------- --------
Total expenses.............................................. 1,650 1,699
------- --------
Net loss.................................................... $(1,650) $ (1,699)
======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
--------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Total assets................................................ $ 2,486
Total debt.................................................. 3,500
Stockholders' deficit....................................... (3,099)
</TABLE>
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors,"
as well as those discussed elsewhere in this Prospectus. The historical results
set forth in this discussion and analysis are not indicative of trends with
respect to any actual or projected future financial performance of the Company.
This discussion and analysis should be read in conjunction with the audited
financial statements of APPI and Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
APPI has conducted no significant operations to date but will be acquiring,
in connection with the Reorganizations and this offering, tangible and
intangible assets and liabilities of, and entering into Service Agreements with,
the Founding Affiliated Practices. Through the Service Agreements, the Company
will be providing management, administrative, technical and non-medical services
to the Affiliated Practices in return for service fees. The service fees
represent the physician groups revenue, net less amounts retained by physician
groups. Physician groups revenue, net consists of the revenue of the Affiliated
Practices reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered, net of contractual and
other adjustments. The service fees payable to the Company by the Affiliated
Practices under the Service Agreements vary based on the fair market value, as
determined in arms' length negotiations, and the nature and extent of services
provided. Where state law allows, the service fees due under the Service
Agreements are derived from two distinct revenue streams: (i) the Affiliated
Practice pays a service fee based on a negotiated percentage (Founding
Affiliated Practice service fees range from 20% to 25%) of the adjusted
professional revenues as defined in the Service Agreement; and (ii) the
Affiliated Practice pays a service fee based on 100% of the adjusted technical
revenues as defined in the Service Agreement, which equals the fair value of the
services provided. In states where the law requires a flat fee structure, the
Company has negotiated a base service fee, which is equal to the fair market
value of the services provided under the Service Agreement and which is
renegotiated each year to equal the fair market value of the services provided
under the Service Agreement. As structured, the base service fee will result in
the Company receiving substantially the same amount of service fee as it would
have received under its negotiated percentage fee structure. The service fees
received by the Company under either fee structure provide the Company with a
net profits or equivalent interest in the Affiliated Practices and, as a result,
the Company will display the revenues, net of the amounts retained by
physicians, and expenses of the Affiliated Practices in its historical
consolidated statement of operations once the Reorganizations have occurred. The
aggregate initial base service fees in states where the law requires a flat fee
structure are $9,261,000. Adjusted professional revenues and adjusted technical
revenues are determined by deducting certain contractually agreed-upon expenses
(non-physician salaries and benefits, rent, depreciation, insurance, interest
and other non-physician costs) from physician groups revenue of the Affiliated
Practice. In addition, the Company receives income from joint ventures in which
the Affiliated Practices hold ownership interests. Physician compensation is
determined by the Affiliated Practices pursuant to employment arrangements
between the Affiliated Practice and the individual physicians. The Company does
not participate in the negotiation of physician employment arrangements.
The Company expects that the expenses incurred by the Company associated
with its obligations under the Service Agreements generally will be the same as
the operating costs and expenses that would have otherwise been incurred by the
Founding Affiliated Practices, including: the salaries, wages and benefits of
non-physician personnel; medical supplies expenses involved in administering
technical aspects of the practices; the office (general and administrative)
expenses of the practices; depreciation and amortization of assets acquired from
the Affiliated Practices; and certain other items. As further described in
"Business -- Business Strategy," the Company intends to implement measures
designed to reduce these operating costs and expenses through purchase
discounts, economies of scale, benchmarking programs and more effective
equipment utilization. In addition to the operating costs and expenses discussed
above, the Company will be
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<PAGE> 28
incurring additional personnel and administrative expenses in connection with
establishing and maintaining corporate and regional offices, which will provide
management, administrative, marketing and acquisition services.
In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders," published by the Securities
and Exchange Commission (the "Commission"), the acquisition of the assets and
assumption of certain liabilities for all of the Founding Affiliated Practices
pursuant to the Reorganizations is accounted for by the Company at the
transferors' historical cost basis with the shares of Common Stock to be issued
in those transactions being valued at the historical cost of the non-monetary
assets acquired net of liabilities assumed. Each of the securityholders of the
Founding Affiliated Practices is deemed to be a promoter of this offering. The
cash consideration will be reflected as a dividend by APPI to the owners of the
Founding Affiliated Practices. SAB No. 48 will not be applicable to any
acquisitions made by the Company subsequent to this offering. It is currently
anticipated that the Company's future acquisitions of certain assets and
liabilities of Affiliated Practices may result in substantial annual non-cash
amortization charges for intangible assets in the Company's statements of
operations.
An integral part of the Company's business strategy is to grow through
acquisitions and to expand the Affiliated Practices. Although the Company is
currently engaged in discussions with several such potential acquisition
candidates, except as disclosed in this Prospectus, the Company has not entered
into any letters of intent or definitive purchase agreements with respect to any
such acquisitions. No assurance can be provided that any such acquisitions will
be consummated.
RESULTS OF OPERATIONS
APPI has conducted no significant operations to date and will not conduct
significant operations until the Reorganizations and this offering are
completed. APPI has incurred and continues to incur various legal, accounting,
travel and marketing costs in connection with the Reorganizations and this
offering. As of June 30, 1997, such expenses had been funded primarily by the
proceeds received from the issuance of $3.5 million in Convertible Notes. In
addition, during 1996, APPI borrowed $0.4 million in the form of notes from its
stockholders. As of June 30, 1997, these notes were fully repaid.
APPI has recorded a full valuation allowance against its deferred tax
assets because of its current financial condition, its limited operating history
and its operating losses recorded to date. If the Company does achieve
profitability in the future, the valuation allowance will be reduced by a credit
to income.
LIQUIDITY AND CAPITAL RESOURCES
If the Reorganizations and this offering had occurred on June 30, 1997, the
Company would have had pro forma working capital of $17.2 million (assuming an
initial offering price of $15.00 per share and after giving effect to the use of
proceeds from this offering in the manner set forth in "Use of Proceeds").
The Company anticipates making capital expenditures during the remainder of
1997 of approximately $7.0 million, primarily for the purchase of imaging and
teleradiology equipment. In addition to these capital expenditures, the Company
is working to establish relationships with third-party vendors regarding the
potential purchase and implementation of management information systems that
could involve additional expenditures of approximately $2.4 million during the
remainder of 1997. The Company also expects to make acquisitions of the assets
of practices during 1997 that will involve the use of cash and Common Stock.
The Company has executed the $115 million Credit Facility with GE Capital,
as agent, and other lenders, which Credit Facility is expected to become
effective upon completion of this offering and consummation of the
Reorganizations. Under the terms of the Credit Facility, the Company may borrow,
repay and reborrow amounts during the first three years of the Credit Facility.
Amounts outstanding under the Credit Facility at the end of three years are
required to be repaid in quarterly installments of varying amounts commencing
September 30, 2000. The Credit Facility expires and all loans thereunder mature
on the sixth anniversary of the closing date of the Credit Facility. Borrowings
under the Credit Facility at any time may not exceed three
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<PAGE> 29
times the consolidated EBITDA of the Company giving pro forma effect to
acquisitions made with such borrowings. At the Company's option, the interest
rate shall be (i) an adjusted LIBOR rate plus an applicable margin which can
vary from 1.0% to 1.75% or (ii) the prime rate plus an applicable margin which
can vary from 0 to .75%. In each case the applicable margin varies based on
financial ratios maintained by the Company. The Credit Facility will include
certain restrictive covenants including prohibitions on the payment of dividends
and the maintenance of certain financial ratios (including minimum debt-service
coverage and maximum debt-to-EBITDA, as defined). Borrowings under the Credit
Facility are secured by all Service Agreements to which APPI is or becomes a
party and a pledge of the stock of APPI's subsidiaries.
Upon consummation of this offering, the Company intends to borrow
approximately $17,000,000 under the Credit Facility to refinance existing
indebtedness of the Founding Affiliated Practices and fund working capital. The
Company anticipates that it will use future borrowings under the Credit Facility
to fund capital expenditures for the Affiliated Practices, make acquisitions and
for general corporate purposes.
The availability of the Credit Facility is subject to satisfaction of a
number of closing conditions, including consummation of this offering with Net
Proceeds to the Company of at least $60 million, consummation of the
Reorganizations and other closing and borrowing conditions. There can be no
assurance that borrowing capacity under the Credit Facility will be available to
the Company when needed.
The Company anticipates that funds generated from this offering, after
giving effect to the use of proceeds from this offering in the manner set forth
in "Use of Proceeds," funds generated from operations, cash and cash
equivalents, and funds expected to be available under the Credit Facility will
be sufficient to meet the Company's working capital requirements and debt
obligations and to finance any necessary capital expenditures through the end of
1998. Expansion of the Company's business through acquisitions may require
additional funds, which, to the extent not provided by internally-generated
sources, cash, and the Credit Facility, would require the Company to seek
additional debt or equity financing.
The Company intends to call the Convertible Notes for redemption upon
completion of this offering. Upon the call, the Convertible Notes may, at the
election of the noteholders of at least 50% of the outstanding principal amount,
be converted into shares of Common Stock at a conversion price of $8.00 per
share. The Company believes that all of the holders of the Convertible Notes
will elect to convert to Common Stock prior to the redemption. In the event that
some or all of the holders of the Convertible Notes fail to convert their
respective Convertible Notes into Common Stock, the Company intends to make the
redemption payment of up to $3,500,000 plus accrued interest with the proceeds
from the proposed Credit Facility.
28
<PAGE> 30
BUSINESS
GENERAL
The Company was formed in April 1996 to provide physician practice
management and administrative services to radiology practices with a focus on
the development, consolidation and management of integrated radiology and
imaging center networks. Upon completion of this offering, the Company will
provide practice management services to seven radiology practices consisting of
223 physicians practicing at 42 hospitals and 65 diagnostic imaging centers
("ICs") in California, Kansas, Maryland, New York and Texas. The Company will
derive its revenue from service fees paid by Affiliated Practices for
management, administrative, technical and other non-medical services provided by
the Company.
The typical relationship with an Affiliated Practice is expected to involve
the acquisition by the Company of all of the non-medical assets (tangible and
intangible) of the Affiliated Practice and entry into a long-term Service
Agreement with the Affiliated Practice at the time of acquisition pursuant to
which the Company would provide a wide range of management, administrative,
technical and non-medical services in exchange for a service fee. If the
Affiliated Practice owns and operates an IC, the Company would typically acquire
all of the IC-related assets (e.g., x-ray, MRI and CT equipment). As a result,
the Affiliated Practice would rely on the Company to provide all necessary
non-medical business and administrative services and the Affiliated Practice
would continue to employ all of the professional personnel (i.e., the
radiologists) who would continue to provide professional medical services for
and on behalf of the Affiliated Practice.
The Founding Affiliated Practices provide a wide range of diagnostic and
therapeutic services, including x-ray and fluoroscopy, magnetic resonance
imaging, computed tomography, mammography, ultrasound, nuclear medicine,
radiation oncology and interventional radiology. The Founding Affiliated
Practices were selected based on a variety of factors, including: physician and
practice credentials and reputation; competitive market position; subspecialty
mix of physicians; historical financial performance and growth potential; and
willingness to embrace the Company's vision and philosophy regarding the
provision of radiology services. The Company intends to provide Affiliated
Practices with the necessary capital resources and expertise to invest in new
technologies, complete consolidating acquisitions, implement sophisticated
management information systems, promote efficient practice patterns, develop
coordinated marketing efforts and realize purchasing economies of scale.
The Company's objective is to develop integrated networks of radiology
groups and ICs that can provide wide geographic coverage and subspecialty
expertise. The Company intends to provide the networks with sophisticated
management, state-of-the-art information systems and appropriate capital for
expansion. The Company's strategy is to (i) emphasize quality service, (ii)
expand within its selected markets, (iii) improve operating efficiencies within
the Affiliated Practices and (iv) expand into new regional markets through
acquisitions of or affiliations with additional radiology practices and ICs.
The Company was incorporated in Delaware in April 1996, and prior to this
offering has not conducted any significant operations. In connection with the
Reorganizations, APPI will acquire certain assets and liabilities of, and enter
into long-term Service Agreements with, the Founding Affiliated Practices.
Pursuant to the Service Agreements, the Company will provide management,
administrative, technical and non-medical business services to the Founding
Affiliated Practices in exchange for a service fee. The Service Agreements have
a 40-year term, subject to earlier termination under certain circumstances. See
"-- Service Agreements" and "Certain Transactions -- The Reorganizations."
INDUSTRY BACKGROUND
Market Overview
The Health Care Financing Administration estimates that national health
care spending in 1995 was approximately $1 trillion, including approximately
$200 billion for physician services and an additional $600 billion for health
care expenditures under the control or influence of physicians. According to the
American College of Radiology, an estimated 350 million radiological procedures
were performed in the
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<PAGE> 31
United States during 1995. Total spending on radiology services including
diagnostic imaging, interventional radiology and radiation oncology was
estimated at $56 to $70 billion according to a 1995 report prepared by SMG
Marketing Group. Diagnostic imaging, including interventional radiology
procedures, accounted for approximately 82% of the aggregate amount spent on
radiological services performed in the United States, with radiation oncology
services accounting for approximately 18%.
Fees charged for diagnostic imaging, interventional radiology and radiation
oncology procedures consist generally of a technical component relating to
facilities, equipment and non-physician personnel and a professional component
consisting of fees paid to physicians for the interpretation of diagnostic
images, the performance of interventional radiology procedures and the treatment
of radiation oncology patients. Technical facilities are located within
hospitals and in approximately 2,200 outpatient centers throughout the United
States. Professional radiology services are provided by board certified
radiologists, general practitioners and other specialists. There are
approximately 3,200 radiology groups in the United States comprised of
approximately 27,000 practicing radiologists. These groups have a typical size
of six members, but vary in size up to approximately 100 physicians serving a
specific market. Approximately 88% of all radiologists perform diagnostic
procedures, including interventional radiology procedures, and approximately 12%
practice radiation oncology.
Radiology
In general, radiology includes diagnostic imaging, interventional radiology
and radiation oncology. Imaging procedures use energy waves to penetrate human
tissue and generate images of the body, which can be recorded on film or
digitized for display on a video monitor. Diagnostic imaging procedures are used
to diagnose diseases and physical injuries and are performed in hospitals,
physicians' offices, outpatient centers and ICs. Interventional radiology
procedures include the use of radiological methods to monitor and guide
catheters, stents, drains and needles to open clogged vessels, relieve
obstructed kidneys, perform biopsies of mass lesions, drain abscess collections
and lower pressure in certain vessels. Generally, these interventional
procedures are more time efficient, more cost-effective and less invasive than
surgical alternatives and have historically been performed in a hospital setting
to enable utilization of hospital support services. Radiation oncology
procedures use a variety of radiation sources to treat cancer and/or relieve
pain caused by certain tumors and are performed in hospitals and free-standing
outpatient centers.
The principal diagnostic imaging modalities include the following, all of
which are non-invasive:
General Radiology: X-Ray and Fluoroscopy. X-rays utilize roentgen rays
to penetrate the body and record images of organs and structures on film.
Fluoroscopy utilizes ionizing radiation combined with a video viewing
system for real time monitoring of organs. X-ray and fluoroscopy are the
most frequently used imaging modalities.
Computed Tomography ("CT"). CT utilizes a computer to direct the
movement of an x-ray tube to produce multiple cross sectional images of a
particular organ or area of the body. CT is used to detect tumors and other
conditions affecting bones and internal organs. It is also used to detect
the occurrence of strokes, hemorrhages and infections. CT provides higher
resolution images than conventional x-rays, but generally not as well
defined as those produced by magnetic resonance.
Magnetic Resonance Imaging ("MRI"). MRI utilizes a strong magnetic
field in conjunction with low energy electromagnetic waves which are
processed by a computer to produce high-resolution images of body tissue
including the brain, spine, abdomen, heart and extremities. Unlike CT and
conventional x-rays, MRI does not utilize ionizing radiation, which can
cause tissue damage in high doses.
Mammography. Mammography is a specialized form of radiology utilizing
low dosage x-rays to visualize breast tissue and is the primary screening
tool for breast cancer. Mammography procedures also include the biopsy of
cells to assist in the diagnosis of breast cancer.
Ultrasound. Ultrasound imaging utilizes high-frequency sound waves to
develop images of internal organs, unborn fetuses and the vascular system.
Ultrasound has widespread applications, particularly for procedures in
obstetrics, gynecology and cardiology.
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<PAGE> 32
Nuclear Medicine. Nuclear medicine utilizes short-lived radioactive
isotopes which release small amounts of radiation that can be recorded by a
gamma camera and processed by a computer to produce an image of various
anatomical structures or to assess the function of various organs such as
the heart, kidneys, thyroid and bones. Nuclear medicine is used primarily
to study anatomic and metabolic functions.
Trends In Radiology
Technological Advancements. The Company believes that advances in
technology, including the development and continued enhancements of MRI, CT,
nuclear medicine, ultrasound and interventional radiology have contributed to
the growth of the diagnostic imaging industry. These technological advances have
resulted in increased professional and technical utilization and have produced
diagnostic procedures that are safer, more accurate and less-invasive than
techniques previously utilized. While traditional x-rays continue to be the
primary imaging modality based on the number of procedures performed, the use of
advanced diagnostic imaging modalities such as MRI and CT has increased rapidly
in recent years because these modalities allow physicians to diagnose a wide
variety of diseases and injuries quickly and accurately without exploratory
surgery or other surgical or invasive procedures, which are usually more
expensive, involve greater risk to the patient and result in longer
rehabilitation time. As a result, hospital days are shortened or eliminated and
time lost from work is significantly reduced. In addition, diagnostic imaging is
increasingly used as a screening tool for preventive care. The Company believes
that future technological advances will enhance the ability of radiologists to
diagnose and direct treatment, thereby lowering overall health care costs.
Recent technological advancements include: magnetic resonance spectroscopy,
which can differentiate malignant from benign lesions; magnetic resonance
angiography, which can produce three-dimensional images of body parts and assess
the status of blood vessels; spiral computed tomography, which permits three-
dimensional images of body parts; monoclonal antibody studies utilizing nuclear
medicine to localize certain cancers that would otherwise be difficult to detect
or treat; and the development of teleradiology, which digitally transmits
radiological images from one location to another for interpretation. The Company
believes that the utilization of both the diagnostic and therapeutic
capabilities of radiology will continue to increase because of its
cost-effective, time-efficient and risk/benefit advantages over alternative
procedures (including surgery) and that newer technologies and future
technological advancements will result in further sub-specialization and
increased utilization of professional and technical radiological services.
Reimbursement Patterns. Payment for radiology services comes primarily from
third-party payors such as private insurers (including traditional indemnity
insurance plans), managed care plans (including HMOs and PPOs) and governmental
payors (including Medicare and Medicaid). Historically, radiologists and other
physicians generally provided medical services on a fee-for-service basis. The
fee-for-service model provides few incentives for the efficient utilization of
resources and has contributed to increases in health care costs at rates
significantly higher than inflation. As managed care entities and other payors
have focused on providing care in a more cost-effective manner, they have
demanded and received significant discounts from fee-for-service rates charged
for radiological procedures. As a result, physicians have seen a decrease in per
procedure reimbursements from managed care and governmental entities for such
procedures. More recently, payors have focused on shifting more of the financial
risk for the provision of cost-effective services to providers through
capitation and other risk-sharing arrangements. Significant changes of this type
will require the Company to become more actively involved in assisting its
Affiliated Practices in developing practice guidelines and appropriateness
criteria and managing the utilization of radiological procedures.
The Company believes that the shift in financial risk from payors to
providers decreases the attractiveness of under-utilized imaging equipment
within a general practitioner's office and will accelerate the centralization of
resources to high-volume centers. According to an article published in the
American Journal of Radiology in 1993, approximately 64% of all radiological
procedures (primarily x-rays and ultrasound) performed in freestanding ICs and
physicians' offices were performed by non-radiologist physicians including
internists, family and general practitioners and orthopedists. The Company
believes that the general diagnostic imaging services performed by
non-radiologists may be directed to radiologists by managed care entities
seeking to have services performed at the lowest overall cost. As a result, the
Company believes that managed care
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<PAGE> 33
entities, provided with utilization reports, will focus on reducing costs by
shifting radiological procedures performed by non-radiologists to radiologists.
Consolidation of ICs. Concurrent with the growth of managed care and strict
controls on Medicare reimbursement for inpatient costs, diagnostic imaging
services began to shift from hospital settings to ICs in the early 1980s. While
many of these ICs were developed by physicians and hospitals, a subsequent
change in federal law restricted the referral of patients by a physician to a
facility in which the physician maintained an ownership interest. As a result,
many physicians sold their interests in ICs to hospitals, radiologists and
companies engaged exclusively in the ownership, operation and management of ICs.
The Company believes that many of these entities have and will continue to
consolidate the ownership of ICs.
Referral Sources. Non-radiologists, including specialists and primary care
physicians, direct the utilization of radiology services. Most industry
marketing has been focused on developing relationships with these referring
physicians. As more patients move to managed care plans, the Company believes
physicians will have fewer referral options for diagnostic imaging procedures.
In addition, the Company believes that managed care entities will increasingly
demand that providers of radiology services share in the financial risks
associated with providing services for the lives covered by the managed care
entities. As the choices for radiology referrals decrease, the Company believes
that quality of care, subspecialty expertise and patient and referring physician
satisfaction will be important factors in determining referral patterns.
Trends in Radiology Organizations. The trends toward managed care, cost
containment and health care consolidation have combined to limit the number of
positions available and the salaries paid to radiologists. In addition, small
independent physician groups and individual practices are typically at a
competitive disadvantage to larger associations or networks of physicians
because they lack the capital necessary to (i) expand the geographic coverage of
the practice and the imaging modalities offered, (ii) develop state-of-the-art
information systems and (iii) purchase costly new imaging technologies, each of
which can improve quality of care and reduce costs. Generally, they also lack
the cost accounting and quality management systems necessary to allow physicians
to price and monitor complex risk-sharing arrangements with third-party payors.
Additionally, small to medium-sized groups and individual practices often do not
have contractual ties with other providers nor do they have the ability to offer
a broad range of subspecialty imaging services. Small practices often have
higher operating costs (since overhead must be spread over a relatively small
revenue base) and minimal vendor purchasing power. In order to remain
competitive in the changing medical service environment, radiologists are
beginning to affiliate with or create larger organizations by adding
radiologists to their groups, creating or joining a network or an independent
physician association or affiliating with a physician practice management entity
such as the Company.
BUSINESS STRATEGY
The Company's objective is to develop integrated networks of radiology
groups and ICs that can provide wide geographic coverage and subspecialty
expertise. The Company intends to provide the networks with sophisticated
management, state-of-the-art information systems and appropriate capital for
expansion. The Company's strategy is to (i) emphasize quality service, (ii)
expand within its selected markets, (iii) improve operating efficiencies within
the Affiliated Practices and (iv) expand into new regional markets through
acquisitions of or affiliations with additional radiology practices and ICs.
Emphasize Quality Service
The Company plans to make patient service and referring physician
satisfaction a key element of its strategy. The Company intends to form regional
service networks and invest in advanced teleradiology technologies to provide
greater geographic coverage, improve response time and increase overall patient
accessibility. The Company will seek to offer, through its Affiliated Practices,
subspecialty expertise such as interventional radiology and radiation oncology
to address the full range of radiology service needs of patients, referring
physicians, hospitals and payors. The Company also intends to provide capital to
the Affiliated Practices to upgrade existing imaging equipment and purchase
equipment for newer modalities. In addition, the Company plans to implement
information systems which will provide the Company's payors and referral
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<PAGE> 34
sources with outcomes data, cost analyses, utilization management data and other
analyses, in each case with the objective of maximizing patient, referring
physician, hospital and payor satisfaction.
Expand Within Existing Regional Markets
A key element of the Company's strategy is to expand and leverage the
resources and capabilities of its Affiliated Practices to offer high-quality,
comprehensive and competitively priced diagnostic, interventional and
therapeutic radiology programs within selected markets. The Company believes
that cost-conscious payors, particularly those interested in utilizing or
implementing risk-sharing or global capitation arrangements, will prefer to
contract with a single provider for a full range of radiology services within
select geographic markets. The Company plans to acquire and affiliate with
additional complementary radiology practices and, when feasible, acquire,
operate and manage ICs to broaden the range of, and increase the capacity to
deliver, services within its markets. The Company intends to market its
comprehensive service offerings and geographic coverage to obtain payor
contracts.
Improve Operating Efficiencies
The Company intends to utilize its management infrastructure and the
collective knowledge of and information generated by its Affiliated Practices to
identify and promote practice operating efficiencies that benefit all Affiliated
Practices. The Company believes that information technology is critical to such
efforts and plans to implement sophisticated management and financial
information systems to obtain and disseminate information relating to practice
patterns, equipment utilization, facilities and personnel and operating
profitability. The Company believes such information will enable Affiliated
Practices to enhance quality of care, increase revenue, improve cash management
and more effectively control costs. The Company believes that the establishment
of systems that promote "best practices" and operating efficiencies can provide
the Company and its Affiliated Practices with a competitive advantage in
negotiating and obtaining managed care contracts. In addition, the Company
intends to capitalize on the size and purchasing power of the combined
Affiliated Practices to take advantage of economies of scale and to reduce the
cost of administering and operating such practices.
Expand into New Markets
The Company plans to expand into new geographic markets by acquiring and
affiliating with profitable radiology practices that have strong reputations and
competitive positions in their local markets. The Company intends to focus on
markets where there are significant prospects for physician networking and
practice consolidation, high patient-provider ratios and favorable overall
economic conditions. The Company intends to focus on acquiring and affiliating
with platform practices allowing the Company to pursue the expansion strategy
discussed above. The Company believes that it will be attractive to potential
Affiliated Practices because of its (i) exclusive focus on radiology, (ii)
governance structure which promotes physician input, (iii) service fee structure
which aligns the Company's revenue growth incentives with those of the
Affiliated Practices and (iv) transaction structure which permits physicians to
become stockholders of the Company and further aligns the interests of the
Company and the Affiliated Practices. The Company expects that its Affiliated
Practices will be instrumental in identifying potential acquisitions and
affiliations with future Affiliated Practices or ICs.
AFFILIATION STRUCTURE
APPI was formed to provide physician practice management and administrative
services to radiology practices and to own, operate and manage ICs. The
Company's business model is based on a "partnership" with its Affiliated
Practices in which the Company manages the non-medical functions of the
Affiliated Practices in a manner that promotes physician participation and input
in areas such as practice enhancement and operating efficiencies, marketing and
long-term strategy development. The Company believes that its partnering
approach (i.e., shared ownership, economic interest and governance) enables
physicians to provide input in the management and affairs of their practice and
aligns the interests of physicians in the Affiliated Practices with those of the
Company in promoting practice growth and operating efficiencies. The Company
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<PAGE> 35
believes its model will be attractive to potential practice acquisition
candidates. For a discussion of the contractual arrangements between the Company
and its Affiliated Practices, see "Business -- Service Agreements."
In connection with the Reorganizations, the Company will acquire certain
tangible and intangible assets and assume certain liabilities of the Founding
Affiliated Practices. The Company will pay the purchase price for such
transactions in shares of its Common Stock and, to a lesser extent, cash. At the
time of the Reorganizations, the Company will enter into a 40-year Service
Agreement with each Founding Affiliated Practice pursuant to which the Company
will provide a wide range of management, administrative, technical and
non-medical services. For providing services under the Service Agreement, the
Company will receive a fee which is structured to align the interests of the
Company and the Founding Affiliated Practices. Additionally, the Service
Agreements restrict the Founding Affiliated Practices from competing with the
Company and other Affiliated Practices within a specified geographic area during
the term of the Service Agreements and also require each Affiliated Practice to
obtain and enforce similar restrictive covenants with the full-time physicians
affiliated with their practices. As part of its growth strategy, the Company
intends to acquire the assets of and enter into similar long-term Service
Agreements with additional radiology practices based on the partnership model it
has established with the Founding Affiliated Practices.
Additionally, pursuant to the Reorganizations, the Company will acquire
interests in certain joint venture arrangements currently held by the Founding
Affiliated Practices and certain physicians associated with the Founding
Affiliated Practices. The joint venture arrangements represent partnerships with
various hospitals or health systems serviced by certain of the Founding
Affiliated Practices and were formed for the purpose of owning and operating
ICs. Professional services at the joint venture ICs are performed by certain of
the Founding Affiliated Practices. With respect to the six joint venture
interests acquired from Advanced Radiology, LLC, the Company will acquire a 50%
interest in five joint ventures and a controlling interest in one joint venture.
With respect to M&S X-Ray Practices, the Company will acquire a controlling
interest in one joint venture and a minority interest in three joint ventures.
With respect to Radiology and Nuclear Medicine, P.A., the Company will acquire a
minority interest in one joint venture.
The Company believes a shared governance approach is critical to the
long-term success of a physician practice management company. While the Company
will have the primary responsibility for managing the non-medical functions of
its Affiliated Practices, it will operate within a governance structure which
promotes physician involvement in the direction and management of the Affiliated
Practices and the Company. This will be accomplished by the Company and each
Affiliated Practice establishing a Joint Planning Board consisting of three to
six members. The Joint Planning Boards will have responsibility for (i)
establishing payor contracting guidelines, (ii) making recommendations with
respect to operating budgets and capital expenditures and (iii) developing
marketing strategies and long-term objectives for their respective practices.
The Company believes the Joint Planning Boards will promote participation by
physicians in the overall management of their practices and serve as a means for
the Company and its Affiliated Practices to communicate effectively and exchange
information. In addition, the Company intends to establish a Physician Advisory
Board, the primary focus of which will be to enhance the quality of services
provided by the Company and its Affiliated Practices. The Physician Advisory
Board will consist of 9 to 12 practicing physicians from the Affiliated
Practices and will be chaired by the Company's Senior Vice President of
Physician Affairs. This board will serve as a forum in which members can discuss
and make recommendations regarding clinical applications, practice protocols,
appropriateness criteria, utilization guidelines, best practices and managed
care issues. Recommendations will be communicated to all Affiliated Practice
physicians, however, the adoption of such recommendations will be at the
discretion of the Affiliated Practices.
OPERATIONS AND DEVELOPMENT
General
The Founding Affiliated Practices consist of seven radiology practices,
comprised of 223 radiologists, located in five states. All of the Founding
Affiliated Practices provide professional services, which consist of the
supervision, performance and interpretation of radiological procedures in
hospitals, ICs or other settings.
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<PAGE> 36
As a result of the Reorganizations, the Company will own and operate 54 ICs and
operate and manage 11 additional ICs through joint venture relationships. In
addition, the Founding Affiliated Practices currently provide professional
radiology services to 42 hospitals. In the aggregate, the Founding Affiliated
Practices will provide all subspecialty diagnostic and interventional radiology
and radiation oncology services. Substantially all of the 223 radiologists are
board certified.
The number and type of modalities offered at the Company's owned, operated
or managed ICs are determined by the demand for such services within their
respective market areas. Presently, 55 of these ICs offer multiple modalities
including various combinations of MRI, CT, mammography, ultrasound, nuclear
medicine, fluoroscopy and traditional radiography. By offering a wide spectrum
of imaging modalities, the Company intends to market itself as a full-service
provider of diagnostic imaging services. In addition to the ICs, the Founding
Affiliated Practices provide professional services to hospitals, hospital
outpatient facilities, physicians' offices, mobile imaging units and nursing
homes.
The Company intends to expand its operations into new markets principally
through the acquisition of platform practices. Prior to entering a new market,
the Company will consider various factors including the population,
demographics, market potential, competitive environment, degree of managed care
penetration, supply of radiologists, existing imaging services and general
economic conditions within the market. The Company will seek to identify and
affiliate with group practices which have a significant market presence or which
the Company believes can achieve such a presence in the near term. The Company
will identify potential acquisition candidates through a variety of means,
including targeted contacts of radiologists by the Company, participation in
professional conferences, referrals from Affiliated Practices and direct
inquiries by radiologists.
Set forth below are the locations and certain other information with
respect to the Founding Affiliated Practices as of June 30, 1997:
<TABLE>
<CAPTION>
IMAGING CENTERS
----------------------------- TOTAL
PRACTICE HOSPITAL OWNED AND JOINT NON-PHYSICIAN
LOCATION PHYSICIANS AFFILIATIONS(1) OPERATED SITES VENTURES(2) PERSONNEL
-------- ---------- --------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Baltimore, MD........................... 87 10 23 6 518
Rochester, NY........................... 30 5 8 0 127
Oakland, CA............................. 24 5 7 0 60
San Jose, CA............................ 24 4 6 0 72
San Antonio, TX......................... 20 5 3 4 107
Topeka, KS.............................. 24 11 2 1 49
New City, NY............................ 14 2 5 0 147
--- -- -- --- -----
Totals........................ 223 42 54 11 1,080
=== == == === =====
</TABLE>
- ---------------
(1) Hospital affiliations represent contractual or other relationships with
hospitals where the Founding Affiliated Practices provide diagnostic and
interventional radiology or radiation oncology services. In 41 of the 42
hospitals, the Founding Affiliated Practices provide substantially all of
the diagnostic and interventional radiology services provided by
radiologists at such hospitals.
(2) Joint ventures represent partnerships with various hospitals or health
systems serviced by certain of the Founding Affiliated Practices and were
formed for the purpose of owning and operating ICs. Professional services at
the joint venture ICs are performed by certain of the Founding Affiliated
Practices.
The Founding Affiliated Practices were selected based on a variety of
factors, including: physician and practice credentials and reputation;
competitive market position; subspecialty mix of physicians; historical
financial performance and growth potential; and willingness to embrace the
Company's vision and philosophy regarding the provision of radiology services.
35
<PAGE> 37
Services
The Company intends to provide its Affiliated Practices with management
expertise and the capital necessary to compete in a managed care environment.
Specifically, the Company intends to support the Affiliated Practices with
management expertise in the following areas:
<TABLE>
<CAPTION>
MANAGEMENT EXPERTISE APPLICATION
-------------------- -----------
<S> <C>
Strategic Management Provision of strategic advice and
guidance through the proactive
management of practice operations and
pursuit of new market opportunities.
Reimbursement Management Implementation of billing, collection,
reporting and negotiation processes,
procedures and performance standards in
order to maximize practice revenue and
create new or improved contracting
opportunities.
Information Management Use of advanced technology, networking,
communications, systems integration and
data base development/management tools
and skills to increase physician and
practice productivity and effectiveness.
Practice Management Identification of operational savings
opportunities and imple-
mentation of programs to enhance
practice revenue and operating
performance.
Practice Marketing Implementation of radiology marketing
techniques and concepts to focus on
increasing imaging revenue and customer
satisfaction.
Technical Operations Management Implementation of systems, procedures,
management techniques and standards to
increase the effectiveness, efficiency
and profitability of a practice's
technical operations and to improve
productivity and relationships with
patients, physicians and payors.
Materials Management/Purchasing Development and implementation of a
national group purchasing arrangement to
provide cost savings related to
equipment purchasing, leasing and
maintenance and the purchase of
supplies.
</TABLE>
The Company intends to provide its Affiliated Practices with capital for
(i) technological advances, including teleradiology and upgraded diagnostic
imaging equipment, (ii) information systems and (iii) additional ICs and imaging
equipment. Set forth below are specific areas in which the Company intends to
provide capital resources to the Affiliated Practices:
<TABLE>
<CAPTION>
AREA OF EXPENDITURE OBJECTIVE
------------------- ---------
<S> <C>
Advanced Imaging Equipment Provision of high-quality imaging and
image management, including
teleradiology, to maximize facility and
equipment utilization and improve
quality and service to patients,
referring physicians, hospitals and
payors.
Financial and Information Systems Integration of disparate clinical and
financial systems into one common data
repository and coordination of
centralized scheduling, transcription,
utilization and patient flow functions.
Network/Communications Infrastructure Implementation of technologies to link
voice, data and image transmission
capabilities.
ICs Investment in equipment and facilities,
including the construction of new
facilities, the acquisition of existing
facilities or the relocation or
consolidation of existing ICs and
related equipment to achieve the most
efficient use of resources.
</TABLE>
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<PAGE> 38
Information Management
The Company believes that integrated radiology networks require extensive
information management systems to effectively manage operations, compete for
managed care contracts and achieve standardization and economies of scale. The
Company intends to create a network infrastructure, including a Financial
Accounting System ("FAS") and Executive Information System ("EIS"), which may
utilize components of the Founding Affiliated Practices' existing information
systems. The Company is also evaluating the feasibility of deploying other
standard information systems, including a managed care system and a radiology
information system.
The Company intends to implement its initial information management plans
in two phases. During the first phase, the Company intends to focus on building
basic infrastructure. Specifically, the Company intends to create a network
communications infrastructure and implement the FAS during the remainder of
1997. The network communications infrastructure will provide access to the FAS
and EIS, facilitate the gathering of key operational data and increase internal
communications capabilities through the enterprise-wide deployment of standard
office automation applications. The Company expects that the network
infrastructure will provide the foundation for the sharing and utilization of
certain information among the Affiliated Practices and the Company. The network
will be created with standard components to be managed centrally in order to
minimize the need for local information systems personnel.
The Company intends to deploy the FAS to facilitate timely and accurate
financial reporting throughout the Company. Specifically, the Company intends to
deploy general ledger, accounts payable, payroll and materials management
systems at each of the Affiliated Practices. The FAS will be designed to
facilitate the consistent, efficient reporting of financial information across
all practices using one standard chart of accounts with a single set of
accounting practices and financial controls. The Company expects that the
deployment of the FAS will streamline and simplify the financial reporting
process and will provide a tool for managing practice efficiency benchmarks.
During phase two, the Company expects to focus on assimilating and
analyzing data from its Affiliated Practices' disparate information systems. In
this phase, the Company intends to deploy an EIS that will facilitate the
management reporting of key operational data. The Company anticipates that the
EIS will provide a repository to store pertinent encounter data and initially
will use the Affiliated Practices' practice management systems, radiology
information systems and the FAS as primary data sources. It is anticipated that
the EIS will provide variance, utilization, reimbursement efficiency and trend
analysis reporting capabilities. The Company believes that the EIS will enable
Affiliated Practices to enhance the quality of information, increase revenue,
improve operating efficiencies and more effectively control costs. There can be
no assurance that the Company will be able to implement the FAS or EIS on a
timely basis, if at all, or that these systems will produce the expected
benefits. See "Risk Factors -- Dependence on Information Systems."
SERVICE AGREEMENTS
Upon consummation of the Reorganizations, the Company will be a party to a
Service Agreement with each Founding Affiliated Practice under which the Company
will become the exclusive manager and administrator of non-medical services
relating to the operation of the Founding Affiliated Practice. The following
summary of the Service Agreement is intended to be a brief description of the
standard form of the Service Agreement that the Company will be a party to with
each Founding Affiliated Practice. The Service Agreements may vary from the
description below depending on the requirements of local regulations and
negotiations with the individual Founding Affiliated Practices. The Company
expects to enter into agreements with similar provisions with Affiliated
Practices in the future.
The service fees payable to the Company by the Affiliated Practices under
the Service Agreements vary based on fair market value, as determined in arms'
length negotiations, and the nature and extent of services provided. Where state
law allows, service fees due under the Service Agreements are derived from two
distinct revenue streams: (i) the Affiliated Practice pays a service fee based
on a negotiated percentage (Founding Affiliated Practice service fees range from
20% to 25%) of the adjusted professional revenues as defined in the Service
Agreement; and (ii) the Affiliated Practice pays a service fee based on 100% of
the adjusted technical
37
<PAGE> 39
revenues as defined in the Service Agreement, which equals the fair value of the
services provided. In states where the law requires a flat fee structure, the
Company has negotiated a base service fee, which is equal to the fair market
value of the services provided under the Service Agreement and which is
renegotiated each year to equal the fair market value of the services provided
under the Service Agreement. Adjusted professional revenues and adjusted
technical revenues are determined by deducting certain contractually agreed-upon
expenses (non-physician salaries and benefits, rent, depreciation, insurance,
interest and other non-physician costs) from physician groups revenue of the
Affiliated Practice. In addition, the Company will receive income from joint
ventures in which the Company will hold ownership interests. Revenues will be
billed by the Company on behalf of the Affiliated Practices. Payments will be
received by the Affiliated Practice and transferred to the Company on a daily
basis. On a monthly basis the Company will calculate the amount of service fees
due and remit to the Affiliated Practices an amount equal to the difference
between the net revenues of the Affiliated Practice and the service fees
calculated by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
Set forth below is a sample calculation of the service fees under the two
fee structures described above and the respective income statements of a
hypothetical Affiliated Practice and the Company related to such service fee
calculation. The following examples are for illustrative purposes only and do
not represent the actual or potential service fee that would be payable by any
Affiliated Practice, the operating results of any Affiliated Practice or the
relationship of revenues and expenses.
SAMPLE SERVICE FEE CALCULATION
<TABLE>
<CAPTION>
NEGOTIATED PERCENTAGE STRUCTURE BASE FEE STRUCTURE
--------------------------------- ---------------------------------
PROFESSIONAL TECHNICAL TOTAL PROFESSIONAL TECHNICAL TOTAL
------------ --------- ------ ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Physician group revenue, net....... $1,200 $800 $2,000 $1,200 $800 $2,000
Agreed-upon expenses(1)............ 170 594 764 170 594 764
------ ---- ------ ------ ---- ------
Adjusted Professional/Technical
Revenues......................... $1,030 $206 $1,236 $1,030 $206 $1,236
------ ---- ------ ====== ==== ======
Negotiated service fee %........... 20% 100% NA NA NA
Service fee........................ $ 206 $206 $ 412 --
====== ====
Base service fee................... -- $ 412
Reimbursement of expenses.......... 764 764
------ ------
Service fee revenue................ $1,176 $1,176
====== ======
</TABLE>
SAMPLE INCOME STATEMENT
<TABLE>
<CAPTION>
AFFILIATED
PRACTICE APPI SUBSIDIARY
---------- ---------------
<S> <C> <C>
Physician group revenue, net................................ $2,000 $2,000
Less: amounts retained by physician group................... -- (824)
------ ------
Service fee revenue......................................... 2,000 1,176
Cost of physician services.................................. 824 --
Operating expenses(1)....................................... 764 764
APPI service fee............................................ 412 --
------ ------
Total costs and expenses.......................... 2,000 764
Income before taxes......................................... $ -- $ 412
====== ======
</TABLE>
- ---------------
(1) Expenses include non-physician salaries and benefits, rent, depreciation,
insurance, interest, and other non-physician costs.
38
<PAGE> 40
Pursuant to the Service Agreement, the Company will, among other things:
(i) act as the exclusive manager and administrator of non-physician services
relating to the operation of the Founding Affiliated Practice, subject to
matters reserved to the Founding Affiliated Practice or referred to the Joint
Planning Board; (ii) aid in the billing of hospitals, insurance companies and
other third-party payors and collect on behalf of the Founding Affiliated
Practice the fees for professional medical and other services rendered by the
Founding Affiliated Practice; (iii) provide, as necessary, clerical, accounting,
purchasing, payroll, legal, bookkeeping and computer services and personnel,
information management, preparation of certain tax returns and medical
transcribing services; (iv) supervise and maintain custody of substantially all
files and records; (v) provide facilities for the Founding Affiliated Practice;
(vi) prepare, in consultation with the Joint Planning Board and the Founding
Affiliated Practice, all annual operating and capital budgets; (vii) order and
purchase inventory and supplies as necessary; (viii) implement, in consultation
with the Joint Planning Board and the Founding Affiliated Practice, national and
local public relations or advertising programs; (ix) provide financial and
business assistance in the negotiation, establishment, supervision and
maintenance of contracts and relationships with managed care and other similar
providers and payors; and (x) assist the Founding Affiliated Practice with
obtaining medical malpractice insurance for its physicians and other medical
professionals.
The Service Agreements require the Company and each Founding Affiliated
Practice to establish a Joint Planning Board consisting of not less than three
nor more than six members; two designees of the Company (each with one vote) and
no less than one or more than four designee(s) of the Founding Affiliated
Practice (representing two votes in the aggregate). Each Joint Planning Board
will have responsibilities that include developing long-term strategic
objectives relating to practice expansion and payor contracting guidelines,
promoting practice efficiencies, recommending capital expenditures and generally
serving as a means by which the Company and each of the Founding Affiliated
Practices will communicate and exchange information. The Company intends to
continue to establish Joint Planning Boards in the future, some of which may be
on a regional level.
Under the Service Agreements, each Founding Affiliated Practice will remain
responsible for (i) hiring and compensating its physicians and certain other
medical professionals, (ii) the licensing, credentialling and certification
necessary to conduct its practice, (iii) obtaining and maintaining medical
malpractice insurance for the professional entity and its physician employees,
(iv) providing professional radiological services and (v) complying with federal
and state laws, regulations and other ethical standards applicable to the
practice of radiology. Pursuant to the Service Agreements, the Founding
Affiliated Practices will maintain full control over the provision of
professional radiological services. The Company will not engage in the practice
of medicine or provide professional radiological services. In addition, the
Service Agreements with the Founding Affiliated Practices also contain
provisions whereby both the Company and each Founding Affiliated Practice have
agreed to certain restrictions on accepting or pursuing radiology opportunities
within a 15-mile radius (decreasing to 10 miles upon the expiration of 12
months) of any of the Company's owned, operated or managed ICs at which the
Founding Affiliated Practice provides professional radiology services or any
hospital at which a Founding Affiliated Practice provides on-site professional
radiology services. Each Service Agreement also restricts the applicable
Founding Affiliated Practice from competing with the Company and other
Affiliated Practices within a specified geographic area during the term of such
Service Agreement. In addition, the Service Agreements require the Founding
Affiliated Practices to enter into and enforce agreements with the stockholders
and full-time radiologists at each Founding Affiliated Practice (subject to
certain exceptions) that include covenants not to compete with the Company for a
period of two years after termination of employment.
The Service Agreements are for an initial term of 40 years, with automatic
extensions of five years unless notice of termination is given. The Service
Agreements may be terminated by either party if (i) the other party (a) files a
petition in bankruptcy or other similar events occur or (b) defaults in the
performance of a material duty or obligation, which default continues for a
specified period after notice or (ii) an opinion is rendered by a law firm of
nationally-recognized expertise in health care law that a material term of the
Service Agreement is in violation of applicable law (or a court or regulatory
agency finds as such) and such violation cannot be cured.
39
<PAGE> 41
Each Service Agreement may also be terminated by the Company if the
Founding Affiliated Practice or a physician employee engages in conduct, or is
formally accused of conduct, for which the physician employee's license to
practice medicine reasonably would be expected to be subject to revocation or
suspension or is otherwise disciplined by any licensing, regulatory or
professional entity or institution, the result of any of which (in the absence
of termination of such physician or other action to monitor or cure such act or
conduct) does or reasonably would be expected to materially adversely affect the
Founding Affiliated Practice. In addition, the Company may terminate each
Service Agreement with any Founding Affiliated Practice if, during the first
five years of the Service Agreement, more than 33 1/3% of the total number of
physicians employed or retained by such practice are no longer employed or
retained by such practice other than because of certain events, including death,
permanent disability, pre-qualified retirement or involuntary loss of hospital
contracts or privileges.
Upon termination of a Service Agreement with a Founding Affiliated
Practice, depending upon the termination event, the Company may have the right
to require such Founding Affiliated Practice to purchase and assume, or the
Founding Affiliated Practice may have the right to require the Company to sell,
assign and transfer to it, the assets and related liabilities and obligations
associated with the professional and technical radiology services provided by
the Founding Affiliated Practice immediately prior to such termination. The
purchase price for such assets, liabilities and obligations will be the lesser
of fair market value thereof or the return of the consideration received in the
Reorganization; provided, however, that the purchase price shall not be less
than the net book value of the assets being purchased.
PRACTICE MARKETING
The Company intends to focus its marketing efforts on referring physicians,
hospitals and managed care organizations. Prior to the Reorganizations, the
Founding Affiliated Practices' marketing efforts were based primarily upon the
professional reputations and individual efforts of such practices and its
radiologists. The Company believes there is an opportunity to capitalize on the
professional reputations of the Founding Affiliated Practices by applying
professional sales and marketing techniques to increase the Affiliated
Practices' volume of business and expand the potential geographic market for
each Affiliated Practice beyond its local physician community.
In addition, the Company will seek to secure new contracts and expand
existing contracts with managed care organizations for the provision of
radiology services. The Company is prepared to negotiate flexible arrangements
with managed care organizations on behalf of the Affiliated Practices.
GOVERNMENT REGULATION AND SUPERVISION
General
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. The ability of the Company to operate profitably
will depend in part upon the Company, the Affiliated Practices and their
affiliated physicians obtaining and maintaining all necessary licenses,
certificates of need and other approvals and operating in compliance with
applicable health care regulations. The Company believes that health care
regulations will continue to change and, therefore, intends to monitor
developments in health care law and the Company expects to modify its operations
from time to time as the business and regulatory environment changes. There can
be no assurance that the Company will be able to modify its operations so as to
address changes in the regulatory environment.
Licensing and Certification Laws
Every state imposes licensing requirements on individual physicians and on
facilities operated, or services performed, by physicians and others. In
addition, federal and state laws regulate HMOs and other managed care
organizations with which Affiliated Practices or their affiliated physicians may
have contracts. Many states require regulatory approval, including certificates
of need and/or licensing, before establishing or expanding certain types of
health care facilities, offering certain services or making expenditures in
excess of
40
<PAGE> 42
statutory thresholds for health care equipment, facilities or programs. In
connection with the expansion of existing operations and the entry into new
markets, the Company, the Affiliated Practices or their affiliated physicians
may become subject to additional regulation.
Fee-Splitting; Corporate Practice of Medicine
The laws of many states (including each of the states in which the Founding
Affiliated Practices are located) prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. Although the Company intends to
structure its proposed operating structures and methods as described in this
Prospectus so as to comply with existing applicable laws, the Company's business
operations have not been the subject of judicial or regulatory interpretation.
There can be no assurance that a review of the Company's business by courts or
regulatory authorities will not result in determinations that could adversely
affect the operations of the Company or that the health care regulatory
environment will not change so as to restrict the Company's planned operations
and expansion. In addition, the regulatory framework of certain jurisdictions
may limit the Company's expansion into such jurisdictions if the Company is
unable to modify its operational structure to conform with such regulatory
framework.
Medicare Physician Payment System
The Company believes that regulatory trends in cost containment will
continue to result in a reduction from historical levels in per-patient revenue
for medical practices. The federal government has implemented, through the
Medicare program, the RBRVS payment methodology for physician services. The
RBRVS is a fee schedule that, except for certain geographical and other
adjustments, pays similarly situated physicians the same amount for the same
services. The RBRVS is adjusted each year and is subject to increases or
decreases at the discretion of Congress. To date, the implementation of the
RBRVS has reduced payment rates for certain of the procedures historically
provided by the Founding Affiliated Practices. BBA 97 provides for reductions in
the rate of growth of payments for physician services, including services
historically provided by the Affiliated Practices, in the amount of $5.3 billion
over a five-year period ending in 2002. In addition, BBA 97 provides for the
implementation of a resource-based methodology for payment of physician practice
expenses under the physician fee schedule over a four-year period beginning in
1999. Adoption of this methodology is expected to reduce payments for services
historically provided by the Affiliated Practices. There can be no assurance
that any reduced operating margins could be offset by the Company through cost
reductions, increased volume, the introduction of additional procedures or
otherwise. Private third-party payors and Medicare and Medicaid have increased
their use of managed care as a means of cost containment. Increasingly, private
third-party payors negotiate discounts from established physician and hospital
charges or require capitation or other risk sharing arrangements as a condition
of patient referral to physician groups such as the Affiliated Practices. BBA 97
also includes provisions designed to increase the enrollment of Medicare and
Medicaid participants in managed care programs. The inability of the Company to
negotiate satisfactory arrangements with managed care companies would have a
material adverse effect on the Company's business, financial condition and
results of operation.
Rates paid by non-governmental insurers, including those that provide
Medicare supplemental insurance, are based on established physician and hospital
charges and are generally higher than Medicare payment rates. A change in the
makeup of the patient mix of the medical practices that results in a decrease in
patients covered by private insurance plans could adversely affect the Company's
revenue and income.
Medicare and Medicaid have increased their use of managed care as a means
of cost containment. As with private third party payors, Medicare and Medicaid
managed care contractors negotiate discounts from established physician and
hospital charges or require capitation or other risk sharing arrangements as a
condition of patient referral to physician groups such as the Affiliated
Practices. BBA 97 includes provisions designed to increase the enrollment of
Medicare and Medicaid participants in managed care programs. The inability of
the Company to negotiate satisfactory arrangements with Medicare and Medicaid
managed care contractors could have a material adverse effect on the Company's
business, financial condition and results of operation.
41
<PAGE> 43
Medicare and Medicaid Fraud and Abuse
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person, (ii) the furnishing or arranging for the furnishing of items or services
reimbursable under the Medicare, Medicaid or other governmental programs or
(iii) the purchase, lease or order or arranging or recommending purchasing,
leasing or ordering of any item or service reimbursable under the Medicare,
Medicaid or other governmental programs. Pursuant to this anti-kickback law, the
federal government has recently announced a policy of increased scrutiny of
joint ventures and other transactions among health care providers in an effort
to reduce potential fraud and abuse relating to Medicare costs. The
applicability of these provisions to many business transactions in the health
care industry has not yet been subject to judicial and regulatory
interpretation. Noncompliance with the federal anti-kickback legislation can
result in exclusion from the Medicare, Medicaid, or other governmental programs
and civil and criminal penalties.
The Company believes that although it will receive fees under the Service
Agreements for management and administrative services, it is not in a position
to make or influence referrals of patients or services reimbursed under the
Medicare, Medicaid or other governmental programs to Affiliated Practices or
their affiliated physicians, or to receive such referrals. Such service fees are
intended by the Company to be consistent with fair market value in arms' length
transactions for the nature and amount of management and administrative services
rendered. For these reasons, the Company does not believe that fees payable to
it should be viewed as remuneration for referring or influencing referrals of
patients or services covered by such programs as prohibited by statute. If,
however, the Company is deemed to be in a position to make, influence or receive
referrals from or to physicians, or the Company is deemed to be a provider under
the Medicare or Medicaid programs, the operations of the Company could be
subject to scrutiny under federal and state anti-kickback and anti-referral laws
and the Company's operations could be materially and adversely affected.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically enlarging
the field of physician-owned or physician-interested entities to which the
referral prohibitions apply. Stark II prohibits a physician from referring
Medicare or Medicaid patients to an entity providing "designated health
services", including without limitation radiology services, in which the
physician has an ownership or investment interest, or with which the physician
has entered into a compensation arrangement. The penalties for violating Stark
II include a prohibition on payment by these government programs and civil
penalties of as much as $15,000 for each violative referral and $100,000 for
participation in a "circumvention scheme." The Company believes that although it
will receive fees under the Service Agreements for management and administrative
services, it is not in a position to make or influence referrals of patients.
In addition, the Company intends to structure its acquisition of the assets
of existing practices so as to not violate the anti-kickback and Stark II laws
and regulations. Specifically, the Company believes the consideration paid by
the Company to physicians to acquire the tangible and intangible assets
associated with their practices is consistent with fair market value in arms'
length transactions and not intended to induce the referral of patients. Should
this practice be deemed to constitute an arrangement designed to induce the
referral of Medicare or Medicaid patients, then the Company's acquisitions could
be viewed as possibly violating anti-kickback and anti-referral laws and
regulations. A determination of liability under any such laws could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern the Company's contemplated activities. There can be no
assurance that the Company's contemplated activities will not be investigated,
that claims will not be made against the Company or that these increased
enforcement activities will not directly or indirectly have an adverse effect on
the Company's business, financial condition and results of operation.
42
<PAGE> 44
HealthCare Reform Initiatives
In addition to existing government health care regulation, there have been
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The Company
believes that such initiatives will continue during the foreseeable future.
Certain aspects of these reforms as proposed in the past, such as further
reductions in Medicare and Medicaid payments and additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, if adopted, could adversely affect the Company. Concern about the
potential effects of such reform measures has contributed to the volatility of
stock prices of many companies in health care and related industries and may
similarly affect the market price of the Common Stock.
Compliance Program
With the assistance of the Company's special health care regulatory
counsel, the Company intends to implement a program to monitor compliance with
federal and state laws and regulations applicable to health care entities. The
Company intends to appoint a compliance officer who will be charged with
implementing and supervising the Company's compliance program, which will
involve the adoption of (i) "Standards of Conduct" for its employees and
affiliates and (ii) an "Ethics Process" that will specify how employees,
affiliates and others may report regulatory or ethical concerns to the Company's
compliance officer. As part of the Ethics Process, the Company intends to
introduce various methods designed to facilitate the reporting of any regulatory
and ethical issues to the compliance officer for investigation or appropriate
corrective action. In addition, the Company intends to conduct or have its
special health care regulatory counsel conduct periodic audits of various
aspects of its operations, including the Affiliated Practices. The Company also
intends to initiate a training program designed to familiarize its employees
with the regulatory requirements and the elements of the Company's compliance
program.
Insurance Laws and Regulation
Certain states have enacted statutes or adopted regulations affecting risk
assumption in the health care industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based contracting to
applicable insurance laws and regulations, which may include, among other
things, laws and regulations providing for minimum capital requirements and
other safety and soundness requirements. The Company believes that it and the
Affiliated Practices are currently in compliance with such insurance laws and
regulations. However, implementation of additional regulations or compliance
requirements could result in substantial costs to the Company and the Affiliated
Practices. The inability to enter into capitated or other risk-sharing
arrangements or the cost of complying with certain applicable laws that would
permit expansion of the Company's risk-based contracting activities could have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The Affiliated Practices and the Company's owned, operated or managed ICs
will compete with local radiologists and technical imaging service providers,
including for profit and non-profit hospitals and health systems, in each of the
markets served by the Company. The Company believes that changes in governmental
and private reimbursement policies and other factors have resulted in increased
competition among providers for medical services to consumers and that cost,
accessibility, quality and scope of services provided are the principal factors
that affect competition. There can be no assurance that the Affiliated Practices
and the Company's owned, operated or managed ICs will be able to compete
effectively in the markets that they serve, which inability to compete could
adversely affect the Company.
The Company believes that the current trends in the hospital industry have
resulted in increased competition by radiology groups for hospital contracts.
Each of the Founding Affiliated Practices provides radiology services to
hospitals. These relationships can be affected through competition with other
radiology groups, the outsourcing of the radiology and imaging functions within
the hospital or closure of the hospital due to consolidation or financial
instability. There can be no assurance that each of the Founding Affiliated
43
<PAGE> 45
Practices will maintain its current hospital relationships and be able to renew
or extend its current arrangements under favorable terms or effectively compete
for new relationships.
The Company is under competitive pressures for the acquisition and
retention of the assets of, and the provision of management, technical and
administrative services to, additional radiology practices, MSOs and ICs. There
are a number of publicly-traded companies focused on owning or managing ICs,
including U.S. Diagnostic, Inc., Medical Resources, Inc., TeamHealth (a
subsidiary of MedPartners, Inc.) and Health Images (a division of HEALTHSOUTH
Corporation). The Company is aware of at least two privately-held physician
practice management companies focused on professional and technical radiology
services. Several companies, both publicly and privately held, that have
established operating histories and, in some instances, greater resources than
the Company are pursuing the acquisition of general and specialty physician
practices (including radiology in the case of TeamHealth) and the management of
such practices. Additionally, some hospitals, clinics, health care companies,
HMOs and insurance companies engage in activities similar to those of the
Company. There can be no assurance that the Company will be able to compete
effectively with such competitors for the acquisition of, or affiliation with,
radiology practices, that additional competitors will not enter the market, that
such competition will not make it more difficult or expensive to acquire the
assets of, and provide management, administrative, technical and non-medical
services to, radiology practices on terms beneficial to the Company or that
competitive pressures will not otherwise adversely affect the Company.
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 2301 NationsBank Plaza,
901 Main Street, Dallas, Texas 75202, in approximately 13,349 square feet
occupied under a lease which expires on September 30, 2001. As of September 12,
1997, the Company had 19 employees and, upon consummation of the
Reorganizations, the Company expects that it will have approximately 1,100
employees, approximately 30 of which will be employed at the Company's
headquarters and regional offices and the remainder of which will be employed at
the Founding Affiliated Practices. The Company believes that its relationship
with its employees is good. See "Business -- Development and Operations."
CORPORATE LIABILITY AND INSURANCE
The Founding Affiliated Practices maintain professional liability insurance
coverage primarily on a claims made basis. Such insurance provides coverage for
claims asserted when the policy is in effect regardless of when the events that
caused the claim occurred. As a result of the Reorganizations, the Company will
in some cases succeed to certain liabilities of the Founding Affiliated
Practices. Therefore, claims may be asserted after the Reorganizations against
the Company for events which occurred prior to the Reorganizations. Following
the Reorganizations, the Company and the Affiliated Practices intend to maintain
insurance coverage similar to the coverage previously maintained by the Founding
Affiliated Practices. On September 1, 1997, a new law became effective in the
state of Texas that permits injured patients to sue health insurance carriers,
HMOs and other managed care entities for medical malpractice. There can be no
assurance that this law will not increase the cost of liability insurance to the
Company for services provided in Texas or any other states in which the Company
does business if similar legislation is adopted in those states.
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. The Company's intent is to not influence
or control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. As a result of the relationship between the
Company and the Affiliated Practices, however, the Company may become subject to
medical malpractice actions under various theories, including successor
liability. There can be no assurance that claims, suits or complaints relating
to services provided by Affiliated Practices will not be asserted against the
Company in the future. The Company maintains insurance coverage that it believes
will be adequate. The Company anticipates that such insurance will extend to
professional liability claims that may be asserted against employees of the
Company that work on site at Affiliated Practice locations. In addition,
pursuant to the Service Agreements, the Founding Affiliated Practices are
required (and the Company intends to require any other Affiliated Practices) to
maintain comprehensive professional liability insurance. The availability and
cost of such insurance is affected by
44
<PAGE> 46
various factors, many of which are beyond the control of the Company and
Affiliated Practices. The cost of such insurance to the Company and the
Affiliated Practices may have an adverse effect on the Company's operations. In
addition, successful malpractice or other claims asserted against Affiliated
Practices or the Company that exceed applicable policy limits could have a
material adverse effect on the Company.
In connection with the Reorganizations, the shareholders of the Founding
Affiliated Practices have agreed to indemnify the Company for certain claims.
There can be no assurance that the Company will be able to receive payments
under any such indemnity agreements or that the failure to fully recover such
amounts will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Following the Reorganizations, the Founding Affiliated Practices will be
required by the terms of the Service Agreements to maintain medical malpractice
liability insurance consistent with minimum limits mandated in their hospital
contracts or by applicable state law. It is anticipated that the minimum amounts
to be maintained will be $1 million per occurrence and $3 million in the
aggregate. The Company intends to maintain general liability and umbrella
coverage of $5 million per occurrence and $5 million in the aggregate.
Additionally, the Company will maintain workers' compensation insurance on all
employees. Coverage will be placed on a statutory basis and will respond to each
state's specific requirements.
LEGAL PROCEEDINGS
The Company is not a party to any suits or complaints relating to services
provided by the Company or the Founding Affiliated Practices, although there can
be no assurances that claims will not be asserted against the Company in the
future. The Company will become subject to certain pending claims as the result
of successor liability in connection with the Reorganizations; however, the
Company believes that the ultimate resolution of such claims will not have a
material adverse effect on the business, financial condition or results of
operations of the Company.
Although the Company has not been named in any of the lawsuits against a
Founding Affiliated Practice, there can be no assurance that the Company will
not subsequently be named as a defendant in one or more of these lawsuits
following consummation of the Reorganizations. Each Founding Affiliated Practice
has retained responsibility for, and agreed to indemnify the Company in full
against, the liabilities associated with these lawsuits. In the event the
Company is subsequently added as a party in any of these lawsuits, or a monetary
judgment is entered against the Company and indemnification is unavailable for
any reason, the Company's business, financial condition and results of
operations could be materially adversely affected.
45
<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gregory L. Solomon(1)(2).................. 52 President, Chief Executive Officer and Director
Lawrence R. Muroff, M.D.(1)(2)............ 54 Chairman of the Board of Directors and Senior Vice
President of Physician Affairs
Mark S. Martin............................ 37 Senior Vice President and Chief Operating Officer
Sami S. Abbasi............................ 32 Senior Vice President and Chief Financial Officer
Paul M. Jolas............................. 33 Senior Vice President, General Counsel and
Secretary
John W. Colloton(3)(4).................... 66 Director
John Pappajohn(2)(4)...................... 69 Director
Derace L. Schaffer, M.D.(1)(3)............ 50 Director
Less T. Chafen, M.D....................... 55 Director Nominee
Michael L. Sherman, M.D................... 55 Director Nominee
</TABLE>
- ---------------
(1) Member of the Executive Committee of the Board of Directors.
(2) Member of the Acquisition Committee of the Board of Directors.
(3) Member of the Compensation and Stock Plan Administration Committee of the
Board of Directors.
(4) Member of the Audit Committee of the Board of Directors.
Gregory L. Solomon has served as President, Chief Executive Officer and a
director of the Company since its inception. From April 1995 through September
1995, Mr. Solomon served as Chairman of the Board of Directors and Chief
Executive Officer of Physicians Resource Group, Inc., a publicly-traded
physician practice management company which provides management and
administrative services to ophthalmic and optometric practices. Physicians
Resource Group, Inc. became a public company in June 1995 and is listed on the
New York Stock Exchange. From December 1994 through April 1995, Mr. Solomon
served as a consultant to Physicians Resource Group, Inc. From February 1991
through December 1994, Mr. Solomon served as Chairman of the Board of Directors
and Chief Executive Officer of Associated Optical, Inc., a company that provided
optical laboratory services and distributed contact lenses to private
practitioners, retailers and third-party providers of eye care. From March 1983
through February 1991, he served as President, Chief Executive Officer and a
director of Allco Chemical Corporation, a manufacturer of specialty chemicals
serving the electronic and aerospace industries. Mr. Solomon received his M.B.A.
in finance from Indiana University and his B.S. in economics from Xavier
University.
Lawrence R. Muroff, M.D. has served as Chairman of the Board of Directors
and Senior Vice President of Physician Affairs of the Company since its
inception. In connection with the Reorganizations, the Company will establish a
Physician Advisory Board and Dr. Muroff will serve as its chairman. Dr. Muroff
has served as President of Educational Symposia, Inc., an educational company
which provides qualified teaching credits to radiologists and certain referring
physicians, since January 1975. He has also served as President of Imaging
Consultants, Inc., a company which provides consulting services to radiology
groups, hospital corporations and other entities involved in diagnostic imaging,
since May 1994. Dr. Muroff holds appointments as Clinical Professor of Radiology
at the University of South Florida, College of Medicine (from 1982 to the
present); the University of Florida, College of Medicine (from 1988 to the
present); and the H. Lee Moffitt Cancer Center & Research Institute (from 1994
to the present). From 1974 through 1994, Dr. Muroff was a partner in Sheer,
Ahearn & Associates, a radiology group based in Florida. Dr. Muroff received his
M.D. from Harvard Medical School; his B.M.Sc. in basic medical science from
Dartmouth Medical School; and his A.B. in liberal arts from Dartmouth College.
46
<PAGE> 48
Mark S. Martin has served as Chief Operating Officer and Senior Vice
President of the Company since June 1996. From January 1993 through June 1996,
Mr. Martin served as Executive Vice President of Practice Management Development
and Support for Medaphis Physician Services Corporation, a subsidiary of
Medaphis Corporation, a publicly-traded company which provides business and
information services to physicians, physician group practices and hospitals.
From October 1987 through December 1992, he served as Vice President of
Financial Services for CompMed, Inc., a company which provided comprehensive
management and administrative services to hospital-based physicians and
physician groups, with a primary emphasis on radiology. From 1982 through 1987,
Mr. Martin was employed by KPMG Peat Marwick as a tax manager. Mr. Martin was
licensed as a Certified Public Accountant in 1982. He received his B.A. in
accounting from Capital University.
Sami S. Abbasi has served as Chief Financial Officer and Senior Vice
President of the Company since August 1996. From January 1995 through July 1996,
Mr. Abbasi served as Vice President in the Health Care Group of Robertson,
Stephens & Company. His responsibilities included investment banking business
development and transaction execution with emerging growth publicly-held and
privately-held companies in the health care industry, with specific emphasis on
physician practice management companies. From 1988 through January 1995, he held
various positions with Citicorp Securities, Inc., including Vice President and
Senior Analyst -- Health Care Group. Mr. Abbasi received his M.B.A. from the
University of Rochester and his B.A. in economics from the University of
Pennsylvania.
Paul M. Jolas has served as General Counsel and Senior Vice President of
the Company since August 1996 and as Secretary of the Company since October
1996. From September 1989 through July 1996, Mr. Jolas was an attorney with the
law firm of Haynes and Boone, L.L.P. in Dallas, Texas, where he practiced in the
corporate finance section and was responsible for a broad range of corporate and
securities transactions including numerous initial and secondary public
offerings of equity and debt securities, mergers and acquisitions and public
company reporting requirements. Mr. Jolas received his J.D. from Duke University
School of Law and his B.A. in economics from Northwestern University.
John W. Colloton became a director of the Company in June 1997. Mr.
Colloton served as the director of the University of Iowa Hospitals and Clinics
from 1971 to 1993, and since 1993, has been Vice President for Statewide Health
Services for the University of Iowa. He also serves as a director of the
following companies: Baxter International, Inc.; MidAmerican Energy, Inc.;
Wellmark, Inc. (Blue Cross and Blue Shield of Iowa and South Dakota); OncorMed,
Inc.; and Iowa State Bank and Trust Company. Mr. Colloton is also a trustee of
the University of Pennsylvania Medical Center. Mr. Colloton, who earned his M.A.
in Hospital and Health Administration from the University of Iowa, has been
elected to the Institute of Medicine of the National Academy of Sciences and has
received Distinguished Service Awards from both the American Hospital
Association and the Association of American Medical Colleges.
John Pappajohn has been a director of the Company since its inception.
Since 1969, Mr. Pappajohn has been the President and principal stockholder of
Equity Dynamics, Inc., a financial consulting firm, and the sole owner of
Pappajohn Capital Resources, a venture capital firm, both located in Des Moines,
Iowa. He also serves as a director of the following public companies: Core,
Inc.; Drug Screening Systems, Inc.; Fuisz Technologies Ltd.; OncorMed, Inc.; The
Care Group, Inc.; PACE HealthManagement Systems, Inc.; Patient InfoSystems,
Inc.; and HealthDesk Corporation. Mr. Pappajohn received his Bachelors degree in
business from the University of Iowa.
Derace L. Schaffer, M.D. has been a director of the Company since its
inception. Dr. Schaffer is President of The Ide Group, P.C., one of the Founding
Affiliated Practices, as well as the Lan Group, a venture capital firm. He also
serves as a director of the following public companies: The Care Group, Inc.,
Oncor, Inc., and Patient InfoSystems, Inc. He is also a director of several
private companies, including Automated Dispatch Solutions, Inc., Medical Records
Corporation, NeuralMed, Inc., NeuralTech, Inc. and Preferred Oncology Networks
of America, Inc. Dr. Schaffer is a board certified radiologist. He received his
postgraduate radiology training at the Harvard Medical School and Massachusetts
General Hospital, where he served as Chief Resident. Dr. Schaffer is a member of
Alpha Omega Alpha, the national medical honor society, and is Clinical Professor
of Radiology at the University of Rochester School of Medicine.
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<PAGE> 49
Less T. Chafen, M.D. has been nominated and approved to serve as a Director
of the Company effective upon consummation of this offering. Since 1978, Dr.
Chafen has served as the Chairman of the Board of Pacific Imaging Consultants, a
Medical Group, Inc., one of the Founding Affiliated Practices. Dr. Chafen
received his M.D. from Loma Linda University and his B.A. in zoology and
chemistry from Columbia Union College.
Michael L. Sherman, M.D. has been nominated and approved to serve as a
Director of the Company effective upon consummation of this offering. Since
1995, Dr. Sherman has served as the President of Advanced Radiology, LLC, one of
the Founding Affiliated Practices. From 1992 to 1995, Dr. Sherman served as the
Managing Partner of Drs. Copeland, Hyman & Shackman. Dr. Sherman received his
M.D. from the University of Maryland Medical School and his A.B. in history and
pre-medicine from Duke University.
BOARD OF DIRECTORS
Upon consummation of this offering, the number of directors of the Company
will be fixed at seven. Directors of the Company are elected by the stockholders
at each annual meeting to serve until the next annual meeting of the
stockholders or until their successors are duly elected and qualified.
The Company's Board of Directors has established an Executive Committee, an
Acquisition Committee, an Audit Committee and a Compensation and Stock Plan
Administration Committee. The Executive Committee exercises all the powers of
the Board of Directors between meetings of the Board of Directors, except such
powers as are reserved to the Board of Directors by law. Upon consummation of
this offering, the Executive Committee will consist of Mr. Solomon and Drs.
Muroff and Schaffer. The Acquisition Committee evaluates acquisition proposals
regarding radiology physician practices, MSOs, ICs and related businesses. Upon
consummation of this offering, the Acquisition Committee will consist of Messrs.
Solomon and Pappajohn and Dr. Muroff, with one director to be named at a later
date. The Audit Committee recommends the firm to be appointed as independent
accountants to audit the Company's financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
the Company's year-end operating results and considers the adequacy of the
Company's internal accounting procedures. Upon consummation of this offering,
the Audit Committee will consist of Mr. Pappajohn, Mr. Colloton and a director
to be named at a later date. The Compensation and Stock Plan Administration
Committee reviews and recommends the compensation arrangements for all directors
and officers and administers the Company's benefit plans, including the
Company's 1996 Stock Option Plan. Upon consummation of this offering, the
Compensation and Stock Plan Administration Committee will consist of Dr.
Schaffer, Mr. Colloton and a director to be named at a later date.
Directors of the Company who are also employees receive no additional
compensation for their services as members of the Board of Directors or as
members of Board Committees.
The Company has no regular compensation arrangements with its non-employee
directors. However, the Company's 1996 Stock Option Plan provides for automatic
grants of non-qualified options to purchase 30,000 shares of Common Stock to
non-employee directors at the time any such director is first elected or
appointed as a non-employee director. Each such option (i) entitles the director
to purchase shares of the Common Stock at an exercise price equal to the fair
market value of the Common Stock on the automatic grant date, (ii) is first
exercisable with respect to 10,000 shares underlying the option on the first
anniversary of the automatic grant date and is exercisable with respect to the
remaining shares underlying the option in 24 equal monthly installments over the
next 24 months (provided such person remains a director of the Company) and
(iii) terminates on the day prior to the tenth anniversary of the automatic
grant date. On the date of each annual stockholders meeting held after this
offering, each non-employee director who is to continue to serve on the Board of
Directors shall automatically be granted an option to purchase 10,000 shares of
Common Stock, provided that the initial 30,000-share option grant to such
individual was made at least three years prior to the date of such meeting. Each
such 10,000-share option grant shall become exercisable in 12 equal monthly
installments over the next 12 months following the grant date.
48
<PAGE> 50
All directors of the Company are reimbursed for travel expenses incurred in
attending meetings of the Board of Directors and for other incidental expenses
for serving as a director.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain information regarding the
compensation paid by APPI for services rendered in all capacities to APPI during
1996 to the Company's Chief Executive Officer and the four other most highly
paid executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
------------------ --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Gregory L. Solomon...................... $142,500 -- -- 250,000 $ 4,518(1)
President and Chief Executive Officer
Lawrence R. Muroff, M.D. ............... 75,000 -- -- 230,000 --
Chairman of the Board of Directors and
Senior Vice President of Physician
Affairs
Mark S. Martin.......................... 84,529 -- -- 180,000 25,274(2)
Senior Vice President and Chief
Operating Officer
Sami S. Abbasi.......................... 66,667 -- -- 180,000 5,619(3)
Senior Vice President and Chief
Financial Officer
Paul M. Jolas........................... 58,333 -- -- 140,000 945(4)
Senior Vice President and General
Counsel
</TABLE>
- ---------------
(1) Represents amount of health insurance premiums reimbursed by the Company.
(2) Represents amount of health insurance premiums and $24,399 in relocation
expenses reimbursed by the Company.
(3) Represents amount of health insurance premiums and $4,103 in relocation
expenses reimbursed by the Company.
(4) Represents amount of health insurance premiums reimbursed by the Company.
49
<PAGE> 51
Option Grants During 1996
The following table presents information regarding 1996 grants of options
to purchase shares of Common Stock for each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(3)
OPTIONS TO EMPLOYEES BASE PRICE -----------------------
NAME GRANTED(1) IN FISCAL YEAR ($/SH)(2) EXPIRATION DATE 5%($) 10%($)
---- ---------- ---------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Solomon.......... 250,000(4) 21.7% $0.125 04/30/06 $19,653 $49,804
Lawrence R. Muroff, M.D..... 230,000(5) 20.0 0.125 04/30/06 18,081 45,820
Mark S. Martin.............. 180,000(4) 15.6 0.125 06/11/06 14,150 35,859
Sami S. Abbasi.............. 180,000(4) 15.6 0.125 07/31/06 14,150 35,859
Paul M. Jolas............... 140,000(6) 12.2 0.125 07/31/06 11,006 27,890
</TABLE>
- ---------------
(1) All options were granted at fair market value at the date of grant, as
determined by the Board of Directors. These options vest monthly over a
five-year period.
(2) The option exercise price may be paid in shares of Common Stock owned by the
executive officer, in cash, or in any other form of valid consideration as
determined by the Compensation and Stock Plan Administration Committee in
its discretion.
(3) The dollar amounts in these columns represent the potential realizable value
that might be realized upon exercise of the options immediately prior to the
expiration of their term, assuming that the market price of Common Stock
appreciates in value from the date of grant at assumed annual rates of 5%
and 10%. These assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission, and therefore are not
intended to forecast possible future appreciation, if any, of the price of
the Common Stock. These numbers do not take into account provisions of
certain options providing for termination of the option following
termination of employment, nontransferability or vesting over periods.
(4) Upon consummation of this offering, this option becomes exercisable with
respect to the greater of 50% of the shares covered thereby or the actual
number of shares that have vested. The remainder of the shares underlying
the option become exercisable in equal monthly installments over the
remaining vesting period. These numbers do not take into account provisions
of certain options providing for termination of the option following
termination of employment, nontransferability or vesting over periods.
(5) As to 200,000 shares, upon consummation of this offering, this option
becomes exercisable with respect to the greater of 100,000 shares or the
actual number of shares that have vested, and the remainder of such shares
become exercisable in equal monthly installments over the remaining vesting
period. As to 30,000 shares, 10,000 shares become exercisable on the first
anniversary of the date of grant and the remaining shares become exercisable
in 24 equal monthly installments over the next 24 months. These numbers do
not take into account provisions of certain options providing for
termination of the option following termination of consulting relationships,
cessation of services as a director of the Company or nontransferability.
(6) Upon consummation of this offering, this option becomes exercisable with
respect to the greater of 25% of the shares covered thereby or the actual
number of shares that have vested upon consummation of this offering. The
remainder of the shares underlying the option become exercisable in equal
monthly installments over the remaining vesting period. These numbers do not
take into account provisions of certain options providing for termination of
the option following termination of employment, nontransferability or
vesting over periods.
50
<PAGE> 52
Aggregated Option Exercises During 1996 and Year-end Option Values
No stock options were exercised by the Named Executive Officers during the
fiscal year ended December 31, 1996. The following table sets forth certain
information regarding unexercised stock options held by each of the Named
Executive Officers as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory L. Solomon............................ 29,166 220,834 $433,844 $3,284,906
Lawrence R. Muroff, M.D....................... 23,333 206,667 347,078 3,074,172
Mark S. Martin................................ 18,000 162,000 267,750 2,409,750
Sami S. Abbasi................................ 12,000 168,000 178,500 2,499,000
Paul M. Jolas................................. 9,333 130,667 138,828 1,943,672
</TABLE>
- ---------------
(1) Based on an assumed initial public offering price of $15.00 per share, less
the option exercise price.
STOCK OPTION PLAN
In May 1996, the Board of Directors adopted, and the stockholders of the
Company subsequently approved, the Company's 1996 Stock Option Plan (the
"Plan"). The purpose of the Plan is to provide directors, key employees and
certain advisors with additional incentives by increasing their proprietary
interest in the Company. Under the Plan, the aggregate amount of Common Stock
with respect to which options may be granted may not exceed 3,000,000 shares.
The Plan is intended to qualify for favorable treatment under Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to
Rule 16b-3 promulgated thereunder ("Rule 16b-3").
The Plan provides for the grant of incentive stock options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and non-qualified stock options (collectively, "Awards"). Following the
consummation of this offering, the Plan will be administered by the Compensation
and Stock Plan Administration Committee, which will be comprised of two or more
non-employee directors who are "disinterested" within the meaning of Rule 16b-3
(the "Committee"). Prior to the consummation of this offering, the Plan has been
administered by the Company's full Board of Directors. The Board of Directors
currently has, and the Committee will have, following consummation of this
offering, subject to the terms of the Plan, the sole authority to grant Awards
under the Plan, to construe and interpret the Plan and to make all other
determinations and take any and all actions necessary or advisable for the
administration of the Plan.
All of the Company's employees, non-employee directors and advisors are
eligible to receive Awards under the Plan, but only employees of the Company are
eligible to receive ISOs. Options will be exercisable during the period
specified in each option agreement and will generally be exercisable in
installments pursuant to a vesting schedule to be designated by the Committee.
Notwithstanding the provisions of any option agreement, options will become
immediately exercisable in the event of a "change in control" (as defined in the
Plan) of the Company and in the event of certain mergers and reorganizations of
the Company. No option will remain exercisable later than ten years after the
date of grant (or five years from the date of grant in the case of ISOs granted
to holders of more than 10% of the Common Stock).
The exercise price for ISOs granted under the Plan may be no less than the
fair market value of the Common Stock on the date of grant (110% of fair market
value in the case of ISOs granted to holders of more than 10% of the Company's
Common Stock). The exercise price for nonqualified options granted under the
Plan may be no less than 85% of the fair market value of the Common Stock on the
date of grant.
The Plan provides for automatic grants of non-qualified options to purchase
30,000 shares of Common Stock to non-employee directors at the time a director
is first elected or appointed as a non-employee director, which vest with
respect to 10,000 shares on the first anniversary of the date of the grant and
the remaining
51
<PAGE> 53
shares become exercisable in 24 equal monthly installments over the next 24
months, provided that such person continues to serve as a director of the
Company. In addition, upon expiration of the 36-month period following the
initial option grant to such non-employee director, such non-employee director
shall automatically be granted at each annual stockholders meeting a
non-qualified option to purchase 10,000 shares of Common Stock vesting over a
term of 12 months. Each such option entitles the director to purchase shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the automatic grant date. Each option shall have a ten year term
measured from the automatic grant date.
The Plan will also permit the Company to grant stock options to advisors
and consultants of the Company who are employed as physicians of an Affiliated
Practice. Generally, such options will expire upon the termination of employment
with the Affiliated Practice or the advisory or consultant relationship with the
Company or on the day prior to the tenth anniversary of the date of grant,
whichever occurs first.
The Company anticipates that upon the consummation of this offering it will
have outstanding options to purchase a total of approximately 1,681,000 shares
of Common Stock to its employees, directors and consultants. Generally, the
outstanding options are exercisable based on a monthly vesting schedule over 60
months. The Company anticipates that it will issue additional options
concurrently with or shortly following consummation of this offering. Such
options will be exercisable at the fair market value of the Common Stock on the
date of grant.
CASH BONUS PROGRAM
In April 1997, the Board of Directors adopted, and the stockholders of the
Company subsequently approved, the Company's Cash Bonus Program (the "Program").
The purpose of the Program is to establish a bonus plan pursuant to which
eligible employees will be entitled to receive cash bonuses based on the
performance of the Company. Those employees eligible to receive cash bonuses
under the Program include the executive officers of the Company and certain key
employees whose responsibilities and activities are closely connected to the
Company's overall performance.
Under the Program, cash bonuses are calculated as a percentage of each
eligible employee's base salary, with such percentage being determined based
upon the annual increase in the Company's earnings per share. In addition, each
eligible employee may receive a cash bonus based upon the achievement of certain
individual objectives and the Company's overall performance. The Program will
become effective upon consummation of this offering and will be administered by
the Compensation and Stock Plan Administration Committee of the Board of
Directors.
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company has entered into employment agreements with Gregory L. Solomon,
Mark S. Martin, Sami S. Abbasi and Paul M. Jolas, each of whom shall receive
following this offering annual salaries at the rate of $225,000, $190,000,
$190,000 and $150,000, respectively. Each employment agreement has a term of one
year with automatic successive one-year renewal periods. Each employment
agreement provides that in the event of a termination of employment by the
Company (i) other than for cause, (ii) upon disability or (iii) upon voluntary
termination by employee due to an adverse change in duties, such employee shall
be entitled to receive from the Company a payment equal to one-half of the
amount of such employee's then current annual base salary, to be paid in one
lump sum, plus a payment for all accrued but unpaid wages and expense
reimbursements. Such employment agreements provide that in the event such
employee's employment terminates following a change in control transaction (as
defined in such employment agreements) of the Company, the Company shall pay
such employee two times such employee's then current annual base salary.
Each such employment agreement contains a covenant-not-to-compete with the
Company for a period of one year following termination of employment.
52
<PAGE> 54
CERTAIN TRANSACTIONS
On April 30, 1996, Derace L. Schaffer, M.D., a director of the Company,
purchased 1,000,000 shares of Common Stock in the Company for $125,000 and John
Pappajohn, a director of the Company, and his affiliates purchased 1,000,000
shares of Common Stock for $125,000. During August 1996, Mr. Pappajohn and Dr.
Schaffer advanced a total of $400,000 to the Company as loans which were repaid
on October 31, 1996, out of the proceeds of the Company's private placement of
the Convertible Notes. Dr. Schaffer owns $107,500 in principal amount of the
Convertible Notes. Mr. Pappajohn owns $250,000 in principal amount of the
Convertible Notes. On July 17, 1997, Mr. Pappajohn advanced $150,000 to the
Company as a loan bearing interest at an annual rate of 6%. On July 25, 1997,
Mr. Pappajohn and Dr. Schaffer personally guaranteed a $1,000,000 line of credit
for the benefit of the Company. The Company repaid the $150,000 loan from Mr.
Pappajohn on August 21, 1997 out of the proceeds of the $1,000,000 line of
credit. On October 3, 1997, Mr. Pappajohn advanced $100,000 to the Company as a
loan bearing interest at an annual rate of 6%. Mr. Pappajohn has agreed to loan
an additional $250,000 to the Company on the same terms prior to the
consummation of this offering, if needed by the Company. The Company intends to
repay the $100,000 and any such additional amounts borrowed from Mr. Pappajohn
upon the consummation of this offering through borrowings under the Credit
Facility.
The Company and Lawrence R. Muroff, M.D., Chairman of the Board of
Directors of the Company and Senior Vice President of Physician Affairs, entered
into a consulting agreement in October 1997 pursuant to which Dr. Muroff will
receive annual compensation of $112,500 (prorated for actual months worked) in
exchange for rendering consulting services to the Company. This agreement will
become effective on the date following the consummation of this offering. In
1996, Dr. Muroff received option grants for 200,000 shares of Common Stock in
connection with his employment by the Company. In addition, he received option
grants for 30,000 shares for his services as a member of the Company's Board of
Directors. See "Business -- Management -- Option Grants During 1996." Dr. Muroff
owns $40,000 in principal amount of the Convertible Notes.
The Company and Michael L. Sherman, M.D., a director nominee of the
Company, entered into a consulting agreement in August 1996 pursuant to which
Dr. Sherman received an option grant for 20,000 shares of Common Stock. In
addition, the Company and Dr. Sherman entered into a consulting agreement for
which Dr. Sherman will receive annual compensation of $100,000 commencing on the
date following the consummation of this offering. The Company has agreed to
nominate Dr. Sherman for election to the Board of Directors at the next two
annual meetings of stockholders.
Mr. Solomon, the President, Chief Executive Officer and a director, owns
$40,000 in principal amount of the Convertible Notes.
In connection with the Reorganizations of Advanced Radiology, LLC, Ide
Group, P.C. and Pacific Imaging Consultants, Dr. Sherman will receive 65,014
shares of Common Stock and $325,068, Dr. Schaffer will receive 94,256 shares of
Common Stock and $471,279 and Dr. Less T. Chafen will receive 31,994 shares of
Common Stock and $159,972, respectively.
REORGANIZATIONS
The Company will consummate the Reorganizations simultaneously with the
closing of this offering.
The total consideration to be paid to each Founding Affiliated Practice and
its respective securityholders in connection with the Reorganizations described
below was determined by management based on an analysis of each practice's
relative cash flows and operating cash flows before physician costs and was
determined on a consistent basis. To the extent that the initial public offering
price exceeds $14.00 per share the total consideration paid to the
securityholders of each Founding Affiliated Practice will increase in amount;
and to the extent that the initial public offering price is less than $14.00 per
share, the total number of shares issued to the securityholders of each Founding
Affiliated Practice will increase. The amount to be paid to each physician owner
is based on his/her ownership interest in the Founding Affiliated Practice.
There has been and is no relationship between the Company and any person making
any determination of amounts to be paid to the individual physician owners of
the Founding Affiliated Practices.
53
<PAGE> 55
In connection with each Reorganization, the medical assets (e.g., payor
contracts and patient records) will be transferred to a new professional entity
that will be owned by the physicians of the respective Founding Affiliated
Practice. The Company will acquire the remaining non-medical assets from each
Founding Affiliated Practice. As a result of the Reorganizations, the Company
will not own an equity interest in the professional entities.
The following is a brief discussion of the Reorganizations and assumes an
initial public offering price of $15.00 per share.
Advanced Radiology, LLC
Advanced Radiology, LLC ("Advanced") is a Maryland limited liability
company comprised of six professional association members which, in the
aggregate, have 64 physician shareholders. In June 1997, the Company entered
into agreements to acquire certain tangible and intangible assets, and assume
certain liabilities, of Advanced, pursuant to which, upon completion of the
Reorganization, the Company will have acquired all of the non-medical assets of
Advanced. Pursuant to the terms of the agreements, the securityholders of
Advanced will receive 3,562,500 shares of Common Stock valued at $53,437,500 in
the aggregate and $17,812,500 in cash.
The Ide Group, P.C.
The Ide Group, P.C. ("Ide") is a New York corporation which has 22
physician shareholders. In June 1997, the Company entered into an agreement to
acquire certain tangible and intangible assets, and assume certain liabilities,
of Ide, pursuant to which, upon completion of the Reorganization, the Company
will have acquired all of the non-medical assets of Ide. Pursuant to the terms
of the agreement, the securityholders of Ide will receive 2,026,500 shares of
Common Stock valued at $30,397,500 in the aggregate and $10,132,500 in cash.
Pacific Imaging Consultants
Pacific Imaging Consultants ("Pacific") consists of California corporations
which have an aggregate of 22 physician shareholders. In June 1997, the Company
entered into agreements to acquire certain tangible and intangible assets, and
assume certain liabilities, of Pacific, pursuant to which, upon completion of
the Reorganization, the Company will have acquired all of the non-medical assets
of Pacific. Pursuant to the terms of the agreement, the securityholders of
Pacific will receive 703,875 shares of Common Stock valued at $10,558,125 in the
aggregate and $3,519,375 in cash.
Radiology and Nuclear Medicine, P.A.
Radiology and Nuclear Medicine, P.A. ("RNM") is a Kansas corporation which
has 24 physician shareholders. In June 1997, the Company entered into agreements
to acquire certain tangible and intangible assets, and assume certain
liabilities, of RNM, pursuant to which, upon completion of the Reorganization,
the Company will have acquired all of the non-medical assets of RNM. Pursuant to
the terms of the agreement, the securityholders of RNM will receive 958,500
shares of Common Stock valued at $14,377,500 in the aggregate and $4,792,500 in
cash.
Valley Radiology Group
Valley Radiology Group ("Valley") consists of California corporations which
have an aggregate of 20 physician shareholders. In June 1997, the Company
entered into agreements to acquire certain tangible and intangible assets, and
assume certain liabilities, of Valley, pursuant to which, upon completion of the
Reorganization, the Company will have acquired all of the non-medical assets of
Valley. Pursuant to the terms of the agreements, the securityholders of Valley
will receive 623,250 shares of Common Stock valued at $9,348,750 in the
aggregate and $3,116,250 in cash.
54
<PAGE> 56
Rockland Radiological Group
Rockland Radiological Group ("Rockland") consists of New York corporations
which have an aggregate of 13 physician shareholders. In June 1997, the Company
entered into agreements to acquire certain tangible and intangible assets, and
assume certain liabilities, of Rockland, pursuant to which, upon completion of
the Reorganization, the Company will have acquired all of the non-medical assets
of Rockland. Pursuant to the terms of the agreements, the securityholders of
Rockland will receive 1,446,375 shares of Common Stock valued at $21,695,625 in
the aggregate and $7,231,875 in cash.
M & S X-Ray Practices
The M&S X-Ray Practices ("M&S") consist of Texas corporations and limited
partnerships which have an aggregate of 20 partners and shareholders. In June
1997, the Company entered into agreements to acquire certain tangible and
intangible assets, and assume certain liabilities, of M & S, pursuant to which
upon completion of the Reorganization, the Company will acquire all of the
non-medical assets of M & S. Pursuant to the terms of the agreements, the
securityholders of M & S will receive 1,563,482 shares of Common Stock valued at
$23,452,230 in the aggregate and $7,817,419 in cash.
The following table provides certain information concerning the
securityholders of the Founding Affiliated Practices, including cash
distributions to be paid in connection with the Reorganizations. Each of the
below listed securityholders of the Founding Affiliated Practices is deemed to
be a promoter of this offering. This table excludes the impact of fractional
shares.
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Advanced Radiology, LLC
Neil Borelli, M.D. .............................. $ 388,072 41,216 $ 206,079
Edward Carter, M.D. ............................. 388,072 41,216 206,079
Valeriano Fugos, M.D. ........................... 388,072 41,216 206,079
Richard Harr, M.D. .............................. 388,072 41,216 206,079
Harry Knipp, M.D. ............................... 388,072 41,216 206,079
Nathan Stofberg, M.D. ........................... 305,891 32,488 162,439
Larry Snyder, M.D. .............................. 612,139 65,014 325,068
Samuel Anderman, M.D. ........................... 612,139 65,014 325,068
Sheldon Bearman, M.D. ........................... 612,139 65,014 325,068
Michael Sherman, M.D. ........................... 612,139 65,014 325,068
Charles Weiner, M.D. ............................ 612,139 65,014 325,068
Bruce Berlanstein, M.D. ......................... 612,139 65,014 325,068
John A. Reeder, M.D. ............................ 612,139 65,014 325,068
Jack Copeland, M.D. ............................. 428,323 45,491 227,455
Edward Mishner, M.D. ............................ 612,139 65,014 325,067
Blair Andrew, M.D. .............................. 612,139 65,014 325,067
Anuradha Bhasin, M.D. ........................... 612,139 65,014 325,067
Bennett Sweren, M.D. ............................ 612,139 65,014 325,067
Laurence Goldstein, M.D. ........................ 612,139 65,014 325,067
James Winthrop, M.D. ............................ 612,139 65,014 325,067
Robert Van Beisen, M.D. ......................... 612,139 65,014 325,067
Danllo Espinola, M.D. ........................... 612,139 65,014 325,067
Judy Destouet, M.D. ............................. 612,139 65,014 325,067
W. David McNeely, M.D. .......................... 601,405 63,874 319,367
Christopher Feifarek, M.D. ...................... 601,405 63,874 319,367
Douglas Brunner, M.D. ........................... 601,405 63,874 319,367
J. Stephen Cunat, M.D. .......................... 601,405 63,874 319,367
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
J. Thayer Simmons, M.D. ......................... 601,405 63,874 319,367
J. Dave Faison, M.D. ............................ 601,405 63,874 319,367
Daniel Aronson, M.D. ............................ 488,365 51,867 259,339
Paul Barnett, M.D. .............................. 488,365 51,867 259,339
Barbara Braitman, M.D. .......................... 488,365 51,867 259,339
Barton Cockey, M.D. ............................. 488,365 51,867 259,339
Colleene Cooke, M.D. ............................ 488,365 51,867 259,339
Lynn Harris-McCorkie, M.D. ...................... 488,365 51,867 259,339
Malonnie Kinnison, M.D. ......................... 488,365 51,867 259,339
Henry Munitz, M.D. .............................. 488,365 51,867 259,339
Margaret Lynch-Nyhan, M.D. ...................... 488,365 51,867 259,339
Rogello Naraval, M.D. ........................... 488,365 51,867 259,339
Henry Wang, M.D. ................................ 488,365 51,867 259,339
Richard Rosenbaum, M.D. ......................... 607,108 64,479 322,395
Allan Skrenta, M.D. ............................. 607,108 64,479 322,395
Lee Goodman, M.D. ............................... 607,108 64,479 322,395
Fred C. Ashman, M.D. ............................ 303,543 32,239 161,192
Luther Wells, Jr., M.D. ......................... 607,108 64,479 322,395
Frank Giargiana, M.D. ........................... 303,543 32,239 161,192
N. Nourmohammadi, M.D. .......................... 607,108 64,479 322,395
Russell Gelman, M.D. ............................ 607,108 64,479 322,395
Martin Auster, M.D. ............................. 382,034 40,574 202,873
Philip E.B. Byrd, Jr., M.D. ..................... 382,034 40,574 202,873
David M. Elder, M.D. ............................ 382,034 40,574 202,873
Bijan Keramati, M.D. ............................ 382,034 40,574 202,873
Sanford D. Minkin, M.D. ......................... 382,034 40,574 202,873
Pedro P. Purcell, M.D. .......................... 382,034 40,574 202,873
Marcos Roffe, M.D. .............................. 382,034 40,574 202,873
David J. Safferman, M.D. ........................ 382,034 40,574 202,873
Lyle T. Saylor, M.D. ............................ 382,034 40,574 202,873
Robert M. Stroud, Jr., M.D. ..................... 382,034 40,574 202,873
Jack Arnold, M.D. ............................... 731,552 77,696 388,479
Stewart Axelbaum, M.D. .......................... 731,552 77,696 388,479
John Bodine, M.D. ............................... 731,552 77,696 388,479
Carlton Jenkins, M.D. ........................... 731,552 77,696 388,479
Henry Lewis, M.D. ............................... 731,552 77,696 388,479
Allison Oidfield, M.D. .......................... 365,933 38,864 194,322
The Ide Group, P.C.
Ted D. Barnett, M.D. ............................ 326,462 94,255 471,279
Laurence W. Betts, M.D. ......................... 326,462 94,255 471,279
Frederick S. Cohn, M.D. ......................... 326,462 94,255 471,279
Fredrick S. Erdman, M.D. ........................ 163,232 47,127 235,641
Nancy A. Gadziala, M.D. ......................... 326,461 94,256 471,279
Ronald L. Hainen, M.D. .......................... 326,461 94,256 471,279
Steven G. Herbert, M.D. ......................... 326,461 94,256 471,279
Francis M. Kelley, M.D. ......................... 326,461 94,256 471,279
John D. Kennedy, M.D. ........................... 326,461 94,256 471,279
Michael E. Lebowitz, M.D. ....................... 326,461 94,256 471,279
David J. Millet, M.D. ........................... 326,461 94,256 471,279
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
George W. Parker, M.D. .......................... 326,461 94,256 471,279
Kenneth D. Pearsen, M.D. ........................ 326,461 94,256 471,279
Victor S. Regenbogen, M.D. ...................... 326,461 94,256 471,279
Derace L. Schaffer, M.D. ........................ 326,461 94,256 471,279
W. Winslow Schrank, M.D. ........................ 326,461 94,256 471,279
Robert F. Spataro, M.D. ......................... 326,461 94,256 471,279
Bruce J. Thaler, M.D. ........................... 326,461 94,256 471,279
Richard E. Tobin, M.D. .......................... 326,461 94,256 471,279
Rosemary Utz, M.D. .............................. 326,461 94,256 471,279
Herman A. Wallinga, M.D. ........................ 326,461 94,256 471,279
David M. Wolf, M.D. ............................. 326,461 94,256 471,279
M&S X-Ray Practices
Neil J. Bowie, M.D. ............................. 286,737 71,387 356,938
F. Joseph Carabin, M.D. ......................... 460,283 96,775 483,878
Robert W. Daehler, M.D. ......................... 225,877 38,681 193,406
Morgan G. Dunne, M.D. ........................... 225,877 38,681 193,406
Gregory C. Godwin, M.D. ......................... 434,913 91,094 455,472
Polly B. Hansen, M.D. ........................... 256,793 46,654 233,272
Michael D. Howard, M.D. ......................... 466,240 98,109 490,547
Philip S. Kline, M.D. ........................... 492,966 105,204 526,021
Julio C. Otazo, M.D. ............................ 499,102 107,043 535,216
R.K. Daniel Peterson, M.D. ...................... 512,614 110,069 550,344
Randall S. Preissig, M.D. ....................... 630,039 136,364 681,812
Rise P. Ross, M.D. .............................. 423,000 88,427 442,134
Jose A. Saldana, M.D. ........................... 512,614 110,069 550,344
Anthony F. Smith, M.D. .......................... 253,463 45,189 225,943
Robert L. Thompson, M.D. ........................ 486,196 104,153 520,767
A. Kenneth Trevino, M.D. ........................ 225,877 38,681 193,406
Howard R. Unger, Jr., M.D. ...................... 225,877 38,681 193,406
Jeremy N. Wiersig, M.D. ......................... 294,250 55,304 276,521
Gary L. Wilson, M.D. ............................ 263,161 47,030 235,150
W. Gregory Wojcik, M.D. ......................... 451,928 95,887 479,436
Pacific Imaging Consultants
John W. Barr, M.D. .............................. 188,642 31,994 159,972
Richard S. Breiman, M.D. ........................ 188,642 31,994 159,972
Less T. Chafen, M.D. ............................ 188,642 31,994 159,972
Frederick K. Chin, M.D. ......................... 188,642 31,994 159,972
Richard H. Culhane, M.D. ........................ 188,642 31,994 159,972
Edward Drasin, M.D. ............................. 188,642 31,994 159,972
Hayden Evans, M.D. .............................. 188,642 31,994 159,972
Michael J. Faer, M.D. ........................... 188,642 31,994 159,972
Charles E. Fiske, M.D. .......................... 188,642 31,994 159,972
Steven B. Hammerschlag, M.D. .................... 188,642 31,994 159,972
David C. Hansen, M.D. ........................... 188,642 31,994 159,972
Allen V. Havener, M.D. .......................... 188,642 31,994 159,972
Ira E. Kanter, M.D. ............................. 188,642 31,994 159,972
Richard J. Keene, M.D. .......................... 188,642 31,994 159,971
Carl J. Mani, M.D. .............................. 188,642 31,994 159,971
Susan C. Marks, M.D. ............................ 188,642 31,995 159,971
</TABLE>
57
<PAGE> 59
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Jeremy A. McCreary, M.D. ........................ 188,642 31,995 159,971
Patrick J. Perkins, M.D. ........................ 188,642 31,995 159,971
Philip J. Rich, M.D. ............................ 188,642 31,995 159,971
Douglas C. Riehle, M.D. ......................... 188,642 31,995 159,971
Gary G. Shrago, M.D. ............................ 188,642 31,995 159,971
Juanit O. Villanueva, M.D. ...................... 188,643 31,995 159,971
Radiology and Nuclear Medicine, P.A.
Stephen D. Coon, M.D. ........................... 216,743 39,938 199,688
Russell Clay Harvey, M.D. ....................... 216,743 39,938 199,688
Richard Meidinger, M.D. ......................... 216,743 39,938 199,688
Dennis C. Petterson, M.D. ....................... 216,743 39,938 199,688
Peter E. Schloesser, M.D. ....................... 216,743 39,938 199,688
William J. Walls, M.D. .......................... 216,743 39,938 199,688
Timothy A. Allen, M.D. .......................... 216,743 39,938 199,688
Philip L. Duniven, M.D. ......................... 216,743 39,938 199,688
Mikel D. Elder, M.D. ............................ 216,743 39,938 199,688
Benjamin A. Franklin, M.D. ...................... 216,743 39,938 199,688
John D. Gay, M.D. ............................... 216,743 39,938 199,688
Crosby L. Gernon, M.D. .......................... 216,743 39,938 199,688
Mark Greenberg, M.D. ............................ 216,743 39,937 199,687
Watlon S. Launey, M.D. .......................... 216,743 39,937 199,687
James W. Owen, M.D. ............................. 216,743 39,937 199,687
Vernon J. Peterson, M.D. ........................ 216,743 39,937 199,687
Phillip B. Sisk, M.D. ........................... 216,743 39,937 199,687
Jack W. Snarr, M.D. ............................. 216,743 39,937 199,687
Stephen J. Tempero, M.D. ........................ 216,743 39,937 199,687
James P. Werner, M.D. ........................... 216,743 39,937 199,687
Russell E. Greene, M.D. ......................... 216,743 39,937 199,687
Judith A. Kooser, M.D. .......................... 216,742 39,937 199,687
Ralph D. Reymond, M.D. .......................... 216,742 39,937 199,687
Terry J. Wall, M.D. ............................. 216,742 39,937 199,687
Rockland Radiological Group
Herbert Z. Geller, M.D. ......................... 855,829 111,260 556,298
Hector L. Correa, M.D. .......................... 855,829 111,260 556,298
Nancy A. Sussman, M.D. .......................... 855,829 111,260 556,298
Robert F. Mackey, M.D. .......................... 855,829 111,260 556,298
Elliot V. Handler, M.D. ......................... 855,829 111,260 556,298
Daniel J. Cohen, M.D. ........................... 855,829 111,260 556,298
Steven I. Klein, M.D. ........................... 855,829 111,260 556,298
Mark E. Geller, M.D. ............................ 855,829 111,260 556,298
Leslie M. Ossip, M.D. ........................... 855,829 111,259 556,298
Joel M. Schwarz, M.D. ........................... 855,829 111,259 556,298
Kenneth I. Blumberg, M.D. ....................... 855,829 111,259 556,298
Roger J. Frey, M.D. ............................. 855,830 111,259 556,298
Clara Chudow, M.D. .............................. 855,830 111,259 556,299
Valley Radiology Group
Richard Baxter, M.D. ............................ 181,733 29,697 148,485
Robert Filpi, M.D. .............................. 222,623 32,094 160,472
Keith Fraker, M.D. .............................. 222,623 32,094 160,472
</TABLE>
58
<PAGE> 60
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
---------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES DISTRIBUTION
----------------------------- -------------- ----------- ------------
<S> <C> <C> <C>
Franklin Gee, M.D. .............................. 222,623 32,094 160,472
Bruce Hyman, M.D. ............................... 222,623 32,094 160,472
Stephen Kahn, M.D. .............................. 181,733 29,697 148,485
Young Kang, M.D. ................................ 181,733 29,697 148,485
Andrew Koo, M.D. ................................ 222,623 32,094 160,472
Edward Lebowitz, M.D. ........................... 222,623 32,094 160,472
Peter Long, M.D. ................................ 222,623 32,094 160,472
Cyril McDonald, M.D. ............................ 222,622 32,095 160,472
Michael Myers, M.D. ............................. 181,733 29,697 148,485
John Noonan, M.D. ............................... 222,622 32,095 160,472
Harjit Sekhon, M.D. ............................. 181,733 29,697 148,485
Richard Silberstein, M.D. ....................... 222,622 32,095 160,472
Drew Sullivan, M.D. ............................. 181,733 29,697 148,485
Stephen Teng, M.D. .............................. 222,622 32,095 160,472
Eric Trefelner, M.D. ............................ 181,733 29,697 148,485
James Vaudagna, M.D. ............................ 222,622 32,095 160,472
William T. McLaughlin, M.D. ..................... 214,265 30,238 151,191
----------- ----------- -----------
Total.................................... $72,825,333 10,884,482 $54,422,419
=========== =========== ===========
</TABLE>
- ---------------
(1) Assets to Be Contributed reflects the historical book value of the assets of
each Founding Affiliated Practice, including their patient receivable
balance. The non-monetary assets are reflected at historical cost in
accordance with SAB No. 48. All monetary assets are recorded at fair value,
which is approximated by the historical costs recorded by the Founding
Affiliated Practices.
59
<PAGE> 61
The following chart depicts the Company's organizational structure
following this offering and the consummation of the Reorganizations.
Organization Structure following this offering and the consummation of the
Reorganizations
60
<PAGE> 62
COMPANY POLICY
It is anticipated that future transactions with affiliates of the Company
will be minimal, will be approved by a majority of the disinterested members of
the Board of Directors and will be made on terms no less favorable to the
Company than could be obtained from unaffiliated third parties. The Company does
not intend to make any loans to, or incur any indebtedness to, any of its
executive officers or directors.
61
<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of Common Stock as of September 12, 1997, and as adjusted, to give
effect to the Reorganizations, the conversion of the Convertible Notes and
completion of this offering, by (i) all persons known to the Company to be the
beneficial owner of 5% or more of the Common Stock, (ii) each director of the
Company, (iii) each Named Executive Officer, and (iv) all directors and
executive officers as a group. This table does not include shares of Common
Stock that may be purchased pursuant to options not exercisable within 60 days
of the consummation of this offering. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENTAGE OWNED(2)
------------------------
SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED(1) OFFERING OFFERING
---- ------------------- ---------- ---------
<S> <C> <C> <C>
Gregory L. Solomon(3)(4)............................. 135,682 6.4% *%
Lawrence R. Muroff, M.D.(3)(5)....................... 124,545 5.9 *
Mark S. Martin(3)(6)................................. 94,000 4.5 *
Sami S. Abbasi(3)(7)................................. 93,830 4.5 *
Paul M. Jolas(3)(8).................................. 39,468 1.9 *
Derace L. Schaffer, M.D.(3)(9)....................... 1,122,694 50.7 6.1
John Pappajohn(3)(10)................................ 1,046,250 51.1 5.7
John W. Colloton(3).................................. 0 * *
Michael L. Sherman, M.D.(3)(11)...................... 85,014 1.0 *
Less T. Chafen(3)(12)................................ 31,994 * *
Edgewater Private Equity Fund, II, L.P.(13).......... 250,000 11.1 1.3
All directors and executive officers as a group (10
persons)(14)....................................... 2,773,477 100.0 14.5%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Shares of Common Stock issuable upon the
exercise or conversion of stock options or other securities currently
exercisable or convertible, or exercisable or convertible within 60 days of
September 12, 1997 are deemed outstanding and to be beneficially owned by
the person holding such option or security for purposes of computing such
person's percentage ownership, but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Except
for shares held jointly with a person's spouse or subject to applicable
community property laws, or as indicated in the footnotes to this table,
each stockholder identified in the table possesses sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder.
(2) Applicable percentage of ownership is based on 2,000,000 shares of Common
Stock outstanding as of September 12, 1997 and 18,321,982 shares of Common
Stock outstanding upon consummation of this offering, the Reorganizations
and conversion of the Convertible Notes.
(3) The address of Messrs. Solomon, Martin, Abbasi, Jolas, Pappajohn and
Colloton and Drs. Muroff, Schaffer, Chafen and Sherman is c/o American
Physician Partners, Inc., 2301 NationsBank Plaza, 901 Main Street, Dallas,
Texas 75202.
(4) Includes 5,000 shares of Common Stock into which $40,000 in certain
Convertible Notes issued by the Company and held by Mr. Solomon are
convertible. See "Description of Capital Stock -- Convertible Notes." Also
includes 130,682 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997.
(5) Includes 5,000 shares of Common Stock into which $40,000 in certain
Convertible Notes issued by the Company and held by Dr. Muroff are
convertible. See "Description of Capital Stock -- Convertible Notes." Also
includes 104,545 shares of Common Stock issuable upon exercise of options
exercisable
62
<PAGE> 64
within 60 days of September 12, 1997; and exercisable options to purchase
15,000 shares of Common Stock in connection with service as a Director of
the Company.
(6) Includes 94,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997.
(7) Includes 93,830 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997.
(8) Includes 39,468 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997.
(9) Includes 13,438 shares of Common Stock into which $107,500 in certain
Convertible Notes issued by the Company and held by Dr. Schaffer are
convertible. Also includes exercisable option to purchase 14,167 shares of
Common Stock in connection with service as a Director of the Company
exercisable within 60 days of September 12, 1997. Also includes 94,256
shares received in connection with the Ide Reorganization.
(10) Includes 31,250 shares of Common Stock into which $250,000 in certain
Convertible Notes issued by the Company and held by Mr. Pappajohn are
convertible. Also includes exercisable option to purchase 14,167 shares of
Common Stock in connection with service as a Director of the Company
exercisable within 60 days of September 12, 1997. Also includes 200,000
shares held by Halkis Ltd., a sole proprietorship owned by Mr. Pappajohn,
150,000 owned by Thebes Ltd., a sole proprietorship owned by Mr.
Pappajohn's spouse, Mary Pappajohn, and 150,000 shares owned directly by
Mary Pappajohn. Mr. Pappajohn disclaims beneficial ownership of the shares
owned by Thebes Ltd. and by Mary Pappajohn.
(11) Includes exercisable options to purchase 20,000 shares of Common Stock in
connection with service as a consultant to the Company. Also includes
65,014 shares received in connection with the Advanced Reorganization.
(12) Includes 31,994 shares of Common Stock received in connection with the
Pacific Reorganization.
(13) Includes 250,000 shares of Common Stock into which $2,000,000 in certain
Convertible Notes issued by the Company and held by Edgewater are
convertible.
(14) Includes 538,525 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of September 12, 1997 and 54,688 shares of
Common Stock issuable upon conversion of Convertible Notes.
63
<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.0001 per share, and 10,000,000 shares of preferred
stock, par value $.0001 per share (the "Preferred Stock").
As of the date of this Prospectus and giving effect to the Reorganizations,
the conversion of the Convertible Notes, and the completion of this offering,
the Company will have outstanding 18,321,982 shares of Common Stock (assuming an
initial public offering price of $15.00 per share) and no shares of Preferred
Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. Holders of the Common Stock are entitled to share ratably in
the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of any Preferred Stock
then outstanding. The holders of Common Stock have no preemptive rights to
purchase shares of stock of the Company. Shares of Common Stock are not subject
to any redemption provisions and are not convertible into any other securities
of the Company. All outstanding shares of Common Stock are, and the shares of
Common Stock being offered hereby will be, upon payment of consideration
therefor, fully paid and nonassessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time at the discretion of the
Board of Directors as shares of one or more series. Subject to the provisions of
the Company's Restated Certificate of Incorporation and limitations prescribed
by law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares and to change the number of shares
constituting any series, and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of Preferred Stock, in each case without any further action or vote by
the stockholders.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock at a premium to, or may otherwise adversely affect,
the market price of the Common Stock.
CONVERTIBLE NOTES
The following summaries of certain provisions of the Convertible Notes and
the Registration Rights Agreement do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all provisions of the
Convertible Notes and the Registration Rights Agreement.
64
<PAGE> 66
General
The Convertible Notes represent unsecured general obligations of the
Company and are convertible into Common Stock as described below. The
Convertible Notes bear interest at the annual rate of 6%, and all accrued but
unpaid interest shall be due and payable upon the closing of this offering. In
the event the Convertible Notes are not converted into Common Stock by January
31, 1998, all accrued interest is due and payable immediately and the interest
rate will increase to the prime rate as published in The Wall Street Journal
plus 2% per annum thereafter, payable quarterly. Interest will be computed on
the basis of a 360-day year comprised of 12 30-day months. As of the date of
this Prospectus, the outstanding principal amount of the Convertible Notes was
$3,500,000.
Optional Redemption
The Convertible Notes are redeemable at the option of the Company, in whole
or in part, at the time of or any time after this offering. The Convertible
Notes are redeemable in their principal amount on at least 15 days' written
notice at the option of the Company, in whole or in part, together with accrued
and unpaid interest. The Company intends to call the Convertible Notes for
redemption as soon as practicable following the date of this Prospectus.
Conversion Rights
Upon receipt of written notice of redemption by the Company, the holders
may convert the principal of such Convertible Notes into Common Stock upon
approval of at least 50% of the outstanding principal of the Convertible Notes.
Upon conversion, holders of the Convertible Notes will receive shares of Common
Stock at the rate of one share of Common Stock for each $8.00 of Convertible
Note principal (the "Conversion Price"). Proportional adjustments shall be made
to the conversion ratio for splits, dividends, recapitalizations, and other
distributions of the Common Stock. The Conversion Price shall be reduced,
subject to several exceptions, if the Company sells any of its Common Stock for
less than $8.00 per share, to a price determined by dividing (i) an amount equal
to the sum of (A) the number of shares of Common Stock outstanding immediately
prior to such sale (including as outstanding all shares of Common Stock issuable
upon conversion of Convertible Notes) multiplied by the then existing Conversion
Price, and (B) the consideration, if any, received by the Company upon such
sale, by (ii) the total number of shares of Common Stock outstanding immediately
after the sale, including those issuable upon conversion of the Convertible
Notes. No adjustment is made to the Conversion Price for options granted to
officers, employees, directors and consultants of the Company pursuant to any
stock option plan of the Company, including the Plan.
Each Convertible Note may be converted into shares of Common Stock at the
then effective Conversion Price (i) upon approval of the holders of at least 50%
of the outstanding principal amount of the Convertible Notes following the
closing of an initial public offering of the Common Stock pursuant to an
effective registration statement under the Securities Act in which the aggregate
gross proceeds received by the Company equals or exceeds $10,000,000 prior to
January 31, 1998, or (ii) upon approval of the holders of at least 50% of the
outstanding principal amount of the Convertible Notes on or after January 31,
1998.
If the Company sells shares of Common Stock for less than $14.00 per share
in this offering, the conversion rate shall be adjusted so that at the time of
conversion the aggregate market value of the Common Stock into which the
Convertible Notes are converted will equal the principal of the Convertible
Notes times 1.75.
Lock-up
Each of the holders of the Convertible Notes has entered into a lock-up
agreement with the Company, pursuant to which each such holder has agreed with
the Company not to sell the Convertible Notes or the shares of Common Stock
issued or issuable upon conversion thereof owned by them at the time for a
period of 24 months following issuance of such Convertible Notes (which Notes
were issued between September 30 and December 31, 1996). The Company has agreed
with the Underwriters not to waive this lock-up agreement for 180 days following
the date of this Prospectus.
65
<PAGE> 67
Registration Rights
The holders of the Convertible Notes have certain registration rights upon
conversion of the Convertible Notes into Common Stock. At any time from and
after 12 months following this offering, and not later than September 30, 2001,
holders owning 50% or more of the aggregate of the shares of Common Stock into
which any of the Convertible Notes have been or can be converted shall have the
right on one occasion to require the Company to prepare and file a registration
statement under the Securities Act covering such shares of Common Stock, and the
Company, at its expense, will use its best efforts to cause such registration
statement to become effective as soon as possible.
In addition, the holders of Convertible Notes shall be entitled, subject to
the approval of the underwriter, to two "piggyback" registrations at the
Company's expense, as part of a registration by the Company of its shares of
Common Stock at any time subsequent to 12 months after the date of this
offering, but prior to September 30, 2001. Holders of the Convertible Notes are
granted the right on up to two occasions at the Company's expense, and prior to
September 30, 2001, to have their shares registered on Form S-3, if such form is
available for use by the Company and such holder or holders. The registration
rights are subject to a number of terms and conditions, including but not
limited to, requirements as to minimum offering size and reaching satisfactory
underwriting terms.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 ("Section 203") of
the Delaware General Corporation Law (the "DGCL"). Section 203 provides, with
certain exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person or an affiliate, or associate of
such person, who is an "interested stockholder" for a period of three years from
the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by the persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66% of the corporation's outstanding
voting stock at an annual or special meeting, excluding the shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage. The Company has not adopted
such an amendment to the Company's Restated Certificate of Incorporation or
Amended and Restated Bylaws. The applicability of Section 203 to the Company
could delay or prevent a change in control of the Company and, consequently,
could adversely affect the market price for the Common Stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the DGCL, the Company can indemnify its directors and
officers against liabilities they may incur in such capacities, including
liabilities under the Securities Act. The Company's Amended and Restated Bylaws
provide that the Company will indemnify its directors and officers to the
fullest extent permitted by law and require the Company to advance litigation
expenses upon receipt by the Company of an undertaking by the director or
officer to repay such advances if it is ultimately determined that the director
or officer is not entitled to indemnification. The Amended and Restated Bylaws
further provide that rights
66
<PAGE> 68
conferred under such Bylaws do not exclude any other right such persons may have
or acquire under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Company's Restated Certificate of Incorporation provides that, pursuant
to Delaware law, its directors shall not be liable for monetary damages for
breach of the directors' fiduciary duty of care to the Company and its
stockholders. This provision in the Restated Certificate of Incorporation does
not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the Company
or its stockholders, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director's responsibilities under any
other law, such as the federal securities laws or state or federal environmental
laws.
The Company intends to enter into agreements to indemnify its directors and
certain of its officers in addition to the indemnification provided for in the
Restated Certificate of Incorporation and Amended and Restated Bylaws. These
agreements, among other things, will indemnify the Company's directors and
certain of its officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company, or as a director or officer
of any other company or enterprise to which the person provides services at the
request of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chase Mellon
Shareholder Services, LLC.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market following this
offering. Upon the completion of this offering, the Company will have
outstanding 18,321,982 shares of Common Stock. The 5,000,000 shares of Common
Stock to be sold in this offering will be freely tradable without restriction
under the Securities Act unless acquired by "affiliates" of the Company, as that
term is defined under the Securities Act or contractually restricted.
Simultaneously with the closing of this offering, securityholders of the
Founding Affiliated Practices will receive, in the aggregate, 10,884,482 shares
of Common Stock as a portion of the consideration for their practices, which
shares will have been registered under the Securities Act. Certain other
stockholders of the Company will hold, in the aggregate, an additional 2,000,000
shares of Common Stock, none of which are being offered by this Prospectus and
none of which were acquired in transactions registered under the Securities Act.
Such unregistered shares may not be sold except in transactions registered under
the Securities Act or pursuant to an exemption from registration. The holders of
these 12,884,482 shares of Common Stock have entered into agreements with the
Company pursuant to which such holders have agreed not to sell any shares of
Common Stock owned by them at the time of consummation of the Reorganization for
a period of 12 months following this offering, and to thereafter limit the sale
of such Common Stock to 25% of such shares upon expiration of such 12-month
period following this offering; up to an additional 25% of such shares upon
expiration of an 18-month period following this offering, and the remaining 50%
of such shares upon expiration of a 24-month period following this offering.
Further, each of the holders of the Convertible Notes have also entered into
agreements with the Company pursuant to which each holder has agreed not to sell
any portion of the Convertible Notes or any shares of the Common Stock issued or
issuable upon conversion thereof for a period of 24 months following the date
the Convertible Notes were issued to such holder (which Convertible Notes were
issued between September 30, 1996 and December 31, 1996). If GE Capital
purchases Common Stock in this offering, it is expected that GE Capital would
agree not to sell any shares of Common Stock owned by them for a period of 12
months following this offering. The Company has agreed with the Underwriters not
to waive the restrictive provisions of these agreements for 180 days after the
date of
67
<PAGE> 69
this Prospectus without the prior written consent of Smith Barney Inc. Upon
expiration of these agreements, the registered shares of Common Stock will be
eligible for resale in the public market and the unregistered shares of Common
Stock, the Convertible Notes and the shares of Common Stock issued or issuable
upon conversion of the Convertible Notes will become eligible for sale in the
public market, subject to the provisions of Rule 144 of the Securities Act.
In addition, the Company and its officers and directors and substantially
all other holders of Common Stock and securities convertible into or exercisable
or exchangeable for Common Stock have agreed that for a period of 180 days after
the date of this Prospectus they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock except, in the case of the Company, in certain limited
circumstances.
The Company anticipates that prior to the consummation of this offering,
the Company will have outstanding under its Plan options to purchase
approximately 1,681,000 shares of Common Stock, and at or shortly following
consummation of this offering the Company anticipates that it will issue options
to purchase up to 275,000 shares of Common Stock under the Plan. The Company
intends to register the shares of Common Stock issuable upon exercise of the
options granted under the Plan so that such shares will be eligible for resale
in the public market. The sale of the shares will be subject to the lock-up
provisions described above.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from the Company or any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then-outstanding shares of
Common Stock or the average weekly trading volume of the Common Stock on all
exchanges and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. If two years have elapsed since the later of the date of acquisition of
restricted shares of Common Stock from the Company or any affiliate of the
Company and the acquiror or subsequent holder thereof is deemed not to have been
an affiliate of the Company at any time during the 90 days preceding a sale,
such person will be entitled to sell such shares under Rule 144(k) without
regard to the limitations described above.
Prior to this offering there has been no market for the Common Stock, and
no prediction can be made as to the effect, if any, that the sale of shares or
the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the Common
Stock in the public market could adversely affect prevailing market prices and
the ability of the Company to raise equity capital in the future.
68
<PAGE> 70
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Smith Barney Inc. ..........................................
BancAmerica Robertson Stephens..............................
Cowen & Company.............................................
Piper Jaffray Inc. .........................................
---------
Total............................................. 5,000,000
=========
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., BancAmerica Robertson
Stephens, Cowen & Company and Piper Jaffray Inc. are acting as representatives
(the "Representatives"), propose initially to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to other Underwriters or to certain other dealers. After
the initial public offering, the public offering price and such concessions may
be changed by the Underwriters. The Representatives have informed the Company
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 750,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Underwriters have reserved $5.0 million of shares of the Common Stock
offered hereby to offer to GE Capital at the initial public offering price. The
Underwriters will not receive any underwriting discounts or commissions with
respect to any shares sold to GE Capital.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Each holder of Convertible Notes and each holder of shares of Common Stock
to be issued in the Reorganizations has agreed with the Company to certain
contractual restrictions on resales of such securities and, in the case of the
Convertible Notes, the underlying Common Stock. The Company has agreed with the
69
<PAGE> 71
Underwriters not to waive the restrictive provisions of these agreements for 180
days after the date of this Prospectus without the prior written consent of
Smith Barney Inc. In addition, the Company and its officers and directors and
substantially all other holders of Common Stock and securities convertible into
or exercisable or exchangeable for Common Stock have agreed that for a period of
180 days after the date of this Prospectus they will not, without the prior
written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise
dispose of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock except, in the case of the Company, in certain
limited circumstances. See "Shares Eligible for Future Sale."
In connection with this offering and in accordance with applicable law and
industry practice, the Underwriters may over-allot or effect transactions which
stabilize, maintain or otherwise affect the market price of the Common Stock at
levels above those which might otherwise prevail in the open market, including
by entering stabilizing bids, effecting syndicate covering transactions or
imposing penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits Smith Barney Inc., as managing underwriter, to
reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock originally sold by the syndicate member are
purchased in syndicate covering transactions. Such transactions may be effected
on the Nasdaq National Market, in the over-the-counter market, or otherwise. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commenced, may be discontinued at any time.
Cowen & Company, one of the Representatives, purchased $200,000 principal
amount of the Convertible Notes in December 1996 at a purchase price equal to
100% of the principal amount thereof. The Convertible Notes held by Cowen &
Company were purchased on the same terms as, are pari passu with, and provide
the same privileges as, all of the Convertible Notes sold by the Company.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives.
Among the factors considered in determining the initial public offering price
were the history of, and the prospects for, the Company's business and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the past and present earnings of the Company and
the trend of such earnings, the prospects for earnings of the Company, the
present state of the Company's development, the general condition of the
securities market at the time of this offering and the market prices of similar
securities of comparable companies at the time of this offering.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Newport Beach, California and for
the Underwriters by Dewey Ballantine LLP, New York, New York. As of the date of
this Prospectus, certain members and investment partnerships of Brobeck, Phleger
& Harrison LLP beneficially own $67,500 in principal amount of the Convertible
Notes.
EXPERTS
The financial statements of American Physician Partners, Inc. as of
December 31, 1996 and for the period from inception (April 30, 1996) to December
31, 1996, included in this Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The consolidated financial statements of Advanced Radiology, LLC, the
combined financial statements of M&S X-Ray Practices, the combined financial
statements of Pacific Imaging Consultants, the financial statements of Radiology
and Nuclear Medicine, P.A., the combined financial statements of Rockland
70
<PAGE> 72
Radiological Group, and the combined financial statements of Valley Radiology
Group included in this Registration Statement, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The combined financial statements of The Ide Group, P.C. and Ide Diagnostic
Imaging Associates included in this Registration Statement have been audited by
DeJoy, Knauf & Blood LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 including amendments thereto relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, and each such
statement is qualified by such reference. For further information with respect
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits and schedules thereto and the
Company's Registration Statement on Form S-4 (No. 333-31611) relating to the
Reorganizations, including exhibits and schedules thereto. A copy of the
Registration Statements may be inspected without charge at the Securities and
Exchange Commission's principal office located at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, the New York Regional Office located at 7 World
Trade Center, Suite 1300, New York, New York 10048, and the Chicago Regional
Office located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and copies of all or any parts thereof may be obtained from
the Public Reference Section of the Securities and Exchange Commission. The
Registration Statements may also be obtained from the website that the
Securities and Exchange Commission maintains at http://www.sec.gov.
71
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN PHYSICIAN PARTNERS, INC.
Report of Independent Public Accountants.................. F-3
Balance Sheets as of December 31, 1996, and June 30, 1997
(unaudited)............................................ F-4
Statements of Income for the period from inception (April
30, 1996) to December 31, 1996, and the six months
ended June 30, 1997 (unaudited)........................ F-5
Statements of Stockholders' Deficit for the period from
inception (April 30, 1996) to December 31, 1996, and
the six months ended June 30, 1997 (unaudited)......... F-6
Statement of Cash Flows for the period from inception
(April 30, 1996) to December 31, 1996, and the six
months ended June 30, 1997 (unaudited)................. F-7
Notes to Financial Statements............................. F-8
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
Report of Independent Public Accountants.................. F-12
Consolidated Balance Sheets as of December 31, 1995 and
1996, and June 30, 1997
(unaudited)............................................ F-13
Consolidated Statements of Income for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-14
Consolidated Statements of Owners' Equity for the years
ended December 31, 1995 and 1996, and the six months
ended June 30, 1997 (unaudited)........................ F-15
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-16
Notes to Consolidated Financial Statements................ F-17
THE IDE GROUP, P.C. AND IDE DIAGNOSTIC IMAGING ASSOCIATES
Independent Auditors' Report.............................. F-25
Combined Balance Sheets as of June 30, 1994, 1995, and
1996 and June 30, 1997 (unaudited)..................... F-26
Combined Statements of Income for the years ended June 30,
1994, 1995, and 1996 and June 30, 1997 (unaudited)..... F-27
Combined Statements of Changes in Stockholders' Equity and
Partners' Capital for the years ended June 30, 1994,
1995, and 1996, and June 30, 1997 (unaudited).......... F-28
Combined Statements of Cash Flows for the years ended June
30, 1994, 1995, and 1996, and June 30, 1997
(unaudited)............................................ F-29
Notes to Combined Financial Statements.................... F-30
M & S X-RAY PRACTICES
Report of Independent Public Accountants.................. F-36
Combined Balance Sheets as of December 31, 1995 and 1996,
and June 30, 1997
(unaudited)............................................ F-37
Combined Statements of Income for the years ended December
31, 1995 and 1996, and the six months ended June 30,
1996 and 1997 (unaudited).............................. F-38
Combined Statements of Owners' Equity for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1997 (unaudited).............................. F-39
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-40
Notes to Combined Financial Statements.................... F-41
</TABLE>
F-1
<PAGE> 74
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PACIFIC IMAGING CONSULTANTS
Report of Independent Public Accountants.................. F-47
Combined Balance Sheets as of December 31, 1995 and 1996,
and June 30, 1997
(unaudited)............................................ F-48
Combined Statements of Income for the years ended December
31, 1995 and 1996, and the six months ended June 30,
1996 and 1997 (unaudited).............................. F-49
Combined Statements of Owners' Equity (Deficit) for the
years ended December 31, 1995 and 1996, and the six
months ended June 30, 1997 (unaudited)................. F-50
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-51
Notes to Combined Financial Statements.................... F-52
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
Report of Independent Public Accountants.................. F-58
Balance Sheets as of December 31, 1995 and 1996, and June
30, 1997 (unaudited)................................... F-59
Statements of Income for the years ended December 31, 1995
and 1996, and the six months ended June 30, 1996 and
1997 (unaudited)....................................... F-60
Statements of Owners' Equity for the years ended December
31, 1995 and 1996, and the six months ended June 30,
1997 (unaudited)....................................... F-61
Statements of Cash Flows for the years ended December 31,
1995 and 1996, and the six months ended June 30, 1996
and 1997 (unaudited)................................... F-62
Notes to Financial Statements............................. F-63
ROCKLAND RADIOLOGICAL GROUP
Report of Independent Public Accountants.................. F-68
Combined Balance Sheets as of September 30, 1995 and 1996,
and June 30, 1997
(unaudited)............................................ F-69
Combined Statements of Income for the years ended
September 30, 1994, 1995 and 1996, and the nine months
ended June 30, 1996 and 1997 (unaudited)............... F-70
Combined Statements of Owners' Equity (Deficit) for the
years ended September 30, 1994, 1995 and 1996, and the
nine months ended June 30, 1997 (unaudited)............ F-71
Combined Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996, and the nine months
ended June 30, 1996 and 1997 (unaudited)............... F-72
Notes to Combined Financial Statements.................... F-73
VALLEY RADIOLOGY GROUP
Report of Independent Public Accountants.................. F-78
Combined Balance Sheets as of December 31, 1995 and 1996,
and June 30, 1997
(unaudited)............................................ F-79
Combined Statements of Income for the years ended December
31, 1995 and 1996, and the six months ended June 30,
1996 and 1997 (unaudited).............................. F-80
Combined Statements of Owners' Equity for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1997 (unaudited).............................. F-81
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996, and the six months ended
June 30, 1996 and 1997 (unaudited)..................... F-82
Notes to Combined Financial Statements.................... F-83
</TABLE>
F-2
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
American Physician Partners, Inc.:
We have audited the accompanying balance sheet of American Physician
Partners, Inc. -- A Development Stage Company (a Delaware corporation) as of
December 31, 1996, and the related statements of income, stockholders' deficit,
and cash flows for the period from inception (April 30, 1996) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Physician Partners,
Inc. -- A Development Stage Company as of December 31, 1996, and the results of
its operations and its cash flows for the period from inception (April 30, 1996)
to December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 10, 1997
F-3
<PAGE> 76
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,490,679 $ 110,237
Prepaid expenses.......................................... 15,002 137,859
----------- -----------
Total current assets.............................. 2,505,681 248,096
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $2,612 and $15,303 at December 31, 1996 and June 30,
1997, respectively........................................ 57,405 166,654
DEFERRED IPO COSTS.......................................... -- 2,055,766
OTHER ASSETS................................................ 14,480 15,711
----------- -----------
Total assets...................................... $ 2,577,566 $ 2,486,227
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accrued expenses.......................................... $ 477,109 $ 2,085,169
CONVERTIBLE NOTES PAYABLE................................... 3,500,000 3,500,000
----------- -----------
Total liabilities................................. 3,977,109 5,585,169
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.0001 par value; 10,000,000 shares
authorized; no shares outstanding...................... -- --
Common stock, $.0001 par value; 50,000,000 shares
authorized; 2,000,000 shares issued and outstanding.... 200 200
Additional paid-in capital................................ 249,800 249,800
Accumulated deficit....................................... (1,649,543) (3,348,942)
----------- -----------
Total stockholders' deficit....................... (1,399,543) (3,098,942)
----------- -----------
Total liabilities and stockholders' deficit....... $ 2,577,566 $ 2,486,227
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 77
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PERIOD FROM
(APRIL 30, 1996) JANUARY 1, 1997,
TO TO
DECEMBER 31, JUNE 30,
1996 1997
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
REVENUES.................................................... $ -- $ --
COSTS AND EXPENSES:
Salaries and benefits..................................... 545,949 901,065
Rent and lease expense.................................... 57,015 114,134
General and administrative................................ 299,585 412,494
Depreciation.............................................. 2,612 12,691
Interest expense.......................................... 36,031 104,792
Professional services..................................... 607,482 143,859
Marketing expense......................................... 114,067 43,499
----------- -----------
Total costs and expenses.......................... 1,662,741 1,732,534
----------- -----------
INTEREST INCOME............................................. 13,198 33,135
----------- -----------
NET LOSS.................................................... $(1,649,543) $(1,699,399)
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 78
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, April 30, 1996 (inception)..... -- $ -- $ -- $ -- $ --
Issuance of common stock.............. 2,000,000 200 249,800 -- 250,000
Net loss.............................. -- -- -- (1,649,543) (1,649,543)
--------- ---- -------- ----------- -----------
BALANCE, December 31, 1996.............. 2,000,000 200 249,800 (1,649,543) (1,399,543)
Net loss (unaudited).................. -- -- -- (1,699,399) (1,699,399)
--------- ---- -------- ----------- -----------
BALANCE, June 30, 1997 (unaudited)...... 2,000,000 $200 $249,800 $(3,348,942) $(3,098,942)
========= ==== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 79
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(APRIL 30,
1996) TO SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
--------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,649,543) $(1,699,399)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation........................................... 2,612 12,691
Changes in assets and liabilities --
Prepaid expenses..................................... (15,002) (122,857)
Intangible asset..................................... -- (2,055,766)
Other assets......................................... (14,480) (1,231)
Accrued expenses..................................... 477,109 1,608,060
----------- -----------
Net cash used in operating activities............. (1,199,304) (2,258,502)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (60,017) (121,940)
----------- -----------
Net cash used in investing activities............. (60,017) (121,940)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable................... 400,000 --
Payments on notes payable................................. (400,000) --
Proceeds from issuance of convertible notes payable....... 3,500,000 --
Issuance of common stock.................................. 250,000 --
----------- -----------
Net cash provided by financing activities......... 3,750,000 --
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 2,490,679 (2,380,442)
CASH AND CASH EQUIVALENTS, at inception..................... -- 2,490,679
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,490,679 $ 110,237
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period
Interest............................................... $ 7,104 $ --
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-7
<PAGE> 80
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS:
American Physician Partners, Inc. -- A Development Stage Company (the
"Company"), a Delaware corporation, is a radiology practice management entity.
The Company is a development stage company which through December 31, 1996, had
no revenue or significant operations. During the period from inception (April
30, 1996) to December 31, 1996, the Company reported a net loss of approximately
$1.6 million primarily as a result of general and administrative expenses
incurred during its startup and organizational stage. The Company's operating
prospects are dependent upon a number of factors including the ability to
attract physicians to its business concept and integrate their operations,
competition from similar entities as the Company and overall trends in the
healthcare industry (including the effects of government regulation and
reimbursement trends).
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements have been prepared on the accrual basis of
accounting and include the accounts of the Company.
The Company's financial statements have been prepared in anticipation of an
initial public offering of the Company's common stock (the "offering").
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment, consisting of furniture, fixtures, and equipment,
are stated at cost. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets (five years).
Net Loss Per Share
Net loss per share data has not been presented as historical information
does not reflect the distribution to the promoters (see Note 8) which will occur
in conjunction with the offering and will be paid with the proceeds thereof.
In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings Per Share" (FASB No. 128.) This Statement simplifies the
standards for computing earnings per share previously found in APB No. 15,
"Earnings Per Share," and applies to entities with publicly held common stock or
potential publicly held common stock. FASB No. 128 is effective for financial
statements for both interim and annual periods ending after December 31, 1997,
early application is not permitted.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-8
<PAGE> 81
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim period from January 1, 1997, to June 30, 1997, has been included
herein. The results of operations for the interim period is not necessarily
indicative of the results for the full year.
3. CONVERTIBLE NOTES PAYABLE:
During 1996, the Company issued $3,500,000 in convertible notes (the
"Notes"). As of December 31, 1996, $40,000 and $357,000 of the Notes are held by
employees and shareholders, respectively. The interest rate on the Notes is 6%
and they mature on January 31, 1998. The Notes may, at the election of the
noteholders of at least 50% of the outstanding principal amount, be converted
into shares of common stock at a conversion price of $8 per share, subject to
certain limitations, as defined in the Note agreement. In addition, upon or
after the effective date of the offering, the Company may redeem the Notes at
par in whole or in part. The Company expects that the note holders will elect
conversion upon the Company's request for redemption.
If the Notes remain outstanding at January 31, 1998, the interest rate
increases to the prime rate plus 2% per annum.
The Company issued $400,000 in notes to stockholders during 1996. The
interest rate on these notes was the bank base lending rate. These notes were
paid in full prior to December 31, 1996.
4. COMMON STOCK AND STOCK OPTION PLAN:
Common Stock
During 1996, the Company's Board of Directors issued 2,000,000 shares of
common stock. No shares of stock were held by employees at December 31, 1996.
Stock Option Plan
During 1996, the Company's Board of Directors approved a Stock Option Plan
(the "Plan") under which 3,000,000 options to purchase shares of the Company's
common stock may be granted to key directors, employees and other health care
professionals associated with the Company, as defined by the Plan. Options
granted under the Plan may be either incentive stock options (ISO) or
nonqualified stock options (NQSO). The option price per share under the Plan may
not be less than 100% of the fair market value at the grant date for ISO and may
not be less than 85% of the fair market value at the grant date for NQSO.
Generally, options vest over a 5-year period.
The Company accounts for its stock-based compensation arrangements under
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25). In 1995, Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" (FASB No.
123), was issued, whereby companies may elect to account for stock-based
compensation using a fair value based method or continue measuring compensation
expense using the intrinsic value method prescribed in APB No. 25. FASB No. 123
requires that companies electing to continue to use the intrinsic
F-9
<PAGE> 82
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value method make pro forma disclosure of net income and net income per share as
if the fair value based method of accounting had been applied.
The Company used the minimum value method to estimate the fair value of
options. For purposes of the minimum value method, the Company used U.S.
Treasury strip rates for its risk-free interest rates, assumed no volatility or
future dividends, and assumed the expected life of the options through the
applicable expiration dates. The pro forma effects of adopting FASB No. 123's
fair value based method for the period ended December 31, 1996 were not
materially different from the corresponding APB No. 25 intrinsic value
methodology because the weighted average grant-date fair value of options
granted during the period was negligible. However, the effects of applying FASB
No. 123 during 1996 are not likely to be representative of the effects on pro
forma net income for future years because the vesting of options will cause
additional incremental expense to be recognized in future periods.
As of December 31, 1996, 1,210,000 options were granted and 1,790,000
options were available to be granted under the Plan. The weighted average
exercise prices for total granted options and total exercisable options were
$.74 and $.20, respectively, at December 31, 1996. The following table
summarizes information for the significant option groups outstanding at December
31, 1996:
<TABLE>
<CAPTION>
EXERCISE OPTIONS REMAINING EXERCISABLE
PRICE OUTSTANDING LIFE OPTIONS
- -------- ----------- ----------- -----------
(YEARS)
<C> <C> <C> <C>
$ .125 1,115,000 10 99,083
8.00 95,000 10 917
</TABLE>
Upon the effective date of the offering, the vesting period of 480,000
options will accelerate. Acceleration of the vesting period does not change the
measurement date pursuant to the provisions of APB 25 and accordingly no
compensation expense will be recognized.
5. INCOME TAXES:
The Company has incurred losses since inception. At December 31, 1996, the
Company has a net operating loss carryforward for income tax purposes of
approximately $1,647,000 available to reduce future amounts of taxable income.
If not utilized to offset future taxable income, the net operating loss
carryforward will expire in 2011.
The deferred tax benefit of approximately $600,000 generated during 1996
has been fully offset by a valuation allowance. The Company has recorded a full
valuation allowance against its deferred tax asset because of the Company's
current financial condition, its limited operating history, and its operating
losses recorded to date. If the Company does achieve profitability in the
future, the valuation allowance will be reduced by a credit to income.
6. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Instruments," requires disclosure about the fair value of
financial instruments. The carrying amounts and the estimated fair values for
these financial instruments as of December 31, 1996, were as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $2,490,679 $2,490,679
Convertible notes payable................................... 3,500,000 3,421,687
</TABLE>
F-10
<PAGE> 83
AMERICAN PHYSICIAN PARTNERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Leases
Lease expense of $57,015 for the period ended December 31, 1996, consists
of corporate office space and corporate equipment.
The following is a schedule of future minimum lease payments under
noncancelable operating leases as of December 31, 1996:
<TABLE>
<S> <C>
1997........................................................ $164,865
1998........................................................ 164,865
1999........................................................ 164,220
2000........................................................ 157,125
2001........................................................ 130,940
</TABLE>
8. SUBSEQUENT EVENTS:
The Company plans to reorganize and complete an initial public offering. As
part of this transaction, all nonmonetary assets and certain monetary assets
(primarily accounts receivable, cash, and other monetary assets such as
inventory, deposits, prepaids and miscellaneous other receivables, but excluding
notes receivable from physicians) and liabilities, excluding those liabilities
payable to physicians such as accrued or defined physician compensation, and
certain other liabilities payable to physicians related to other benefit plans
of seven radiology practices (the "Founding Affiliated Practices") will be
exchanged for the Company's common stock and cash. Each of the stockholders of
the Founding Affiliated Practices is deemed to be a promoter of the offering.
The exchange will be accounted for at the historical cost basis with the stock
being valued at the historical cost of the net assets exchanged. The cash
payments to the owners of the Founding Affiliated Practices will be reflected as
dividends paid by the Company. Concurrent with these exchanges, the physicians
will create new medical professional corporations (PC's) which will enter into
40-year service agreements with the Company. Additionally, all physicians will
enter into employment and noncompete agreements with the new PC's.
As of the closing date, the Company will agree to pay the owners of the
Founding Affiliated Practices amounts equal to their existing cash and net
accounts receivable, less certain accounts payable and accrued liabilities of
the Founding Affiliated Practices.
The following summarized unaudited pro forma information assumes the
exchange between the Company and the Founding Affiliated Practices, but does not
give effect to the offering or the distribution to promoters. This pro forma
information assumes the exchanges occurred on June 30, 1997 (in thousands):
<TABLE>
<S> <C>
Balance sheet --
Working capital........................................... $ 3,895
Total assets.............................................. 75,524
Long-term debt and capital leases, net of current
maturities............................................. 19,754
Stockholders' equity...................................... 19,264
</TABLE>
This pro forma information may not be indicative of actual results if the
transactions had occurred on the dates indicated or which may be realized in the
future.
F-11
<PAGE> 84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Advanced Radiology, LLC:
We have audited the accompanying consolidated balance sheets of Advanced
Radiology, LLC (a Maryland limited liability company) and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of income,
owners' equity, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Radiology, LLC and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 21, 1997
F-12
<PAGE> 85
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 1,822,724 $ 3,048,169 $ 184,677
Accounts receivable, net of allowances of
$11,656,529, $13,591,727, and $14,922,987 at
December 31, 1995 and 1996 and June 30, 1997 ,
respectively................................... 9,957,828 12,041,297 15,042,029
Other receivables................................. -- 229,162 374,624
Other current assets.............................. 406,753 1,509,912 669,365
----------- ----------- -----------
Total current assets...................... 12,187,305 16,828,540 16,270,695
PROPERTY AND EQUIPMENT, net......................... 12,871,519 13,950,022 14,860,394
INVESTMENTS IN AFFILIATED ENTITIES.................. 497,345 743,586 1,101,109
OTHER ASSETS, net................................... 6,130,486 7,888,383 7,064,871
----------- ----------- -----------
Total assets.............................. $31,686,655 $39,410,531 $39,297,069
=========== =========== ===========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facilities....................... $ 1,700,000 $ 4,000,000 $ 2,900,000
Accounts payable and accrued expenses............. 2,591,707 625,224 2,007,387
Accrued salaries and benefits..................... 2,073,807 1,328,370 1,605,918
Due to joint ventures............................. 1,162,296 1,430,415 693,257
Current portion of long-term debt................. 2,357,143 3,999,473 3,909,343
Other current liabilities......................... -- 248,450 748,789
----------- ----------- -----------
Total current liabilities................. 9,884,953 11,631,932 11,864,694
----------- ----------- -----------
LONG-TERM DEBT, net of current portion.............. 5,142,857 6,708,214 4,812,573
OTHER LIABILITIES................................... -- 359,012 359,012
----------- ----------- -----------
Total liabilities......................... 15,027,810 18,699,158 17,036,279
MINORITY INTEREST................................... -- 381,698 408,103
OWNERS' EQUITY...................................... 16,658,845 20,329,675 21,852,687
----------- ----------- -----------
Total liabilities and owners' equity...... $31,686,655 $39,410,531 $39,297,069
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 86
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Medical service revenue,
net........................ $19,277,956 $37,357,073 $51,692,004 $23,241,501 $31,103,238
Other revenue................. 3,173,533 1,476,239 1,189,986 524,288 456,914
----------- ----------- ----------- ----------- -----------
Total revenue......... 22,451,489 38,833,312 52,881,990 23,765,789 31,560,152
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Distributions to physician
owners..................... 8,755,971 12,355,000 20,563,799 8,600,000 12,199,998
Costs of affiliated physician
services................... -- 811,926 2,293,233 1,589,158 2,308,427
Practice salaries, wages and
benefits................... 6,325,282 10,051,129 12,317,949 5,567,355 7,683,633
Practice supplies............. 1,145,397 2,626,338 3,206,294 1,576,699 1,838,344
Practice rent and lease
expense.................... 862,257 2,184,472 2,301,575 1,306,004 1,598,479
Depreciation and
amortization............... 1,879,420 3,268,977 3,695,649 1,868,353 2,102,488
Other practice expenses....... 3,338,356 4,184,188 6,272,470 2,694,655 3,542,759
Interest expense.............. 410,752 1,003,042 751,086 307,409 445,779
----------- ----------- ----------- ----------- -----------
Total costs and
expenses............ 22,717,435 36,485,072 51,402,055 23,509,633 31,719,907
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EQUITY IN
EARNINGS OF INVESTMENTS....... (265,946) 2,348,240 1,479,935 256,156 (159,755)
EQUITY IN EARNINGS OF
INVESTMENTS................... 761,999 634,659 1,207,670 680,447 642,367
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES..... -- -- (18,055) 9,239 (26,405)
----------- ----------- ----------- ----------- -----------
NET INCOME...................... $ 496,053 $ 2,982,899 $ 2,669,550 $ 945,842 $ 456,207
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE> 87
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1993.................................. $10,638,485
Capital contributions..................................... 1,200
Net income................................................ 496,053
-----------
BALANCE, December 31, 1994.................................. 11,135,738
Assets contributed, net of distribution to Copeland....... 240,208
Capital contributions..................................... 2,300,000
Net income................................................ 2,982,899
-----------
BALANCE, December 31, 1995.................................. 16,658,845
Contribution of practice net assets....................... 1,001,280
Net income................................................ 2,669,550
-----------
BALANCE, December 31, 1996.................................. 20,329,675
Capital Contributions (unaudited)......................... 1,066,805
Net income (unaudited).................................... 456,207
-----------
BALANCE, June 30, 1997 (unaudited).......................... $21,852,687
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE> 88
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ---------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 2,982,899 $ 2,669,550 $ 945,842 $ 456,207
Adjustments to reconcile net income to net cash provided
by operating activities --
Minority interest in income of consolidated
subsidiaries......................................... -- 18,055 (9,239) 26,405
Depreciation and amortization.......................... 3,268,977 3,695,649 1,868,353 2,102,488
Investment (income) loss from affiliated entities...... (634,659) (1,207,670) (680,447) (642,367)
(Gain) loss on sale of assets.......................... 12,302 379 -- --
Changes in assets and liabilities
(Increase) decrease in --
Accounts receivable, net............................. (9,957,828) (2,083,469) (731,663) (3,000,732)
Other receivables and other current assets........... (724,734) (261,143) (1,548,458) 695,085
Other noncurrent assets.............................. (242,636) (2,023,516) (1,208,878) --
Increase (decrease) in --
Accounts payable and accrued expenses................ 2,307,168 (1,966,483) 992,615 1,382,163
Accrued salaries and benefits........................ 2,073,806 (745,436) (2,012,306) 277,548
Due to joint ventures................................ 1,608,528 268,119 (269,952) (737,158)
Other liabilities.................................... -- 248,450 -- 500,338
------------ ------------ ------------ ------------
Net cash provided by operating activities......... 693,823 (1,387,515) (2,654,133) 1,059,977
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of capital equipment.............. -- -- -- --
Purchases of capital equipment........................... (1,821,663) (3,295,696) (1,333,481) (2,189,347)
Contributions to partnerships............................ (61,198) (265,426) -- (302,772)
Distributions received from affiliated entities.......... 59,407 1,246,214 655,043 587,616
------------ ------------ ------------ ------------
Net cash used in investing activities............. (1,823,454) (2,314,908) (678,438) (1,904,503)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................. 9,000,000 5,114,881 -- --
Repayment of long-term debt.............................. (10,047,645) (2,850,656) (239,873) (1,985,771)
Net increase in line of credit........................... 1,700,000 2,300,000 1,778,000 (1,100,000)
Contributions from members............................... 2,300,000 -- -- 1,066,805
Proceeds from the sale of stock.......................... -- -- -- --
Minority interest contribution to joint venture.......... -- 363,643 363,644 --
------------ ------------ ------------ ------------
Net cash used in financing activities............. 2,952,355 4,927,868 1,901,771 (2,018,966)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 1,822,724 1,225,445 (1,430,800) (2,863,492)
CASH AND CASH EQUIVALENTS, beginning of period............. -- 1,822,724 1,822,724 3,048,169
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period................... $ 1,822,724 $ 3,048,169 $ 391,924 $ 184,677
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE:
Cash interest paid....................................... $ 1,003,000 $ 751,086 $ 307,409 $ 445,779
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 89
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Advanced Radiology, LLC (the "Company") is a Maryland limited liability
company organized to provide radiology and imaging healthcare services. Its
offices are located in the Baltimore, Maryland, metropolitan area. The Company
was organized in October 1994 and began providing healthcare services in January
1995.
The consolidated financial statements include the accounts of the Company
and its seventy-three percent owned subsidiary, MRI at St. Joseph Medical
Center, LLC ("MRI"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
The Company was formed through the contribution of assets and medical
business of five existing radiology practices -- Drs. Copeland, Hyman, and
Shackman, P.A. ("Copeland"); Drs. Thomas, Wallop, Kim, and Lewis, P.A.
("Arundel"); Diagnostic Imaging Associates, P.A. (DIAPA); Drs. DeCarlo, Lyon,
Hearn, and Pazourek, P.A. ("DeCarlo"); and Carroll Imaging Associates, P.A.
("Carroll") (collectively, the "Practices"). Effective January 1, 1995, the
Practices contributed certain assets (primarily fixed assets and investments in
joint ventures) and the debt related to those assets in exchange for ownership
interests in the Company. The Company did not acquire the ownership interests of
the Practices; however, the Company became the sole provider of medical
services. The Practices remain in existence and continue to employ all
physician-owners. Distributions are made by the Company to the Practices, who
then pay all physician-owner salaries. Such distributions have been included as
operating expenses in the consolidated statements of income.
The initial formation of the Company has been accounted for as a purchase
under APB No. 16. Based on the asset sizes of the individual contributed
radiology practices, Copeland was identified as the accounting acquirer, and
accordingly, all balances prior to January 1, 1995, represent the activities of
Copeland on a stand alone basis. The net assets contributed by Arundel, DIAPA,
DeCarlo, and Carroll were recorded at the estimated fair value of the assets
contributed and liabilities assumed. The excess purchase price (goodwill) was
determined based upon the fair value of the ownership interest received relative
to Copeland less the fair value of net assets contributed. Following are the
assets and liabilities, by practice.
<TABLE>
<CAPTION>
ARUNDEL DIAPA DECARLO CARROLL TOTAL
----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Fixed assets.................... $ 2,082,667 $ 931,433 $ 502,922 $ 37,939 $ 3,554,961
Investments in joint venture.... -- -- -- (336,732) (336,732)
Debt............................ (1,705,357) (670,203) (262,405) (20,998) (2,658,963)
Other........................... 19,732 (19,414) 923 875 2,116
----------- --------- --------- --------- -----------
Total................. $ 397,042 $ 241,816 $ 241,440 $(318,916) 561,382
=========== ========= ========= ========= -----------
Excess purchase price
(goodwill).................... 6,150,426
-----------
Total estimated fair market
value contributed............. $ 6,711,808
===========
</TABLE>
In addition, as part of the initial formation of the Company, all of the
assets and liabilities of Copeland, other than fixed assets, debt, and certain
miscellaneous assets, were maintained by Copeland and were not contributed to
the Company. Net assets in the amount of $6,471,600 (consisting primarily of
accounts receivable) were not contributed to the Company by Copeland. This
amount, less the $6,711,808 described above, has been reflected as a
contribution of $240,208 in the accompanying consolidated statements of owners'
equity.
F-17
<PAGE> 90
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each of the Practices received Class B membership interests in the Company.
Such Class B interests represent in excess of 99% of the Company's ownership.
The Class A members are approximately 50 physicians, each owning an .01%
interest. The Class B members appoint the Management Committee, which has the
authority to manage regular operations of the Company.
In April 1996, Harbor Radiologists, P.A. ("Harbor") was admitted as a
14.30% Class B member of the Company. Its shareholders were also admitted as
Class A members. The estimated fair market values of assets and liabilities
contributed by Harbor in exchange for an interest in the Company are as follows:
<TABLE>
<S> <C>
Fixed Assets............................................. $1,921,376
Debt..................................................... (943,461)
Other.................................................... 23,365
----------
Estimated fair market value.............................. $1,001,280
==========
</TABLE>
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment is recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Investments in Affiliated Entities
Investments in joint venture partnerships are accounted for using the
equity method. In addition, the Company holds two investments in entities
accounted for under the cost method.
Other Assets
Other assets include loan origination costs, organization costs, deposits
and other assets. Loan origination costs are being amortized on a straight-line
basis over a four-year period. Organizations costs are being amortized on a
straight-line basis over a five-year period. Goodwill is being amortized over a
twenty-five year life.
F-18
<PAGE> 91
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Medical Service Revenues
Medical service revenue are accounted for in the period in which the
services are provided. The revenue are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in the
period in which the revised amount is determined. A significant portion of the
Company's medical service revenue are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse physicians based on
fee schedules which are determined by the related governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated rates.
All physician owners are employed by the Practices. Distributions are made
by the Company to the Practices, who then pay all physician owner salaries. Such
distributions have been included as an operating expense in the consolidated
statements of income.
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include all compensation to
non-owner physicians, as well as certain benefits, educational and travel costs
paid to non-owner physicians and physician owners.
Income Taxes
There is no provision for income taxes in the accompanying consolidated
financial statements. The members include their respective share of Company
profits and losses in their individual and corporate tax returns. In 1994,
Copeland was an S corporation, and accordingly all profits and losses were
reported by the individual physicians in their individual corporate returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1996, to June 30, 1996, and from January
1, 1997, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
F-19
<PAGE> 92
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATED ENTITIES:
In 1995, investments in affiliated entities consist of 50% interests in two
partnerships (Franklin Imaging Joint Venture ("Franklin") and Advanced Imaging
of Carroll County Limited Partnership (AICC)), which perform radiology and
imaging healthcare services, and 50% of the common stock of a corporation
(Advanced Medical Imaging, Inc. (AMI)) which enters into and administers managed
care contracts for radiology services.
In January 1996, the Company became a 50% member in Poole Road Imaging, LLC
("Poole"), which was organized to perform radiology and imaging healthcare
services in the Carroll County General Hospital service area. The Company's
initial capital contribution consisted primarily of the fixed assets at its
Poole Road office, which had a net book value of approximately $712,000 at
December 31, 1995. The Poole Road office is now operated by Poole. In August,
1996, the Company became a 50% member in Health Systems Imaging, LLC, which owns
and operates diagnostic imaging centers. These investment balances at December
31 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Franklin.................................................... $ 856,535 $539,843
AICC........................................................ (330,555) (71,075)
AMI......................................................... (33,635) 17,424
Health Systems Imaging, LLC................................. -- 107,598
Poole....................................................... -- 64,796
Other....................................................... 5,000 85,000
--------- --------
$ 497,345 $743,586
========= ========
</TABLE>
Summary information from the unaudited financial statements of Franklin as
of and for the year ended December 31, 1996, is as follows:
<TABLE>
<S> <C>
Current assets.............................................. $2,981,926
Total assets................................................ 3,123,695
Current liabilities......................................... 1,275,441
Total liabilities........................................... 1,662,751
Partners' equity............................................ 1,460,944
Revenue..................................................... $5,202,128
Net income.................................................. $1,567,258
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Medical equipment.......................... 5-10 $ 19,312,384 $ 24,716,479
Leasehold improvements..................... 3-19 5,267,811 5,900,495
Furniture and fixtures..................... 5-7 4,156,432 5,078,959
------------ ------------
28,736,627 35,695,933
Accumulated depreciation and
amortization............................. (15,865,108) (21,745,911)
------------ ------------
Property and equipment, net.............. $ 12,871,519 $ 13,950,022
============ ============
</TABLE>
F-20
<PAGE> 93
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt as of December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Mercantile Safe Deposit and Trust -- prime plus 1/4% (8.5%
at December 31, 1996), due December 31, 1998............. $ 7,500,000 $ 5,142,858
Mercantile Safe Deposit and Trust -- prime (8.25% at
December 31, 1996), due June 30, 2001.................... -- 2,706,667
Mercantile Safe Deposit and Trust -- prime (8.25% at
December 31, 1996), due 2001............................. -- 2,214,882
First National Bank of Maryland notes -- 30 day LIBOR plus
2.25% (8.03% at December 30, 1996), due March 1999....... -- 643,280
----------- -----------
Total long-term debt....................................... 7,500,000 10,707,687
Less current maturities.................................... (2,357,143) (3,999,473)
----------- -----------
Total long term debt, net of current portion............... $ 5,142,857 $ 6,708,214
=========== ===========
</TABLE>
The Company has a $5,000,000 revolving line of credit for working capital
purposes with Mercantile Safe Deposit and Trust Company ("Mercantile"). At
December 31, 1996, the Company had $4,000,000 outstanding under the line. In
addition, the Company has a $15,000,000 revolving credit facility with
Mercantile for equipment purchases. Advances under the credit facilities bear
interest at bank's prime rate, payable monthly. The interest rate at December
31, 1996, was 8.25%. The maturity date is July 3, 1997 or on such later date as
the bank may elect; however, on an annual basis, the bank may approve a one-year
extension. Advances under the credit facility, when combined with any
outstanding balances on two of the term loan note payables described above, are
limited to $20,000,000 in total. At December 31, 1996, the maximum amount of
funds available under the credit facility approximated $8,200,000. Advances are
collateralized by a first lien on all assets of the Company and the guarantees
of the five Class B members.
In connection with the term and revolving credit facility to Mercantile,
the Company is required to maintain a liabilities to net worth ratio not
exceeding 1 to 1, and a minimum cash flow coverage ratio of at least 1.25 to 1.
In addition, the agreement provides that at no time shall total debt to
Mercantile exceed 80% of the fair market value of the Company's fixed assets,
plus the Company's and guarantors' eligible accounts receivable (as defined).
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 3,999,473
1998.................................................... 3,824,027
1999.................................................... 1,031,566
2000.................................................... 1,022,976
2001.................................................... 829,645
-----------
$10,707,687
===========
</TABLE>
F-21
<PAGE> 94
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases office facilities and certain equipment under various
noncancelable operating leases that expire at various dates through 2004.
Certain of the office leases provide for renewal options. Future minimum lease
payments under noncancelable operating leases at December 31, 1996, are as
follows:
<TABLE>
<S> <C>
1997..................................................... $1,608,947
1998..................................................... 1,319,045
1999..................................................... 952,888
2000..................................................... 552,661
2001..................................................... 498,810
----------
Total.......................................... $4,932,351
==========
</TABLE>
Total rent expense was approximately $862,000 in 1994, $2,069,000 in 1995,
and $2,156,000 in 1996.
The Company has also entered into a three-year agreement, expiring in April
1998, whereby it pays a quarterly fee for selection, procurement, repair and
maintenance of its radiology and imaging equipment. Total fees paid under this
arrangement approximate $950,000 per year, and are subject to adjustment to
reflect changes in the equipment and clinical needs of the Company.
7. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) plan for employees of the Company and its
five corporate members who have completed one year of service and are at least
age 21. The plan does not provide for employer matching contributions, but does
allow discretionary employer contributions. The Company's contribution in 1995
was $1,911,000, which was remitted in February 1996. Included in this amount is
$1,455,000 relating to Class A members, which is included in distributions to
owners in the accompanying statement of owners' equity. The Company's
contribution for 1996 was $2,136,000, which was remitted in March 1997. Included
in this amount is $1,605,000 relating to Class A members, which is included in
distributions.
8. RELATED-PARTY TRANSACTIONS:
As indicated in Note 3, the Company has 50% partnership interests in
Franklin, AICC, and Poole. A Class B member of the Company has a 50% partnership
interest in Greater Baltimore Diagnostic Imaging Partnership (GBDIP). Under
agreements with these partnerships (Franklin, AICC, GBDIP, and Poole), the
Company performs professional, billing, and management services. These services
are billed to the partnerships based primarily upon agreed-upon percentages of
the partnerships' cash basis revenue. Management and professional fees earned
from these partnerships are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Franklin............................... $2,016,579 $1,678,000 $1,851,000
AICC................................... -- 162,000 204,000
GBDIP.................................. -- 149,000 474,000
Poole.................................. -- -- 364,000
---------- ---------- ----------
$2,016,579 $1,989,000 $2,893,000
========== ========== ==========
</TABLE>
F-22
<PAGE> 95
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also collects the receivables of the partnerships and
periodically remits the collections to them. In addition, the Company pays
certain expenses on behalf of the partnerships and is periodically reimbursed by
them.
Amounts due to/(from) affiliated entities at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Franklin.................................................... $ 980,183 $ 687,226
AICC........................................................ (61,800) 186,303
GBDIP....................................................... 243,913 110,298
Poole....................................................... -- 99,644
Health Systems Imaging, LLC................................. -- 346,944
---------- ----------
$1,162,296 $1,430,415
========== ==========
</TABLE>
The Company performs radiology and imaging healthcare services under
managed care contracts entered into and administered by AMI (see Note 3), and
remits a management fee to AMI. Such management fees were not significant in
1995 and 1996. In addition, the Company pays certain expenses on behalf of AMI
and is periodically reimbursed. There are no significant amounts due from or to
AMI at December 31, 1995 and 1996.
The Company leases seven of its office facilities from entities in which
certain of the Company's members have ownership interests. Rent expense relating
to such facilities was approximately $800,000 in 1995 and $796,000 in 1996.
There were no such arrangements during 1994.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. The carrying amounts of accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short maturity of these
instruments. The carrying amount of the Company's long-term debt also
approximates fair value.
10. MEMBERSHIP REDEMPTION OPTION:
Under the terms of the Company's operating agreement, at any time on or
after October 17, 1999, the Company has the option to redeem the membership
interests of all of the Class B members (which are the corporate members of the
Company) at a price equal to the then positive capital account balances of such
members, or, if such balances are zero or negative, for a price of $10.
Twenty-five percent of the redemption price is to be paid no later than six
months after the exercise of the option with the remainder generally being paid
in three annual installments, including interest.
11. CONTINGENCIES:
The Company is a defendant in certain claims arising from alleged acts of
malpractice. Legal counsel for the Company is of the opinion that such claims
are adequately covered by malpractice insurance.
The Company is a defendant in a lawsuit brought by two former employees of
a Class B member alleging employment discrimination. Total damages claimed are
$80 million. The case has been compelled to binding arbitration; however, no
Scheduling Order has been issued, and no substantive discovery has taken place.
In the opinion of management, the ultimate disposition of this case will not
have a material adverse effect on the Company's financial condition or results
of operations.
F-23
<PAGE> 96
ADVANCED RADIOLOGY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company became self-insured for employee health insurance
benefits. Stop-loss insurance coverage has been purchased which covers all
claims exceeding $35,000 per family with an aggregate maximum limit of 125% of
expected claims, as determined by the insurance company (approximately $684,000
in 1996).
12. SUBSEQUENT EVENTS:
On August 13, 1996, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
leases and other general operating expenses.
Effective January 1, 1997, Drs. Perilla, Sindler & Associates, P.A. (PSA)
contributed certain assets and liabilities to the Company in exchange for an
11.39% ownership interest. This transaction will be accounted for using the
purchase method.
F-24
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
The Ide Group, P.C.:
We have audited the accompanying combined balance sheets of The Ide Group,
P.C. (a New York professional corporation) and Ide Diagnostic Imaging Associates
(a New York general partnership) as of June 30, 1997, 1996 and 1995, and the
related combined statements of income, changes in stockholders' equity and
partners' capital, and cash flows for the three years then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Ide Group, P.C.
and Ide Diagnostic Imaging Associates as of June 30, 1997, 1996, and 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
DEJOY, KNAUF & BLOOD LLP
Rochester, New York,
August 5, 1997
F-25
<PAGE> 98
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 238,071 $ 199,048 $ 268,854
Accounts receivable, net of allowance
for doubtful accounts and
contractual adjustments of
$1,185,000, $1,857,000 and
$2,425,000 at June 30, 1997, 1996
and 1995, respectively.............. 5,261,378 4,770,648 4,235,067
Supplies on hand...................... 81,988 116,938 99,177
Prepaids and deposits................. 43,649 23,085 65,247
----------- ----------- -----------
Total current assets............ 5,625,086 5,109,719 4,668,345
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Radiology equipment................... 4,625,916 5,147,974 5,000,123
Furniture and fixtures................ 1,385,415 1,560,388 1,534,760
Leasehold improvements................ 409,119 409,862 555,785
----------- ----------- -----------
6,420,450 7,118,224 7,090,668
Less -- Accumulated depreciation...... (5,423,810) (5,787,413) (5,104,880)
----------- ----------- -----------
996,640 1,330,811 1,985,788
----------- ----------- -----------
OTHER ASSETS:
Cash surrender value of life insurance
policies............................ 348,649 337,326 314,591
Refundable bonds...................... 10,000 43,950 50,950
Other assets.......................... 38,541 38,541 10,274
----------- ----------- -----------
397,190 419,817 375,815
----------- ----------- -----------
TOTAL ASSETS............................ $7,018,916 $ 6,860,347 $ 7,029,948
=========== =========== ===========
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Line of credit........................ $ -- $ -- $ 200,000
Accounts payable...................... 1,633,103 755,391 759,743
Current portion of long-term debt..... 436,440 380,000 841,463
Accrued liabilities................... 388,877 355,346 77,628
Accrued profit sharing................ 198,820 -- 240,678
Accrued vacation...................... 362,864 342,579 320,027
----------- ----------- -----------
Total current liabilities....... 3,020,104 1,833,316 2,439,539
----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-term debt........................ 1,250,227 1,361,667 1,145,650
Life insurance loans payable.......... 171,379 171,379 167,613
Deferred income taxes................. 1,041,833 1,185,742 811,965
----------- ----------- -----------
2,463,439 2,718,788 2,125,228
----------- ----------- -----------
STOCKHOLDERS' EQUITY AND PARTNERS'
CAPITAL:
Common stock ($1 par, 20,000 shares
authorized, 2,400 shares issued and
outstanding)........................ 2,400 2,400 2,300
Additional paid-in capital............ 3,268 3,268 3,268
Retained earnings..................... 1,529,955 2,034,754 1,594,827
Partners' capital..................... -- 268,071 865,036
Less -- Treasury stock................ (250) (250) (250)
----------- ----------- -----------
Total stockholders' equity and
partners' capital............. 1,535,373 2,308,243 2,465,181
----------- ----------- -----------
TOTAL LIABILITIES, STOCKHOLDERS'
EQUITY
AND PARTNERS' CAPITAL......... $7,018,916 $ 6,860,347 $ 7,029,948
=========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these balance sheets.
F-26
<PAGE> 99
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Medical service revenue, net......................... $26,892,138 $25,996,948 $25,521,062
Other revenue........................................ 11,323 22,736 12,692
----------- ----------- -----------
26,903,461 26,019,684 25,533,754
----------- ----------- -----------
COSTS AND EXPENSES:
Costs of affiliated physician services............... 15,279,935 11,483,239 10,935,981
Practice salaries wages and benefits................. 3,203,763 3,080,586 3,141,263
Practice supplies.................................... 1,289,106 1,558,493 1,597,236
Practice rent and lease expense...................... 3,982,938 3,598,904 3,532,920
Depreciation and amortization........................ 532,053 835,326 838,919
Other practice expenses.............................. 3,150,236 3,356,050 3,241,889
Interest expense..................................... 111,569 202,195 225,447
----------- ----------- -----------
Total costs and expenses..................... 27,549,600 24,114,793 23,513,655
----------- ----------- -----------
INCOME (LOSS) BEFORE (PROVISION FOR) BENEFIT FROM
DEFERRED INCOME TAXES................................ (646,139) 1,904,891 2,020,099
(PROVISION FOR) BENEFIT FROM DEFERRED INCOME TAXES..... 141,340 (374,977) 182,454
----------- ----------- -----------
NET INCOME (LOSS)...................................... $ (504,799) $ 1,529,914 $ 2,202,553
=========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-27
<PAGE> 100
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
COMBINED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED PARTNERS' TREASURY
SHARES AMOUNT CAPITAL EARNINGS CAPITAL STOCK TOTAL
------ ------ ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994..... 2,000 2,000 3,268 1,665,141 1,509,174 (100) 3,179,483
Net income (loss).......... -- -- -- (70,314) 2,272,867 -- 2,202,553
Sale of stock.............. 300 300 -- -- -- -- 300
Purchase of stock.......... -- -- -- -- -- (150) (150)
Capital distributions...... -- -- -- -- (2,917,005) -- (2,917,005)
----- ------ ------ ---------- ---------- ----- ----------
BALANCE, June 30, 1995..... 2,300 2,300 3,268 1,594,827 865,036 (250) 2,465,181
Net income................. -- -- -- 439,927 1,089,987 -- 1,529,914
Sale of stock.............. 100 100 -- -- -- -- 100
Capital contributions...... -- -- -- -- 68,661 -- 68,661
Capital distributions...... -- -- -- -- (1,755,613) -- (1,755,613)
----- ------ ------ ---------- ---------- ----- ----------
BALANCE, June 30, 1996..... 2,400 2,400 3,268 2,034,754 268,071 (250) 2,308,243
Net loss................... -- -- -- (504,799) -- -- (504,799)
Capital distributions...... -- -- -- -- (268,071) -- (268,071)
----- ------ ------ ---------- ---------- ----- ----------
BALANCE, June 30, 1997..... 2,400 $2,400 $3,268 $1,529,955 $ -- $(250) $1,535,373
===== ====== ====== ========== ========== ===== ==========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-28
<PAGE> 101
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (504,799) $ 1,529,914 $ 2,202,553
---------- ----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 532,053 835,326 838,919
Deferred taxes......................................... (143,909) 373,777 (191,327)
(Increase) decrease in accounts receivable............. (490,730) (535,581) 377,070
Decrease (increase) in prepaids and deposits........... (20,564) 42,162 172,264
(Increase) decrease in supplies on hand................ 34,950 (17,761) 16,233
(Increase) decrease in other assets.................... -- (28,267) 4,514
Increase (decrease) in accounts payable................ 877,712 (4,352) 74,873
Increase (decrease) in accrued profit sharing.......... 198,820 (240,678) 240,678
Increase (decrease) in accrued liabilities............. 53,816 300,270 12,428
---------- ----------- -----------
Total adjustments................................. 1,042,148 724,896 1,545,652
---------- ----------- -----------
Net cash provided by operating activities......... 537,349 2,254,810 3,748,205
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (197,882) (180,349) (1,281,275)
(Increase) decrease in purchase deposits.................. -- -- 459,168
Decrease in refundable bonds.............................. 33,950 7,000 2,100
Capital contributions and net stock purchases............. -- 68,761 150
Capital distributions..................................... (268,071) (1,755,613) (2,917,005)
Increase in cash surrender value of life insurance
policies............................................... (11,323) (22,735) (12,692)
---------- ----------- -----------
Net cash used by investing activities............. (443,326) (1,882,936) (3,749,554)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit.......................... -- (200,000) (400,000)
Principal payments on long-term debt...................... (380,000) (633,585) (910,767)
Net proceeds from issuance of long-term debt.............. 325,000 391,905 455,000
---------- ----------- -----------
Net cash provided (used) by financing activities....... (55,000) (441,680) (855,767)
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 39,023 (69,806) (857,116)
CASH AND CASH EQUIVALENTS, beginning of year................ 199,048 268,854 1,125,970
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 238,071 $ 199,048 $ 268,854
========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
F-29
<PAGE> 102
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Presentation and Principles of Combination
The accompanying combined financial statements present the combined
financial position, results of operations, and cash flows of The Ide Group, P.C.
("Ide"), a New York professional corporation, and Ide Diagnostic Imaging
Associates ("IDIA"), a New York general partnership. Ide was formed to practice
medicine specializing in radiology and radiation oncology in the Rochester, New
York region. IDIA provided magnetic resonance imaging services in the Rochester,
New York region. Effective January 1, 1996, substantially all of the operations
of IDIA were assumed by Ide.
Ide and IDIA are affiliated through common ownership. All material
intercompany balances and transactions are eliminated in combination.
Basis of Accounting
The accompanying financial statements are prepared using the accrual basis
of accounting.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from these estimates.
Revenue Recognition
Revenue is recognized when the related service is performed. Revenue is
recorded net of allowances for contractual adjustments and estimated
uncollectible accounts.
Supplies on Hand
Supplies on hand are stated at the lower of cost, determined on the
first-in, first-out basis, or market.
Property and Equipment
Depreciation and amortization of property and equipment are computed using
methods and lives prescribed under the Internal Revenue Code, which are as
follows:
<TABLE>
<S> <C>
Radiology equipment......................................... 5 years
Furniture and fixtures...................................... 5-7 years
Leasehold improvements...................................... 4-39 years
</TABLE>
F-30
<PAGE> 103
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT:
Long-term debt consisted of the following at June 30:
<TABLE>
<CAPTION>
TERMS 1997 1996 1995
----- ---------- ---------- ----------
<S> <C> <C> <C> <C>
M&T Bank-
Term loan agreement....................... (a) $1,361,667 $1,741,667 $ --
Term loan agreement....................... (b) 325,000 -- --
Chase Manhattan Bank-Term loan agreement.... (c) -- -- 1,987,113
---------- ---------- ----------
1,686,667 1,741,667 1,987,113
Less- Current portion..................... (436,440) (380,000) (841,463)
---------- ---------- ----------
Long-term portion......................... $1,250,227 $1,361,667 $1,145,650
========== ========== ==========
</TABLE>
- ---------------
(a) During fiscal 1996, Ide refinanced its term loan agreement with M&T Bank
("The Bank"). The term loan agreement requires 60 equal monthly principal
payments of $31,667 through January 2001 plus interest. Interest on the term
loan is fixed at 7.74%. The term loan is secured by substantially all of
Ide's assets. Ide has received a commitment from the Bank to allow
borrowings up to a maximum of $3,000,000.
(b) The term loan agreement requires 60 equal monthly installments of $6,674
including interest through June 2002. Interest on the term loan is fixed at
8.54%. The term loan is secured by substantially all of Ide's assets.
(c) Ide refinanced this term loan agreement in fiscal 1996.
As part of the financial covenants contained in Ide's agreements with M&T
Bank, Ide must generate no less than zero taxable income as reflected in
Ide's federal tax return and tangible net worth is not to decline by more
than 20% during any fiscal year. At June 30, 1997, Ide was in default of
both of these covenants. Waivers of these defaults have been obtained from
the bank.
The aggregate annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ------------------------------------------------------------ ----------
<S> <C>
1998........................................................ $ 436,440
1999........................................................ 439,446
2000........................................................ 444,726
2001........................................................ 292,142
2002........................................................ 73,913
----------
$1,686,667
==========
</TABLE>
3. LINES OF CREDIT:
Ide has a line of credit facility with M&T Bank under which Ide may borrow
up to $1,300,000 at the prime rate (8.5% at June 30, 1997). There were no
borrowings outstanding under this line at June 30, 1997 and 1996. The line of
credit agreement requires that there be no outstanding borrowings under the line
for at least thirty consecutive days each year.
F-31
<PAGE> 104
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Ide previously had an agreement with Chase Manhattan Bank, N.A. which
permitted Ide to borrow up to $600,000 through February 28, 1996. Borrowings
under the agreement were $200,000 at June 30, 1995. The note was repaid in full
and terminated in February 1996.
4. LIFE INSURANCE LOANS PAYABLE:
Ide's life insurance loans payable are secured by the cash surrender value
of the related policies. These policies bear interest at rates which range from
a fixed rate of five percent to rates which float with the prime rate. It is
Ide's intention to not repay these loans during the next year. Therefore, the
loans are reflected as a long-term liability in the accompanying balance sheets.
5. INCOME TAXES:
Ide follows the provisions of Statement of Financial Accounting Standards
Number 109, "Accounting for Income Taxes."
Deferred taxes are recognized for temporary differences between the basis
of assets and liabilities for financial statement and income tax purposes. The
differences result from the use of the cash basis of accounting for income tax
purposes and the use of the accrual basis of accounting for financial statement
purposes, and consist primarily of accounts receivable, accounts payable,
accrued liabilities and net operating loss carryforwards. It is Ide's intention
in future years to pay compensation to employees in amounts sufficient to reduce
taxable income to zero each year.
For federal tax return purposes, Ide has approximately $500,000 of net
operating loss carryforwards as of June 30, 1997, which expire in the years 2006
through 2012.
The results of the Partnerships' operations are reported in the individual
federal and state income tax returns of the partners. The Partnership files
informational returns and, therefore, no provision for income taxes is recorded.
6. REFUNDABLE BONDS:
Refundable bonds consist of deposits required for each Ide physician by
Ide's medical malpractice mutual insurance carrier. The bonds are refundable
from the free and divisible surplus of the insurance company upon cessation of
medical practice of the Ide physician. The bonds earn interest at the rate of
6%.
7. EMPLOYEE BENEFIT PLANS:
Ide maintains a discretionary qualified defined contribution 401(k) and
profit sharing plan ("the Plan"), covering substantially all employees of Ide
and IDIA who have attained the age of 21 and who have met certain minimum
eligibility requirements. The plan is subject to provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The plan also
provides that participants will be able to contribute up to 15% of their
compensation not to exceed $9,500. Ide contributes an amount equal to 25% of an
employee elective deferrals up to 4% of each employee's compensation.
In addition, Ide maintains a qualified discretionary supplemental profit
sharing plan which is subject to provisions of ERISA. The profit sharing expense
under these plans was $490,769, $539,737 and $518,107 for the years ended June
30, 1997, 1996 and 1995, respectively.
F-32
<PAGE> 105
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
Deferred Compensation Agreements
Each Ide shareholder physician's employment contract contains a deferred
compensation agreement. Under the terms of these agreements, these individuals
will receive payments at retirement or death for past services performed. At
June 30, 1997, 1996 and 1995 the vested amount of deferred compensation balances
total approximately $8,966,681, $9,015,593, and $7,329,000, respectively. These
balances will be paid out over time at indeterminable future dates and in
indeterminable future amounts. As such, the amount of liability that would be
recorded in the balance sheet is not reasonably estimable.
Leases
Ide occupies certain offices under lease agreements expiring at various
dates through December, 2000. The minimum rental commitment under all leases in
effect at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- --------
<S> <C> <C>
1998................................................................ $505,021
1999................................................................ 230,818
2000................................................................ 155,514
2001................................................................ 64,797
--------
$956,150
========
</TABLE>
The Partnership leases office space under leases expiring through 1998. The
Partnership is fully reimbursed for its office space rental expense under the
terms of its agreement with MICA (see Note 12).
9. RELATED PARTIES:
On January 1, 1996, Ide purchased the property and equipment of a related
entity, IDIA.
Ide has an agreement with an affiliated company whereby the affiliate
performs billing and collection functions for services rendered by Ide. Ide pays
the affiliate a fee based on the amount of billings collected. Payments to this
affiliate were $1,348,805, $1,547,143, and $1,324,882 in fiscal 1997, 1996 and
1995, respectively.
10. CREDIT RISK CONCENTRATIONS:
Ide and IDIA maintain bank account balances which, at times, exceeded the
federally insured limit during the years ended June 30, 1997, 1996 and 1995. The
Companies have not experienced losses related to these deposits and management
does not believe that the Companies are exposed to any significant credit risk
with respect to these accounts.
At June 30, 1997, Ide has approximately $1,465,416 of accounts receivable
due from Health Maintenance Organizations ("HMOs") which is subject to
retrospective adjustment. This amount represents withholdings by the HMOs to be
used against any operating losses incurred by the HMO. In fiscal 1996, Ide
received 80% of funds withheld under its contract with one HMO relating to
calendar 1995. Other than fiscal 1996, Ide has historically collected the full
amount of withheld funds each year.
Substantially all of the Companies' revenue is derived from services
performed in the greater Rochester, New York metropolitan area.
F-33
<PAGE> 106
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all of the Companies' revenue is derived from providing
medical services to patients covered under contracts with Blue Cross/Blue Shield
of Greater Rochester or affiliates, Blue Choice, Preferred Care, Medicare, or
Medicaid. Changes in the reimbursement rates Ide receives under these contracts
could have a material effect on Ide's financial position and operations.
Subsequent to June 30, 1996, Ide's management became aware of the intention
of the Rochester Community Individual Practice Association and the Rochester
Individual Practice Association, with whom Ide is a participating provider, to
adopt Resource-Based Relative Value Scale ("RBRVS") fee schedule methodologies.
These fee schedules will be implemented effective October 1, 1997. These
Individual Practice Associations ("IPA's") contract with Blue Choice and
Preferred Care, respectively. Approximately 60% of Ide's revenue is derived from
services provided to patients of Blue Choice and Preferred Care. The IPA's have
proposed community-wide budgets for imaging services based upon 1996
community-wide reimbursement levels. These budgets may reflect reductions in
community-wide imaging reimbursement of 12% in 1998 and 26% in 1999 and
thereafter.
11. SUPPLEMENTARY CASH FLOW DISCLOSURES:
Ide considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Cash payments for income taxes and interest are as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income taxes....................................... $ 2,569 $ 1,200 $ 8,873
-------- -------- --------
Interest........................................... $126,763 $202,798 $224,452
======== ======== ========
</TABLE>
12. EXCLUSIVE SUPPLY AGREEMENT:
On January 1, 1996, Ide assumed the obligations of an agreement between
IDIA and MICA Imaging and Medical Imaging Centers of America, Inc. ("MICA") in
which IDIA agreed to sell to MICA its magnetic resonance imaging ("MRI")
equipment and not to compete with MICA for the provision of MRI services in the
City of Rochester ("City") and within a twenty-five mile radius of the City.
This covenant not to compete also applies to all shareholders of Ide for the
duration of their participation as shareholders and for two years thereafter.
In accordance with the agreement, Ide has the right of first refusal for
the thirty year term of the agreement to provide professional radiology services
at facilities located in specified states in the Northeast except under certain
circumstances as outlined in the agreement.
MICA has the right of first refusal to provide MRI equipment, cryogens
and/or maintenance at any location in specific states in the Northeast where Ide
obtains the right to provide MRI equipment, cryogens and/or maintenance or where
Ide owns, leases or subleases office space for the purposes of providing MRI
services.
Ide also has assumed equipment leases with MICA covering equipment sold by
IDIA to MICA and other MRI equipment operated in private offices located on the
campuses of certain Rochester area hospitals. These lease terms range from five
to thirty years. The rental payments are based upon the aggregate number of MRI
scans performed by Ide using the leased MRI equipment.
If certain events occur under this agreement, Ide may be required to
purchase all fixed and mobile MRI equipment owned by MICA and leased to Ide as
well as to assume leases for fixed MRI equipment leased by
F-34
<PAGE> 107
THE IDE GROUP, P.C.
IDE DIAGNOSTIC IMAGING ASSOCIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
MICA and subleased to Ide by MICA. Ide also may be required to pay MICA a
pro-rata portion of the amount for the exclusive supply contract.
13. ACQUISITION AGREEMENT:
During fiscal 1997, the Company entered into an acquisition agreement with
American Physician Partners, Inc. ("APPI") under which APPI will acquire all of
the non-medical assets of Ide through a merger transaction.
The non-medical assets consist of cash, imaging equipment, accounts
receivable, supplies on hand and other assets. These non-medical assets will be
separated from the medical assets through a reorganization of Ide to be
completed before the transaction with APPI. This reorganization will result in
the creation of a new entity ("New Ide") to provide regulated medical services.
APPI will assume certain liabilities of Ide pursuant to the agreement.
Completion of the transaction is subject to certain conditions, including
the execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to New Ide for a negotiated service fee. All
non-professional employees shall become employees of APPI. In addition, APPI
will assume responsibility for all maintenance, repairs, improvements, lease and
other general operating expenses.
The President of the Company is also a Shareholder of APPI.
F-35
<PAGE> 108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
M&S X-Ray Practices:
We have audited the accompanying combined balance sheets of M&S X-Ray
Practices (see Note 1) as of December 31, 1996 and 1995, and the related
combined statements of income, owners' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of M&S X-Ray Practices as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 5, 1997
F-36
<PAGE> 109
M&S X-RAY PRACTICES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 435,968 $ 425,619 $ 759,813
Accounts receivable, net of allowances of $5,650,732,
$4,887,279 and $5,282,236 at December 31, 1995 and
1996 and June 30, 1997, respectively.............. 3,138,151 3,182,876 3,701,703
Other receivables.................................... 44,472 33,859 192,255
Prepaid expenses and other current assets............ 99,141 73,896 73,068
---------- ---------- ----------
Total current assets......................... 3,717,732 3,716,250 4,726,839
PROPERTY AND EQUIPMENT, net............................ 1,252,330 746,268 757,540
INVESTMENT IN JOINT VENTURES........................... 1,023,079 1,170,953 1,419,785
OTHER ASSETS, net...................................... 733,529 698,269 723,643
---------- ---------- ----------
Total assets................................. $6,726,670 $6,331,740 $7,627,807
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 422,362 $ 190,036 $ 257,337
Accrued expenses..................................... 382,943 24,669 --
Accrued salaries and benefits........................ 112,440 144,961 151,632
Current portion of deferred compensation............. 160,718 83,000 83,000
Current portion of long-term debt.................... 908,626 351,645 230,541
Current portion of capital lease obligations......... 11,773 12,783 12,783
---------- ---------- ----------
Total current liabilities.................... 1,998,862 807,094 735,293
DEFERRED COMPENSATION, net of current portion.......... 1,285,458 1,345,817 1,345,817
CAPITAL LEASE OBLIGATIONS, net of current portion...... 50,018 37,235 37,235
LONG-TERM DEBT, net of current portion................. 541,842 212,408 178,221
---------- ---------- ----------
Total liabilities............................ 3,876,180 2,402,554 2,296,566
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES........ 314,858 346,033 506,203
OWNERS' EQUITY......................................... 2,535,632 3,583,153 4,825,038
---------- ---------- ----------
Total liabilities and owners' equity......... $6,726,670 $6,331,740 $7,627,807
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE> 110
M&S X-RAY PRACTICES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenue, net.......... $14,720,403 $14,776,742 $7,458,604 $7,011,550
Other revenue......................... 347,765 421,603 253,084 208,527
----------- ----------- ---------- ----------
Total revenue................. 15,068,168 15,198,345 7,711,688 7,220,077
COSTS AND EXPENSES:
Cost of affiliated physician
services........................... 8,866,396 8,703,013 3,938,889 3,485,918
Practice salaries, wages and
benefits........................... 1,227,517 1,337,633 402,249 998,893
Practice supplies..................... 495,959 583,610 272,042 316,495
Practice rent and lease expense....... 249,568 271,677 118,114 148,683
Depreciation and amortization......... 963,148 670,617 332,729 147,923
Other practice expense................ 1,907,070 1,541,530 1,304,450 615,682
Interest expense...................... 123,958 69,694 40,814 16,210
----------- ----------- ---------- ----------
Total costs and expenses...... 13,833,616 13,177,774 6,409,287 5,729,804
----------- ----------- ---------- ----------
INCOME BEFORE MINORITY INTERESTS AND
EQUITY IN EARNINGS OF INVESTMENTS..... 1,234,552 2,020,571 1,302,401 1,490,273
EQUITY IN EARNINGS OF INVESTMENTS....... 212,751 604,625 273,172 427,350
MINORITY INTERESTS IN INCOME OF
CONSOLIDATED SUBSIDIARIES............. (216,452) (249,365) (122,266) (160,170)
----------- ----------- ---------- ----------
NET INCOME.............................. $ 1,230,851 $ 2,375,831 $1,453,307 $1,757,453
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE> 111
M&S X-RAY PRACTICES
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $ 2,624,570
Issuance of stock......................................... 100,000
Purchases of stock........................................ (56,418)
Distributions to stockholders............................. (1,363,371)
Net income................................................ 1,230,851
-----------
BALANCE, December 31, 1995.................................. 2,535,632
Issuance of stock......................................... 100,000
Distributions to stockholders............................. (1,428,310)
Net income................................................ 2,375,831
-----------
BALANCE, December 31, 1996.................................. 3,583,153
Issuance of stock (unaudited)............................. 78,408
Distributions to shareholders (unaudited)................. (593,976)
Net income (unaudited).................................... 1,757,453
-----------
BALANCE, June 30, 1997 (unaudited).......................... $ 4,825,038
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE> 112
M&S X-RAY PRACTICES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -----------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 1,230,851 $ 2,375,831 $1,453,307 $1,757,453
Adjustments to reconcile net income to net
cash provided by operating activities --
Minority interest in income of consolidated
subsidiaries............................. 216,452 249,365 122,266 160,170
Depreciation and amortization.............. 963,148 670,617 332,729 147,923
Investment income from joint ventures...... (212,751) (604,625) (273,172) (427,350)
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net................. (417,068) (44,725) (268,012) (518,827)
Prepaid expenses and other current
assets................................ (33,748) 35,858 (219,557) (211,386)
Increase (decrease) in --
Accounts payable and accrued expenses.... 383,567 (590,600) 37,605 42,632
Accrued salaries and benefits............ (58,284) 15,162 30,683 6,671
----------- ----------- ---------- ----------
Net cash provided by operating
activities.......................... 2,072,167 2,106,883 1,215,849 957,286
----------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (60,437) (99,295) (6,255) (130,751)
Distributions received from joint ventures.... 188,790 426,751 287,271 178,518
----------- ----------- ---------- ----------
Net cash provided by investing
activities.......................... 128,353 327,456 281,016 47,767
----------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................. 30,000 96,000 -- 89,000
Repayment of long-term debt................... (974,392) (982,415) (498,022) (244,291)
Principal payments on capital lease
obligation................................. (5,534) (11,773) -- --
Proceeds from sale of stock................... 100,000 100,000 172,423 78,408
Purchases of stock............................ (56,418) -- -- --
Distributions to stockholders and minority
interest holders........................... (1,633,511) (1,646,500) (722,660) (593,976)
----------- ----------- ---------- ----------
Net cash used in financing
activities.......................... (2,539,855) (2,444,688) (1,048,259) (670,859)
----------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (339,335) (10,349) 448,606 334,194
CASH AND CASH EQUIVALENTS, beginning of year.... 775,303 435,968 435,968 425,619
----------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of year................................... $ 435,968 $ 425,619 $ 884,574 $ 759,813
=========== =========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid................................. $ 122,937 $ 68,294 $ 40,814 $ 16,210
</TABLE>
NONCASH FINANCING ACTIVITY:
A capital lease obligation of $67,325 was incurred during 1995 when the Company
entered into a lease for new equipment.
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE> 113
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined financial statements combine the accounts of five
entities under common ownership: M&S X-ray Associates ("M&S"), a Texas
professional association, Madison Square Joint Venture ("Madison"), South Texas
MR, Inc. ("South Texas"), San Antonio MR Inc. ("San Antonio"), and Lexington MR
Ltd. ("Lexington") (collectively the "Company"), all of which are located in San
Antonio, Texas. M&S, a company specializing in radiological medicine, has and an
eight percent investment in Stone Oak Limited Partnership, a real estate limited
partnership. In addition, M&S holds forty-nine percent interest in Southeast
Baptist Imaging Center, a joint venture which owns and operates a diagnostic
imaging center. Madison is also engaged in the practice of radiological
medicine. South Texas holds a forty-nine percent interest in two joint ventures
which own and operate diagnostic imaging centers -- Northeast Baptist MRI Center
and Baptist Imaging Center. San Antonio holds a sixty percent interest in
Lexington, a company which owns and operates diagnostic imaging centers. An
additional nineteen percent of Lexington is owned by individual radiologists
included in the common ownership group. All intercompany transactions have been
eliminated.
The accompanying combined financial statements have been prepared on the
accrual basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Investments in Joint Ventures
Investments in joint ventures are accounted for using the equity method. In
addition, the Company holds an investment in a limited partnership which is
accounted for using the cost method.
Other Assets
Other assets are comprised of organization costs, loan origination costs
and goodwill. Loan origination costs are amortized on a straight-line basis over
the term of the loan. Organization costs are amortized on a straight-line basis
over a five-year period. Goodwill is amortized on a straight-line basis over 15
years.
F-41
<PAGE> 114
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Compensation
Under the terms of the physician employment agreements, physicians who have
completed a minimum of five years of service are entitled to a payment equal to
two-thirds of their final compensation upon retirement or when they cease to be
employees of the Company. These payments are made in sixty equal monthly
payments beginning upon attainment of age 70 or the date when the physician
leaves the Company. The estimated present value of these liabilities is accrued
ratably during the five year service period.
Medical Service Revenues
Medical service revenue are accounted for in the period in which the
services are provided. The revenue are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in the
period in which the revised amount is determined. A significant portion of the
Company's medical service revenue are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse physicians based on
fee schedules which are determined by the related governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated rates.
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include physician compensation and
benefits paid or payable to owner and non-owner physicians during the period.
Income Taxes
As each of the consolidated entities is a non-taxable entity, there is no
provision for income taxes in the accompanying financial statements. The
individual owners include their respective share of Company profits and losses
in their tax returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the
F-42
<PAGE> 115
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company with respect to the results of its operations for the interim periods
from January 1, 1996, to June 30, 1996, and from January 1, 1997, to June 30,
1997, have been included herein. The results of operations for the interim
periods are not necessarily indicative of the results for the full year.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS) 1995 1996
---------------- ----------- -----------
<S> <C> <C> <C>
Equipment................................. 5 $ 5,587,074 $ 5,670,340
Leasehold improvements.................... 1-15 448,734 448,734
Furniture and fixtures.................... 5 390,014 390,014
Computer software......................... 3-5 111,797 124,081
----------- -----------
6,537,619 6,633,169
Less -- Accumulated depreciation and
amortization............................ (5,285,289) (5,886,901)
----------- -----------
Property and equipment, net..... $ 1,252,330 $ 746,268
=========== ===========
</TABLE>
4. INVESTMENTS IN JOINT VENTURES:
Investments in joint ventures consist of 49% interests in three joint
ventures, each of which perform radiology and imaging healthcare services, and
an 8% interest in a real estate limited partnership. The carrying amounts of
these investments at December 31, are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Southeast Baptist Imaging Center............................ $ 666,365 $ 735,770
Baptist Imaging Center...................................... 206,061 140,770
Northeast Baptist MRI Center................................ 77,835 229,996
Stone Oak Limited Partnership............................... 72,818 64,417
---------- ----------
$1,023,079 $1,170,953
========== ==========
</TABLE>
Summary information from the unaudited financial statements of the three
joint ventures, accounted for under the equity method, as of and for the year
ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
SOUTHEAST
BAPTIST BAPTIST NORTHEAST
IMAGING IMAGING BAPTIST
CENTER CENTER MRI CENTER
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets..................................... $1,338,915 $292,712 $ 623,320
Total assets....................................... 3,209,657 324,022 660,898
Current liabilities................................ 915,634 28,785 188,984
Total liabilities.................................. 1,684,905 28,785 188,984
Partners' equity................................... 1,524,752 295,237 471,914
Revenues........................................... $3,173,674 $776,433 $2,054,265
Net income......................................... $ 143,974 $266,003 $ 826,283
Distributions to shareholders...................... $ -- $400,000 $ 515,000
</TABLE>
F-43
<PAGE> 116
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Note payable to related party, bearing interest at prime
(8.5% at December 31, 1995), due in 1996. Paid in full.... $ 30,000 $ --
Note payable to bank, bearing interest at 6.4%, due in 1998.
Quarterly payments of $49,000 plus interest,
collateralized by certain equipment. ..................... 539,000 343,000
Note payable to bank, bearing interest at 6.25%, due in
1996. Monthly payments of $2,780, collateralized by
certain equipment. Paid in full........................... 5,355 --
Note payable to bank, bearing interest at 6.25%, due in
1997. Monthly payments of $7,779, collateralized by
certain equipment......................................... 111,869 23,117
Note payable to bank, bearing interest at 8.25%, due in
2000. Monthly payments of $2,361, collateralized by
certain equipment......................................... -- 85,557
Note payable to bank, bearing interest at 6.25%, due in
1997. Monthly payments of $47,656, collateralized by
certain equipment......................................... 641,591 94,421
Note payable, bearing interest at 6.25%, due in 1997.
Monthly payments of $9,118, collateralized by certain
equipment................................................. 122,653 17,958
-------- ---------
Long-term debt.................................... 1,450,468 564,053
Less-current portion.............................. (908,626) (351,645)
-------- ---------
Long-term debt, net of current portion............ $541,842 $ 212,408
======== =========
</TABLE>
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $351,645
1998 170,751
1999 25,818
2000 15,839
--------
$564,053
========
</TABLE>
6. CAPITAL LEASE OBLIGATIONS:
The following represents the Company's outstanding capital lease
obligations at December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Capital lease for computer software, due in 2000, payable in
monthly installments of $1,369 collateralized by the
equipment................................................. $61,791 $50,018
======= =======
</TABLE>
F-44
<PAGE> 117
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, the minimum annual lease commitments under capital
lease obligations are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 16,433
1998........................................................ 16,433
1999........................................................ 16,433
2000........................................................ 8,496
--------
Total minimum lease payments due............................ $ 57,795
Less -- Amounts representing interest..................... (7,777)
--------
Present value of minimum lease payments..................... $ 50,018
Less -- Current portion................................... (12,783)
--------
Long-term obligations, net of current portion............... $ 37,235
========
</TABLE>
7. LEASES:
The Company leases office facilities under various noncancelable operating
leases that expire at various dates through 1998. The Company leases office
space from Stone Oak Limited Partners (see Note 4) under a lease that expires in
1997. Certain of the office leases provide for renewal options. Future minimum
lease payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER
------- --------
<S> <C> <C>
1997........................................................ $59,252 $111,345
1998........................................................ -- 24,485
------- --------
Total............................................. $59,252 $135,830
======= ========
</TABLE>
Total rent expense in 1995 and 1996 was $240,395 and $260,067,
respectively. Included in rent expense was rent paid to related parties in the
amount of $88,878 in both 1995 and 1996.
8. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) profit sharing plan. Employees of the Company
who are at least age 21 may participate in the 401(k) plan after one year of
service and are eligible for profit sharing after two years of service. The plan
provides for employer matching and profit sharing contributions. The Company's
contributions for 1995 and 1996 were $86,080 and $100,259, respectively.
9. RELATED-PARTY TRANSACTIONS:
Under agreements with affiliated joint ventures (Southeast Baptist Imaging
Center, Baptist Imaging Center, and Northeast Baptist MRI Center), the Company
performs professional, billing, and management services for these joint
ventures. These services are billed to the joint ventures based primarily upon
agreed-upon percentages of the joint ventures' cash basis revenue. Management
fee income from joint ventures is included in other revenue in the accompanying
combined statements of income and consist as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Southeast Baptist Imaging Center............................ $138,658 $183,212
Baptist Imaging Center...................................... 12,375 12,000
Northeast Baptist MRI Center................................ 96,750 96,100
-------- --------
$247,783 $291,312
======== ========
</TABLE>
F-45
<PAGE> 118
M&S X-RAY PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also collects the receivables of the joint ventures, and then
periodically remits the collections to them. In addition, the Company pays
certain expenses on behalf of the joint ventures, and is periodically reimbursed
by them. At December 31, 1996, there were no significant balances due from (to)
the joint ventures.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity of
these instruments. The carrying amount of the Company's long-term debt and
capital lease obligations also approximates fair value.
11. CONTINGENCIES:
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
12. SUBSEQUENT EVENTS:
On September 24, 1996, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
lease and other general operating expenses.
F-46
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Pacific Imaging Consultants:
We have audited the accompanying combined balance sheets of Pacific Imaging
Consultants (see Note 1) as of December 31, 1995 and 1996, and the related
combined statements of income, owners' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Imaging Consultants
as of December 31, 1995 and 1996, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 19, 1997
F-47
<PAGE> 120
PACIFIC IMAGING CONSULTANTS
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ -- $ -- $ --
Accounts receivable, net of allowances of $1,358,461,
$2,107,857 and $2,115,899 at December 31, 1995 and
1996 and June 30, 1997, respectively............... 1,310,879 1,878,911 1,933,826
Prepaid pension expense............................... 197,049 2,100,113 2,100,113
Prepaid expenses and other............................ 62,072 197,251 195,619
---------- ---------- ----------
Total current assets.......................... 1,570,000 4,176,275 4,229,558
PROPERTY AND EQUIPMENT, net............................. 2,851,444 2,260,861 1,862,327
INTANGIBLE ASSETS, net.................................. 145,601 133,251 133,251
OTHER ASSETS, net....................................... 121,641 190,502 107,212
---------- ---------- ----------
Total assets.................................. $4,688,686 $6,760,889 $6,332,348
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................... $ 412,823 $ 898,582 $ 787,863
Accrued salaries and benefits......................... 240,402 287,512 287,512
Accrued liabilities................................... 444,034 490,882 490,155
Deferred income tax liability......................... 165,440 868,958 854,803
Current portion of long-term debt..................... 1,522,779 844,241 844,241
---------- ---------- ----------
Total current liabilities..................... 2,785,478 3,390,175 3,264,574
DEFERRED INCOME TAX LIABILITY........................... 10,871 11,268 11,268
LONG-TERM DEBT, net of current portion.................. 2,742,162 3,133,004 2,801,226
OWNERS' EQUITY (DEFICIT)................................ (849,825) 226,442 255,280
---------- ---------- ----------
Total liabilities and owners' equity
(deficit)................................... $4,688,686 $6,760,889 $6,332,348
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-48
<PAGE> 121
PACIFIC IMAGING CONSULTANTS
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenue, net.......... $11,245,044 $13,119,112 $5,552,390 $6,978,357
Other revenue......................... 203,296 175,408 81,772 73,422
----------- ----------- ---------- ----------
Total revenue................. 11,448,340 13,294,520 5,634,162 7,051,779
COSTS AND EXPENSES:
Costs of affiliated physician
services........................... 5,896,675 7,214,725 2,859,709 4,055,877
Practice salaries, wages and
benefits........................... 1,604,303 1,839,889 842,225 965,805
Practice supplies..................... 485,942 568,235 242,416 258,417
Practice rent and lease expense....... 355,073 384,615 209,742 195,362
Depreciation and amortization......... 996,058 981,289 488,370 474,546
Other practice expenses............... 1,739,436 1,939,384 829,491 985,557
Interest expense...................... 475,007 311,377 197,632 155,534
----------- ----------- ---------- ----------
Total costs and expenses...... 11,552,494 13,239,514 5,669,585 7,091,098
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE TAXES, UNUSUAL ITEM
AND EXTRAORDINARY ITEM................ (104,154) 55,006 (35,423) (39,319)
UNUSUAL ITEM -- gain on curtailment of
defined benefit pension plan.......... -- 1,903,064 1,903,064 --
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... (104,154) 1,958,070 1,867,641 (39,319)
INCOME TAX EXPENSE (BENEFIT)............ 104,194 715,493 672,351 (14,155)
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM.................................. (208,348) 1,242,577 1,195,290 (25,164)
EXTRAORDINARY ITEM -- gain on
refinancing of debt................... -- 134,084 -- --
----------- ----------- ---------- ----------
NET INCOME (LOSS)....................... $ (208,348) $ 1,376,661 $1,195,290 $ (25,164)
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-49
<PAGE> 122
PACIFIC IMAGING CONSULTANTS
COMBINED STATEMENTS OF OWNERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $ (612,553)
Sale of stock............................................. 36,076
Net loss.................................................. (208,348)
Distributions............................................. (65,000)
----------
BALANCE, December 31, 1995.................................. (849,825)
Repurchase of stock....................................... (22,394)
Net income................................................ 1,376,661
Distributions............................................. (278,000)
----------
BALANCE, December 31, 1996.................................. 226,442
Net income (unaudited).................................... (25,164)
Contributions from Owners (unaudited)..................... 72,000
Repurchase of Stock (unaudited)........................... (17,998)
----------
BALANCE, June 30, 1997 (unaudited).......................... $ 255,280
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE> 123
PACIFIC IMAGING CONSULTANTS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ -------------------------
1995 1996 1996 1997
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ (208,348) $ 1,376,661 $ 1,195,290 $ (25,164)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities --
Depreciation and amortization........ 996,058 981,289 488,370 474,546
Deferred income taxes................ 104,194 703,915 672,351 (14,155)
Gain on refinancing of debt.......... -- 134,084 -- --
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net........ (114,465) (568,032) 276,173 (54,915)
Prepaid pension expense......... 4,666 (1,903,064) (1,903,064) --
Prepaid expenses and other...... 33,991 (135,179) (3,630) 1,632
Other assets, net............... (72,334) (68,861) (336,021) 83,290
Increase (decrease) in --
Accounts payable................ 40,282 485,759 153,049 (110,719)
Accrued salaries and benefits... (4,595) 47,110 (112,901) --
Accrued liabilities............. 360,805 46,848 382,487 (727)
---------- ----------- ----------- -----------
Net cash provided by operating
activities.................... 1,140,254 1,100,530 812,104 353,788
---------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..... (388,595) (378,356) (43,174) (76,012)
---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............ 198,992 585,868 -- --
Repayment of long-term debt............. (921,727) (1,007,648) (490,930) (331,778)
Contributions from (distributions to)
owners............................... (65,000) (278,000) (278,000) 72,000
Sale (purchases) of stock............... 36,076 (22,394) -- (17,998)
---------- ----------- ----------- -----------
Net cash used in financing
activities.................... (751,659) (722,174) (768,930) (277,776)
---------- ----------- ----------- -----------
NET CHANGE IN CASH........................ -- -- -- --
CASH, beginning of year................... -- -- -- --
---------- ----------- ----------- -----------
CASH, end of year......................... $ -- $ -- $ -- $ --
========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash interest paid...................... $ 477,736 $ 283,081 $ 197,632 $ 155,534
Cash paid for income taxes.............. $ -- $ 11,578 $ 9,975 $ 8,593
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-51
<PAGE> 124
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements combine the accounts of three
entities under common ownership: Pacific Imaging Consultants, A Medical Group,
Inc. ("Pacific"), a California corporation formerly known as East Bay Medical
Imaging; Total Medical Imaging (TMI), a California S-corporation; and Lafayette
Medical Imaging Health Services (LMI), a California general partnership
(collectively the "Company"), all of which are located in the San Francisco Bay
area. The Company specializes in radiological medicine and the operation of
diagnostic imaging equipment. All intercompany transactions have been
eliminated.
The accompanying financial statements have been prepared on the accrual
basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment is recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Intangible Assets
Intangible assets are comprised of organization costs and noncompete
agreements. Organization costs are being amortized on a straight-line basis over
a five-year period. Noncompete agreements are amortized on a straight-line basis
over the life of the agreements.
Other Assets
Other assets are comprised of equity investments in affiliated entities,
deposits and other receivables. Investments in affiliated entities are being
accounted for under the cost method and equity method as appropriate, based on
percentage of ownership and control of the entity. Such investments are not
material at December 31, 1996.
Medical Service Revenues
Medical service revenue are accounted for in the period in which the
services are provided. The revenue are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period in which
the related services are provided. Any adjustment to the amounts is recorded in
the period in which the revised amount is determined. A significant portion of
the Company's medical service revenue are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated rates.
F-52
<PAGE> 125
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include physician compensation and
benefits paid or payable to owner and non-owner physicians during the period.
Income Taxes
Pacific accounts for income taxes under the liability method which states
that deferred income taxes are determined based on the estimated future tax
effects of differences between the financial reporting and income tax basis of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions are based on the changes to the asset or liability from period to
period. TMI is an S-corporation and LMI is a general partnership, and
accordingly, there is no provision for income taxes related to these entities.
The individual owners include their respective share of profits and losses in
their tax returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1996, to June 30, 1996, and from January
1, 1997, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
F-53
<PAGE> 126
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS) 1995 1996
---------------- ----------- -----------
<S> <C> <C> <C>
Building.................................. 39 $ 122,645 $ 123,817
Automobiles............................... 5 22,818 22,818
Leasehold improvements.................... 5-10 670,479 670,479
Furniture and equipment................... 5-7 5,873,926 6,251,110
----------- -----------
6,689,868 7,068,224
Less -- Accumulated depreciation and
amortization............................ (3,838,424) (4,807,363)
----------- -----------
Property and equipment, net............... $ 2,851,444 $ 2,260,861
=========== ===========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Notes payable to Third Party, bearing interest at 7.5%, due
in 1999. Monthly payments of $5,009 including interest... $ 196,545 $ 136,648
Note payable to Service Provider, noninterest bearing,
balance due in 1996...................................... 13,405 --
Note payable to Bank, bearing interest at the U.S. Treasury
Securities rate plus 3.25% (9.125% at December 31, 1996),
due in 2003. Monthly payments of $1,052 including
interest................................................. 71,502 65,584
Notes payable to Bank, bearing interest at prime (8.5% at
December 31, 1995), due at various dates through 2001.
Monthly payments of $4,509 plus interest................. 443,615 --
Note payable to Bank, bearing interest at prime plus .25%
(8.75% at December 31, 1995), due in 1999. Monthly
payments of $6,636 including interest.................... 633,157 --
Note payable to Bank, bearing interest at prime plus 1%
(9.5% at December 31, 1995), due in 1998. Monthly
payments of $10,411 plus interest........................ 324,999 --
Notes payable to Finance Company, bearing interest ranging
from 8.97% to 9.72%, due in 1998, secured by accounts
receivable and certain property and equipment. Monthly
payments of $97,299 including interest................... 2,581,718 --
Note payable to Bank, bearing interest at the U.S. Treasury
Securities rate plus 2% (7.92% at December 31, 1996),
secured by accounts receivable and certain property and
equipment, due in 2001. Monthly payments of $92,017
including interest....................................... $ -- $3,775,013
----------- ----------
4,264,941 3,977,245
Less -- Current maturities................................. (1,522,779) (844,241)
----------- ----------
$ 2,742,162 $3,133,004
=========== ==========
</TABLE>
F-54
<PAGE> 127
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1996, the Company refinanced all outstanding bank debt. The
previous notes had interest rates ranging from the prime rate to a fixed rate of
9.25%. The new note bears interest at the rate of U.S. Treasury securities plus
2%. The refinancing resulted in a gain of $134,084, which has been reflected as
an extraordinary item in the accompanying financial statements.
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 844,241
1998..................................................... 920,658
1999..................................................... 973,590
2000..................................................... 1,021,470
2001..................................................... 217,286
----------
$3,977,245
==========
</TABLE>
5. OPERATING LEASES:
The Company leases seven facilities under various noncancelable operating
leases that expire at various dates through 2000. Future minimum lease payments
under noncancelable leases are as follows:
<TABLE>
<S> <C>
1997...................................................... $231,936
1998...................................................... 222,312
1999...................................................... 184,492
2000...................................................... 133,418
2001...................................................... 150,206
Thereafter................................................ 67,695
--------
$990,059
========
</TABLE>
6. INCOME TAXES:
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current income tax expense..................... $ -- $ 11,578
Deferred income tax expense.................... 104,194 703,915
-------- --------
Total income tax expense....................... $104,194 $715,493
======== ========
</TABLE>
Significant components of the Company's deferred tax liabilities as of
December 31, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current:
Deferred tax assets --
Accounts payable and accrued liabilities............... $ 131,425 $ 180,275
Deferred tax (liabilities) --
Accounts receivable, net............................... (296,865) (402,191)
Prepaid pension expense................................ -- (647,042)
--------- ---------
Total net current deferred tax liabilities........ $(165,440) $(868,958)
========= =========
Noncurrent:
Deferred tax (liabilities) --
Depreciation........................................... $ (10,871) $ (11,268)
========= =========
</TABLE>
F-55
<PAGE> 128
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the provision for income taxes and the amounts
computed by applying the statutory Federal income tax rate to income (loss)
before income taxes are due to the income (losses) of S-Corporations and
partnerships included in these combined financial statements.
7. EMPLOYEE BENEFIT PLAN:
The Company has a defined benefit pension plan covering all physician
employees and shareholders. The benefits are based on the final pay of each
physician, with minimum flat dollar limits. The Company's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed service to date but also for those expected to be earned in the
future.
Effective May 31, 1996, the Company curtailed the benefits under the plan
through Board of Director resolution to terminate the Plan. Plan benefits were
effectively frozen at this date and physicians will earn no additional defined
benefits for future services. All unrecognized prior service cost and
unrecognized net obligation from the initial application of SFAS 87 have been
reduced to zero as of the effective date of the curtailment, resulting in a gain
from curtailment of approximately $1.9 million. The plan of settlement has not
been determined and subsequent gain or loss may be recorded upon settlement.
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at December 31,
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefits obligations:
Accumulated benefit obligation, including vested
benefits of $3,556,952 and $4,723,679,
respectively......................................... $(3,594,203) $(4,723,679)
=========== ===========
Projected benefit obligation for service rendered to
date................................................. $(4,392,486) $(4,723,679)
Plan assets at fair value, primarily...................... 6,345,352 6,823,792
----------- -----------
Plan assets in excess of projected benefit obligations.... 1,952,866 2,100,113
Unrecognized net obligation at initial adoption of SFAS
No. 87.................................................. (1,755,817) --
----------- -----------
Prepaid pension cost included in other assets............. $ 197,049 $ 2,100,113
=========== ===========
</TABLE>
Net periodic pension cost for 1995 and 1996 included the following
components (in thousands)
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Service cost-benefits earned during the period............. $ 828,307 $ --
Interest cost on projected benefit obligation.............. 286,658 331,193
Actual return on plan assets............................... (269,853) (478,440)
Net amortization........................................... (39,035) (1,755,817)
--------- -----------
Net periodic pension cost (benefit)........................ $ 806,077 $(1,903,064)
========= ===========
Weighted average discount rate............................. 7.39% 7.54%
Rate of increase in future compensation.................... 3.00% N/A
Expected long-term rate of return on assets................ 7.39% 7.54%
</TABLE>
In 1996, the Company began sponsoring a 401(k) and profit sharing plan for
employees of the Company and its two corporate members, who have completed one
year of service and are at least age 21. The 401(k) plan provides for employer
matching contributions equal to three percent of gross salary for eligible
employees. The Company made no contributions to the plan in 1996. Physician
shareholders contributed $88,688 on behalf of the employees of the Company.
F-56
<PAGE> 129
PACIFIC IMAGING CONSULTANTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
The Company has a non-interest bearing note receivable from an employee.
Amounts outstanding at December 31, 1995 and 1996 were $85,000 and $94,836,
respectively. The note has no stated maturity date.
The Company has a note receivable from a physician which bears interest at
8.5% and matures in August, 1995. Amounts outstanding at December 31, 1995 and
1996 were $38,936 and $36,173, respectively.
At December 31, 1995, the Company had a $25,000 note receivable from a
physician. This note was paid in full in 1996.
At December 31, 1996, the Company had a $10,000 note receivable from a
physician which bears interest at 8.25% and matures in 1997. In addition, in
1996, the Company made non-interest bearing advances totaling $70,287 to certain
physicians. These advances are to be repaid in 1997.
The Company has an ownership interest in a real estate partnership. Rent
paid to this partnership was $49,752 in 1995 and 1996.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity of
these instruments. The carrying amount of the Company's long-term debt also
approximates fair value.
10. CONTINGENCIES:
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operation.
11. SUBSEQUENT EVENTS:
On February 26, 1997, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
lease and other general operating expenses.
Effective January 1, 1997, the Company and Valley Radiology Group, a group
of radiologists in San Jose, California, formed a management services
organization to manage their operations.
F-57
<PAGE> 130
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Radiology and Nuclear Medicine, P.A.:
We have audited the accompanying balance sheets of Radiology and Nuclear
Medicine, P.A., (a Kansas corporation) as of December 31, 1995 and 1996 and the
related statements of income, owners' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Radiology and Nuclear
Medicine, P.A., as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 21, 1997
F-58
<PAGE> 131
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 223,067 $ 173,258 $ 887,376
Accounts receivable, net of allowances of $1,664,580,
$1,922,264 and $2,281,491 at December 31, 1995, 1996
and June 30, 1997, respectively....................... 1,596,469 1,756,271 2,021,553
Prepaid expenses and other current assets............. 230,531 220,937 220,937
---------- ---------- ----------
Total current assets............................. 2,050,067 2,150,466 3,129,866
PROPERTY AND EQUIPMENT, net................................ 626,684 572,172 662,005
INVESTMENTS IN JOINT VENTURES.............................. 1,251,110 1,269,545 1,321,507
OTHER ASSETS, net.......................................... 85,361 88,368 88,451
---------- ---------- ----------
Total assets..................................... $4,013,222 $4,080,551 $5,201,829
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 65,064 $ 64,561 $ 64,561
Accrued expenses......................................... 35,943 48,322 144,026
Accrued salaries and benefits............................ 399,750 361,571 419,087
Deferred income taxes.................................... 489,332 536,241 1,005,735
Short-term borrowings.................................... 1,400,000 1,400,000 1,000,000
Current portion of long-term debt........................ 174,371 186,611 119,399
---------- ---------- ----------
Total current liabilities........................ 2,564,460 2,597,306 2,752,808
LONG-TERM DEBT, net of current portion..................... 234,528 45,784 --
---------- ---------- ----------
Total liabilities................................ 2,798,988 2,643,090 2,752,808
COMMITMENTS AND CONTINGENCIES
OWNERS' EQUITY............................................. 1,214,234 1,437,461 2,449,021
---------- ---------- ----------
Total liabilities and owners' equity............. $4,013,222 $4,080,551 $5,201,829
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 132
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenue, net.......... $13,725,958 $13,448,096 $6,601,598 $6,943,616
Other revenue......................... 122,672 124,084 17,957 17,697
----------- ----------- ---------- ----------
Total revenue................. 13,848,630 13,572,180 6,619,555 6,961,313
COSTS AND EXPENSES:
Costs of affiliated physician
services........................... 10,700,150 10,265,121 3,965,406 4,132,057
Practice salaries, wages and
benefits........................... 1,807,179 1,743,761 657,808 682,530
Practice supplies..................... 385,666 293,545 166,273 134,796
Practice rent and lease expense....... 260,347 272,617 130,173 130,173
Depreciation and amortization......... 187,612 202,058 89,358 90,241
Other practice expenses............... 816,860 822,598 405,116 444,782
Interest expense...................... 67,542 70,530 57,805 57,884
----------- ----------- ---------- ----------
Total costs and expenses...... 14,225,356 13,670,230 5,471,939 5,672,463
----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY IN EARNINGS OF INVESTMENTS..... (376,726) (98,050) 1,147,616 1,288,850
EQUITY IN EARNINGS OF INVESTMENTS....... 311,311 292,442 189,665 192,204
INCOME TAX EXPENSE (BENEFIT)............ (33,212) 57,305 423,918 469,494
----------- ----------- ---------- ----------
NET INCOME (LOSS)....................... $ (32,203) $ 137,087 $ 913,363 $1,011,560
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 133
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $1,270,173
Net loss.................................................. (32,203)
Dividends paid............................................ (23,736)
----------
BALANCE, December 31, 1995.................................. 1,214,234
Sale of treasury stock.................................... 104,716
Net income................................................ 137,087
Dividends paid............................................ (18,576)
----------
BALANCE, December 31, 1996.................................. 1,437,461
Net income (unaudited).................................... 1,011,560
----------
BALANCE, June 30, 1997 (unaudited).......................... $2,449,021
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 134
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- --------------------------
1995 1996 1996 1997
---------- ---------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ (32,203) $ 137,087 $ 913,363 $1,011,560
Adjustments to reconcile net income (loss)
to net cash used in operating
activities --
Depreciation and amortization........... 187,612 202,058 89,358 90,241
Deferred income taxes................... (63,815) 46,909 424,007 469,494
Equity in earnings of investments....... (311,311) (292,440) (189,665) (192,204)
Gain on sale of assets.................. (2,410) (6,519) -- --
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net........... 196,804 (159,802) 58,156 (265,282)
Prepaid expenses and other current
assets........................... (14,393) 9,594 -- --
Other assets....................... (6,231) (3,007) (308) (83)
Increase (decrease) in --
Accounts payable and accrued
expenses......................... (19,073) 11,876 96,605 95,704
Accrued salaries and benefits...... 52,323 (38,178) (205,733) 57,516
--------- --------- ----------- ----------
Net cash provided by (used in)
operating activities.......... (12,697) (92,422) 1,185,783 1,266,946
--------- --------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment,
net..................................... (296,206) (147,547) (21,786) (180,074)
Proceeds from sale of fixed assets......... 2,410 7,020 -- --
Distributions from investments............. 515,447 273,502 373 140,242
--------- --------- ----------- ----------
Net cash provided by (used in)
investing activities.......... 221,651 132,975 (21,413) (39,832)
--------- --------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt................ (185,023) (176,502) (108,010) (112,996)
Repayment of short-term borrowings......... -- -- (1,000,000) (400,000)
Sale of treasury stock..................... -- 104,716 -- --
Dividends paid............................. (23,736) (18,576) -- --
--------- --------- ----------- ----------
Net cash used in financing
activities.................... (208,759) (90,362) (1,108,010) (512,996)
--------- --------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 195 (49,809) 56,360 714,118
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 222,872 223,067 223,067 173,258
--------- --------- ----------- ----------
CASH AND CASH EQUIVALENTS,
end of period.............................. $ 223,067 $ 173,258 $ 279,427 $ 887,376
========= ========= =========== ==========
SUPPLEMENTAL DISCLOSURE:
Cash interest paid......................... $ 67,542 $ 70,530 $ 57,805 $ 57,884
Cash income taxes paid..................... $ 30,603 $ 17,616 $ -- $ 1,108
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 135
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Radiology and Nuclear Medicine, a Professional Association (the "Company"),
is a professional corporation organized under the laws of the State of Kansas to
provide diagnostic radiology medical imaging and radiation oncology services.
Its offices are located in Topeka, Kansas and the surrounding area.
The accompanying financial statements have been prepared on the accrual
basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using straight-line methods over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Investments in Affiliated Entities
The Company has investments in two partnerships, Magnetic Resonance Imaging
Center of Kansas ("MRI") and Medical Building West Associates, LP ("MBW") which
are accounted for using the equity method and the cost method, respectively (see
Note 3).
Other Noncurrent Assets
Other noncurrent assets consist of deposits with insurance companies and a
note receivable.
Medical Service Revenues
Medical service revenue are accounted for in the period in which the
services are provided. Revenues are reported at the estimated realizable amounts
from patients, third party payors and others. Provisions for estimated third
party payor adjustments are estimated and recorded in the period the related
services are provided. Any adjustment to the amounts is recorded in the period
in which the revised amount is determined. A significant portion of the
Company's medical service revenue are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse physicians based on
fee schedules which are determined by the related governmental agency.
Additionally, the Company participates in agreements with managed care
organizations to provide services at negotiated rates.
F-63
<PAGE> 136
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for income taxes under the liability method which
states that deferred income taxes are to be determined based on the estimated
future tax effects of differences between the financial reporting and income tax
bases of assets and liabilities given the provisions of enacted tax laws.
Deferred income tax provisions are based on the changes to the asset or
liability from period to period.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1996, to June 30, 1996, and from January
1, 1997, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
3. INVESTMENTS:
Investments in affiliated entities primarily consist of a 22% interest in
MRI and a 15% interest in MBW. The purpose of MRI is to own and operate real and
personal property. The purpose of MBW is to acquire/own land for the production
of income. The initial amount contributed to MBW was $1,000,000.
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
MBW......................................................... $ 966,667 $ 966,667
MRI......................................................... 283,948 302,878
Other....................................................... 495 --
---------- ----------
$1,251,110 $1,269,545
========== ==========
</TABLE>
F-64
<PAGE> 137
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
(YEARS) 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Equipment........................................ 5 - 10 $ 3,715,478 $ 3,781,288
Leasehold improvements........................... 10 319,532 319,532
Furniture and fixtures........................... 5 62,447 116,758
----------- -----------
4,097,457 4,217,578
Less -- Accumulated depreciation and
amortization................................... (3,470,773) (3,645,406)
----------- -----------
Property and equipment, net.................... $ 626,684 $ 572,172
=========== ===========
</TABLE>
5. SHORT-TERM BORROWINGS:
At December 31, 1995 and 1996, the Company had $1,400,000 of short-term
working capital notes outstanding. The interest rate on these borrowings was
8.5% and 8.25% at December 31, 1995 and 1996, respectively and the notes are due
within a one year period.
6. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Note payable to physician, bearing interest at 5.35%, due in
1998. Annual payments of $20,870 plus interest............ 62,607 41,737
Note payable to physician, bearing interest at 6.34%, due in
1997. Annual payments of $21,347 plus interest............ 42,694 21,347
Note payable to bank, bearing interest at the index of the
weekly average yield on U.S. Treasury securities plus 2%
(8.34% and 7.56% at December 31, 1995 and 1996,
respectively), due in 1998. Monthly payments of $12,912
and $12,643 in 1995 and 1996, respectively, secured by the
Company's interest in a limited partnership............... 303,598 169,311
-------- --------
Long-term debt.................................... 408,899 232,395
Less -- Current maturities........................ (174,371) (186,611)
-------- --------
Long-term debt, net of current maturities......... $234,528 $ 45,784
======== ========
</TABLE>
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997....................................................... $186,611
1998....................................................... 45,784
--------
$232,395
========
</TABLE>
Under the terms of a Stock Purchase Agreement between the Company and its
stockholders, the Company is required to repurchase the stock of each
stockholder upon retirement or at any time the stockholder ceases to be an
employee of the Company. The purchase price is based upon the then accounts
receivable balances of the Company, tax-effected, plus owners' equity of the
Company as of the end of the previous year, with certain defined adjustments.
The purchase price is paid in annual installments, not to
F-65
<PAGE> 138
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
exceed five years, with unpaid balances bearing interest at the lesser of 9% or
the U.S. Treasury Note rate. At December 31, 1996, the Company had $63,084
payable under these arrangements.
7. INCOME TAXES:
The provisions for income taxes for the years ended December 31, consist of
the following:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Current income tax expense.................................. $ 30,603 $10,396
Deferred income tax expense (benefit)....................... (63,815) 46,909
-------- -------
Total income tax expense (benefit)................ $(33,212) $57,305
======== =======
</TABLE>
Significant components of the Company's net deferred tax assets as of
December 31, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Depreciation.............................................. $ 44,576 $ 50,331
Accounts payable and accrued liabilities.................. 87,272 85,679
Deferred tax liabilities:
Accounts receivable....................................... (542,800) (597,133)
Other..................................................... (78,380) (75,118)
--------- ---------
Net deferred tax liabilities........................... $(489,332) $(536,241)
========= =========
</TABLE>
The differences between the provision (benefit) for income taxes and the
amounts computed by applying the statutory Federal income tax rate to income
(loss) before income taxes are due to disallowed passive losses from certain
investments.
8. LEASES:
The Company leases office facilities under various noncancelable operating
leases that expire in 2007. Future minimum lease payments under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 177,396
1998..................................................... 149,742
1999..................................................... 149,742
2000..................................................... 149,742
2001..................................................... 149,742
Thereafter............................................... 885,974
----------
$1,662,338
==========
</TABLE>
The Company has also entered into various agreements, expiring in April
1997, whereby it pays a monthly fee for selection, procurement, repair and
maintenance of its radiology and imaging equipment. The fees paid are expected
to approximate $57,000 per year.
9. EMPLOYEE BENEFIT PLAN:
The Company sponsors a defined contribution pension plan for employees of
the Company who have completed one year of service, with a minimum of 1,000
hours worked. The plan provides for employer contributions of 10% of
compensation up to a maximum eligible compensation of $150,000. The Company's
contribution for 1995 and 1996 was approximately $472,000 and $477,000,
respectively.
F-66
<PAGE> 139
RADIOLOGY AND NUCLEAR MEDICINE, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also sponsors a 401(k) plan for employees of the Company who
have completed one year of service, with a minimum 1,000 hours worked. The plan
provides for employer matching contributions of one-half of employee
contributions, up to 2% of the employee's salary. The plan also allows for
employer discretionary contributions. The Company's contributions for 1995 and
1996 were approximately $189,000 and $185,000, respectively.
10. RELATED-PARTY TRANSACTIONS:
As indicated in Note 3, the Company has a 15% partnership interest in MBW
from which the Company leases its office space. Rent expense relating to such
facilities was approximately $150,000 in 1995 and 1996.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable, accrued expenses, short-term borrowings and long-term debt approximate
fair value due to the short maturity of these instruments.
12. CONTINGENCIES:
Litigation
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
Insurance
The Company is self-insured for employee health benefits. Stop-loss
insurance coverage has been purchased to cover claims exceeding certain
retention limits. At December 31, 1996, the Company's maximum exposure for
health insurance claims was $20,000 per family with an aggregate maximum limit
of 125% of expected claims, as determined by the insurance company
(approximately $379,000 in 1996.) An estimate of the amount due and payable on
existing claims for which the Company is liable is included in accrued expenses.
13. SUBSEQUENT EVENTS:
On January 20, 1997, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
lease and other general operating expenses.
F-67
<PAGE> 140
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Rockland Radiological Group:
We have audited the accompanying combined balance sheets of Rockland
Radiological Group (Note 1) as of September 30, 1995 and 1996, and the related
combined statements of income, owners' equity (deficit), and cash flows for each
of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rockland Radiological Group
as of September 30, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 19, 1997
F-68
<PAGE> 141
ROCKLAND RADIOLOGICAL GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 198,387 $ 226,579 $ 368,633
Accounts receivable, net of allowances of $2,457,694,
$2,614,800 and $3,840,588 at September 30, 1995 and
1996 and June 30, 1997, respectively............... 2,686,087 2,995,190 2,842,436
Prepaid expenses and other current assets............. 194,872 212,011 409,638
----------- ----------- -----------
Total current assets.......................... 3,079,346 3,433,780 3,620,707
PROPERTY AND EQUIPMENT, net............................. 3,811,459 4,152,971 5,268,947
DEFERRED INCOME TAX ASSET............................... 854,993 1,029,209 1,203,425
OTHER ASSETS, net....................................... 30,626 2,000 2,143,996
----------- ----------- -----------
Total assets.................................. $ 7,776,424 $ 8,617,960 $12,237,075
=========== =========== ===========
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................... $ 202,486 $ 196,728 $ 188,710
Accrued salaries and benefits......................... 604,948 541,492 541,492
Deferred income tax liability......................... 533,921 639,961 572,785
Current portion of long-term debt..................... 719,078 944,199 1,675,146
Current portion of capital lease obligations.......... 1,077,848 1,193,100 545,557
----------- ----------- -----------
Total current liabilities..................... 3,138,281 3,515,480 3,523,690
DEFERRED COMPENSATION................................... 2,592,054 3,167,979 3,599,923
CAPITAL LEASE OBLIGATIONS, net of current portion....... 2,557,615 1,364,515 1,377,890
LONG-TERM DEBT, net of current portion.................. 1,832,526 2,548,330 5,562,941
----------- ----------- -----------
Total liabilities............................. 10,120,476 10,596,304 14,064,444
OWNERS' EQUITY (DEFICIT)................................ (2,344,052) (1,978,344) (1,827,369)
----------- ----------- -----------
Total liabilities and owners' equity
(deficit)................................... $ 7,776,424 $ 8,617,960 $12,237,075
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-69
<PAGE> 142
ROCKLAND RADIOLOGICAL GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Medical service revenues, net......... $15,078,280 $17,823,023 $17,302,049 $11,560,883 $13,541,174
Other revenues........................ 2,023 1,110 30,759 203,442 126,251
----------- ----------- ----------- ----------- -----------
Total revenues................ 15,080,303 17,824,133 17,332,808 11,764,325 13,667,425
COSTS AND EXPENSES:
Costs of affiliated physician
services........................... 3,674,505 7,074,008 6,051,448 4,824,530 4,799,315
Practice salaries, wages and
benefits........................... 3,916,578 4,118,141 4,251,812 2,967,423 3,542,507
Practice supplies..................... 603,087 1,181,653 1,146,608 856,491 1,033,193
Practice rent and lease expense....... 188,399 163,878 110,413 78,347 90,281
Depreciation and amortization......... 1,605,316 1,628,181 1,350,324 974,819 1,110,446
Other practice expenses............... 3,565,411 4,001,394 3,577,232 1,883,911 2,607,857
Interest expense...................... 1,082,044 702,967 581,786 531,967 591,243
----------- ----------- ----------- ----------- -----------
Total costs and expenses...... 14,635,340 18,870,222 17,069,623 12,117,488 13,774,842
NET INCOME (LOSS) BEFORE INCOME TAXES... 444,963 (1,046,089) 263,185 (353,163) (107,417)
INCOME TAX EXPENSE (BENEFIT)............ 57,662 (335,568) (71,023) (439,332) (258,392)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)....................... $ 387,301 $ (710,521) $ 334,208 $ 86,169 $ 150,975
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-70
<PAGE> 143
ROCKLAND RADIOLOGICAL GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
BALANCE, September 30, 1993................................. $(2,059,332)
Sale of stock............................................. 11,000
Net income................................................ 387,301
-----------
BALANCE, September 30, 1994................................. (1,661,031)
Sale of stock............................................. 27,500
Net loss.................................................. (710,521)
-----------
BALANCE, September 30, 1995................................. (2,344,052)
Sale of stock............................................. 31,500
Net income................................................ 334,208
-----------
BALANCE, September 30, 1996................................. (1,978,344)
Net income (unaudited).................................... 150,975
-----------
BALANCE, June 30, 1997 (unaudited).......................... $(1,827,369)
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-71
<PAGE> 144
ROCKLAND RADIOLOGICAL GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
------------------------------------ -------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ 387,301 $ (710,521) $ 334,208 $ 86,169 $ 150,975
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities --
Depreciation and amortization........... 1,605,316 1,628,181 1,350,324 974,819 1,110,446
Deferred income taxes................... 57,662 (335,568) (71,023) (410,148) (241,392)
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net........... (602,918) (163,544) (309,103) 141,781 152,754
Prepaid expenses and other current
assets........................... (175,810) 234,131 (17,139) (350,186) (197,627)
Other assets....................... 27,569 39,814 28,626 (10,787) (2,141,996)
Increase (decrease) in --
Accounts payable................... 277,466 (296,427) (5,758) (1) (8,018)
Accrued salaries and benefits...... 10,656 280,840 (63,456) 142,956 --
Deferred compensation.............. 46,693 753,358 575,925 565,019 431,944
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in)
operating activities.......... 1,633,935 1,430,264 1,822,604 1,139,622 (742,914)
---------- ---------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment....... (683,491) (275,043) (1,688,989) (1,471,184) (2,226,422)
---------- ---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............... 2,877,000 132,750 1,710,030 1,689,933 4,088,000
Repayment of long-term debt................ (3,018,703) (235,524) (769,105) (501,973) (342,442)
Principal payments on capital lease
obligations............................. (657,836) (1,231,754) (1,077,848) (684,363) (634,168)
Proceeds from sale of stock................ 11,000 27,500 31,500 -- --
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in)
financing activities.......... (788,539) (1,307,028) (105,423) 503,597 3,111,390
---------- ---------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 161,905 (151,807) 28,192 172,035 142,054
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 188,289 350,194 198,387 198,387 226,579
---------- ---------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period..... $ 350,194 $ 198,387 $ 226,579 $ 370,422 $ 368,633
========== ========== ========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash interest paid......................... $ 602,225 $ 700,180 $ 607,321 $ 531,967 $ 591,243
Cash income taxes paid..................... $ -- $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-72
<PAGE> 145
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994, 1995, AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements combine the accounts of nine entities
under common ownership: Mid Rockland Imaging Associates, P.C. ("MRI"), Rockland
Radiological Group, P.C. ("RRG"), Nyack Magnetic Resonance Imaging, P.C.
("NMR"), Central Imaging Associates, P.C., Advanced Imaging of Bergen, P.A.,
Pelham Imaging Associates, P.C., Women's Imaging Consultants, P.C., Montvale
Regional Imaging of Bergen, P.A., and Advanced Imaging of Orange County, P.C.
(collectively the "Company"), all of which are located in the states of New York
and New Jersey and specialize in the practice of radiological medicine. All
intercompany items and transactions have been eliminated.
The accompanying financial statements have been prepared on the accrual
basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment is recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Deferred Compensation
Under the terms of the physician employment agreements, physicians who have
completed a minimum of eight years of service are entitled to a payment of up to
one hundred percent of their final compensation upon retirement or when they
cease to be employees of the Company. The percentage of salary received by the
physician varies based upon the number of years of service. These payments are
made in 36 equal monthly payments beginning upon attainment of age 70 or the
date when the physician leaves the Company. The estimated present value of these
obligations is being accrued ratably during the eight year service period.
Medical Service Revenue
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in the
period in which the revised amount is determined. A significant portion of the
Company's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee
F-73
<PAGE> 146
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
schedules which are determined by the related governmental agency. Additionally,
the Company participates in agreements with managed care organizations to
provide services at negotiated rates.
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include physician compensation and
benefits paid or payable to owner and non-owner physicians during the period.
Income Taxes
MRI and RRG account for income taxes under the liability method which
states that deferred income taxes are to be determined based on the estimated
future tax effects of differences between the financial reporting and income tax
basis of assets and liabilities given the provisions of enacted tax laws.
Deferred income tax provisions are based on the changes to the asset or
liability from period to period. The remaining companies included in the
accompanying combined financial statements are S corporations, and accordingly,
there is no provision for income taxes related to these entities. The individual
owners include their respective share of Company profits and losses in their tax
returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation -- Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from October 1, 1995, to June 30, 1996, and from October
1, 1996, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
F-74
<PAGE> 147
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment at September 30, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES (YEARS) 1995 1996
--------------- ---------- -----------
<S> <C> <C> <C>
Equipment.................................. 5 $6,852,399 $ 8,348,140
Leasehold improvements..................... 15 640,515 782,200
Furniture and fixtures..................... 7 642,978 679,762
Capitalized building lease................. 15 2,634,333 2,648,401
---------- -----------
10,770,225 12,458,503
Less -- Accumulated depreciation and
amortization............................. (6,958,766) (8,305,532)
---------- -----------
Property and equipment, net...... $3,811,459 $ 4,152,971
========== ===========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following as of September 30:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Note payable to related party, bearing interest at 10%, due
in 1997. Monthly payments of $6,453 including interest.... $ 90,642 $ 19,042
Note payable to previous shareholder, bearing interest at
8%, due in 1996. Monthly payment of $4,000 plus
interest.................................................. 12,000 --
Note payable to vendor, bearing interest at 10.36%, due in
1998. Monthly payments of $1,339 including interest....... 34,448 20,712
Note payable to vendor, bearing interest at 8.26%, due in
2001. Monthly payments of $8,955 including interest....... -- 396,552
Note payable to Bank, bearing interest at 8.34%, due in
1999. Monthly payments of $49,603 plus interest, secured
by accounts receivable and certain property and
equipment................................................. 2,281,764 1,686,528
Note payable to Bank, bearing interest at 8.21%, due in
2000, secured by accounts receivable and certain property
and equipment. Monthly payments of $2,250 plus
interest.................................................. 132,750 105,750
Note payable to Bank, bearing interest at 8.95%, due in
2001. Monthly payments of $24,881 including interest...... -- 1,200,000
Note payable to vendor, bearing interest at 9.53%, due in
2001. Monthly payments of $1,419 including interest....... -- 63,945
---------- ----------
Total long-term debt...................................... 2,551,604 3,492,529
Less -- Current maturities................................ (719,078) (944,199)
---------- ----------
Total long-term debt, net of current portion.............. $1,832,526 $2,548,330
========== ==========
</TABLE>
Future maturities of long-term debt at September 30, 1996, are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 944,199
1998..................................................... 942,087
1999..................................................... 866,460
2000..................................................... 399,584
2001..................................................... 340,199
----------
$3,492,529
==========
</TABLE>
F-75
<PAGE> 148
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. CAPITAL LEASES:
The Company leases certain medical equipment and facilities under capital
leases. These leases have been capitalized using the implicit rate stated in
each lease. Future payments due under capital leases as of September 30, 1996,
are as follows:
<TABLE>
<S> <C>
1997.................................................... $ 1,412,563
1998.................................................... 1,389,510
1999.................................................... 60,374
-----------
Total minimum lease payments due........................ 2,862,447
Less -- Amounts representing interest................. (304,832)
-----------
Present value of minimum lease payments................. 2,557,615
Less -- Current portion............................... (1,193,100)
-----------
Long-Term obligation.................................... $ 1,364,515
===========
</TABLE>
6. INCOME TAXES:
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- --------- --------
<S> <C> <C> <C>
Current income tax expense......................... $ -- $ -- $ --
Deferred income tax expense (benefit).............. 57,662 (335,568) (71,023)
------- --------- --------
Total income tax expense (benefit)....... $57,662 $(335,568) $(71,023)
======= ========= ========
</TABLE>
Significant components of the Company's net deferred tax assets and
liabilities as of September 30, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Current:
Deferred tax assets --
Accounts payable and accrued liabilities............... $ 248,176 $ 241,283
Deferred tax (liabilities) --
Accounts receivable.................................... (773,933) (870,234)
Other.................................................. (8,164) (11,010)
--------- ----------
Total net current deferred tax liabilities........ $(533,921) $ (639,961)
========= ==========
Noncurrent:
Deferred tax assets --
Deferred compensation.................................. $ 881,298 $1,077,113
Deferred tax (liabilities) --
Depreciation........................................... (26,305) (47,904)
--------- ----------
Total net noncurrent deferred tax assets.......... $ 854,993 $1,029,209
========= ==========
</TABLE>
The differences between the provision (benefit) for income taxes and the amounts
computed by applying the statutory Federal income tax rate to income (loss)
before income taxes are due to the income (losses) of S-Corporations included in
these combined financial statements.
7. OPERATING LEASES:
The Company leases two facilities under various noncancelable operating
leases that expire at various dates through 1999. The Company leases a portion
of the MRI building under a lease that expires in 1998, and
F-76
<PAGE> 149
ROCKLAND RADIOLOGICAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
also maintains a lease at the Nyack Hospital through NMR. Future minimum lease
payments under noncancelable leases at September 30, are as follows:
<TABLE>
<S> <C>
1997...................................................... $103,970
1998...................................................... 96,014
1999...................................................... 3,958
</TABLE>
8. EMPLOYEE BENEFIT PLAN:
The Company sponsors a profit sharing and 401(k) plan for employees of the
Company, who have completed one year of service and are at least age 21. The
plan provides for employer profit sharing contributions, depending upon the
level of the employee. The plan also provides for employees matching
contributions of 100% of employee contributions, up to 3% of the employee's
salary. The Company's contributions for 1994, 1995, and 1996 were $253,656,
$363,809, and, $404,047 respectively.
9. RELATED-PARTY TRANSACTIONS:
The Company leases office space from a limited partnership. Two
shareholders own an interest in this limited partnership. The Company paid rent
related to these leases of $659,500, $698,500, and $726,310 for the years ended
December 31, 1994, 1995, and 1996, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. The carrying amounts of accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short maturity of these
instruments. The carrying amount of the Company's long-term debt and capital
leases also approximates fair value.
11. CONTINGENCIES:
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
12. SUBSEQUENT EVENTS:
On November 15, 1996, the Company entered into a letter of intent with
American Physician Partners, Inc. (APPI) under which APPI will acquire certain
assets and liabilities of the Company in exchange for common stock and cash.
Completion of the transaction is subject to certain conditions, including the
execution of a forty-year service agreement, stockholder approval by both
parties and successful completion of an initial public offering by APPI. Under
the terms of the service agreement, APPI will provide practice management,
administration and other services to the physicians for a negotiated service
fee. All nonprofessional employees shall become employees of APPI. In addition,
APPI will assume responsibility for all maintenance, repairs, improvements,
lease and other general operating expenses.
In April, 1997, the Company entered into an agreement to purchase certain
assets of Kingston Diagnostic Radiology, P.C. for $2,000,000 in cash and certain
assumed liabilities of approximately $1,850,000. Completion of the transaction
is subject to execution of a five-year service contract.
On March 11, 1997, Wallkill Radiology Associates, P.C. ("Wallkill")
contributed all of its assets to the Company. In exchange, the sole stockholder
of Wallkill was made an equal partner of the Company. At December 31, 1996,
Wallkill had total assets of approximately $480,000. For the year ended December
31, 1996, Wallkill had total revenues of approximately $1,480,000.
F-77
<PAGE> 150
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Valley Radiology Group:
We have audited the accompanying combined balance sheets of Valley
Radiology Group (Note 1) as of December 31, 1995 and 1996, and the related
combined statements of income, owners' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valley Radiology Group as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 19, 1997
F-78
<PAGE> 151
VALLEY RADIOLOGY GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $1,212,535 $1,014,649 $ 386,310
Accounts receivable, net of allowances
of $1,624,631, $2,021,861 and
$2,293,536 at December 31, 1995 and
1996 and June 30, 1997,
respectively....................... 1,632,342 1,616,645 2,076,098
Prepaid expenses and other............ 9,228 28,414 7,650
---------- ---------- ----------
Total current assets.......... 2,854,105 2,659,708 2,470,058
PROPERTY AND EQUIPMENT, net............. 198,263 1,253,425 1,219,586
INVESTMENTS IN AFFILIATED ENTITIES...... 369,172 104,031 26,720
NOTES RECEIVABLE........................ 428,448 405,500 402,500
OTHER ASSETS, net....................... 163,353 61,440 36,003
---------- ---------- ----------
Total assets.................. $4,013,341 $4,484,104 $4,154,867
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................... $ 229,216 $ 94,550 $ 94,822
Accrued salaries and benefits......... 944,296 757,428 257,322
Deferred income tax liability......... 156,004 259,988 372,329
Line of credit payable................ 57,000 825,100 678,333
Current portion of long-term debt..... 298,298 329,028 560,604
---------- ---------- ----------
Total current liabilities..... 1,684,814 2,266,094 1,963,410
DEFERRED INCOME TAX LIABILITY........... 8,344 37,261 37,261
LONG-TERM DEBT, net of current
portion............................... 675,142 395,065 167,188
---------- ---------- ----------
Total liabilities............. 2,368,300 2,698,420 2,167,859
OWNERS' EQUITY.......................... 1,645,041 1,785,684 1,987,008
---------- ---------- ----------
Total liabilities and owners'
equity...................... $4,013,341 $4,484,104 $4,154,867
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-79
<PAGE> 152
VALLEY RADIOLOGY GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenues, net......... $10,156,958 $10,974,993 $5,461,462 $5,895,340
Other revenues........................ 350,331 198,605 109,023 59,057
----------- ----------- ---------- ----------
Total revenues................ 10,507,289 11,173,598 5,570,485 5,954,397
COSTS AND EXPENSES:
Costs of affiliated physician
services........................... 5,510,802 5,383,728 2,549,462 2,708,341
Practice salaries, wages and
benefits........................... 2,268,596 2,592,672 1,143,074 1,247,927
Practice supplies..................... 176,051 355,777 211,656 160,382
Practice rent and lease expense....... 466,155 420,260 228,310 232,769
Depreciation and amortization......... 168,900 223,248 111,624 165,919
Other practice expenses............... 1,385,743 1,337,118 702,027 723,317
Interest expense...................... 53,387 73,475 30,773 55,840
(Gain) loss on sale of equipment...... 20,099 (37,386) (24,930) (930)
----------- ----------- ---------- ----------
Total costs and expenses...... 10,049,733 10,348,892 4,951,996 5,293,565
INCOME BEFORE TAXES AND EQUITY IN
EARNINGS OF INVESTMENTS............... 457,556 824,706 618,489 660,832
EQUITY IN EARNINGS (LOSS) OF
INVESTMENTS........................... 13,698 (18,997) -- --
----------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES.............. 471,254 805,709 618,489 660,832
INCOME TAX EXPENSE (BENEFIT)............ (110,919) 132,901 105,143 112,341
----------- ----------- ---------- ----------
NET INCOME.............................. $ 582,173 $ 672,808 $ 513,346 $ 548,491
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-80
<PAGE> 153
VALLEY RADIOLOGY GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $1,270,013
Sale of stock............................................. 1,304
Net income................................................ 582,173
Distributions............................................. (208,449)
----------
BALANCE, December 31, 1995.................................. 1,645,041
Purchase of stock......................................... (165)
Net income................................................ 672,808
Distributions............................................. (532,000)
----------
BALANCE, December 31, 1996.................................. 1,785,684
Net income (unaudited).................................... 548,491
Distributions (unaudited)................................. (346,250)
Purchase of stock (unaudited)............................. (917)
----------
BALANCE, June 30, 1997 (unaudited).......................... $1,987,008
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-81
<PAGE> 154
VALLEY RADIOLOGY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1995 1996 1996 1997
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 582,173 $ 672,808 $ 513,346 $ 548,491
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization.................... 168,900 223,248 111,624 165,919
Deferred income taxes............................ (110,919) 132,901 105,142 112,341
Investment income from affiliated entities....... (13,698) 18,997 5,470 77,311
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net....................... 242,584 15,697 (309,189) (459,453)
Prepaid expenses and other..................... (8,284) (19,186) (11,882) 20,764
Other assets................................... 10,508 28,242 34,156 4,240
Increase (decrease) in --
Accounts payable............................... (9,662) (134,666) 526 272
Accrued liabilities............................ (609,468) -- -- --
Accrued salaries and benefits.................. 703,728 (186,868) (754,595) (500,106)
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities................................ 955,862 751,173 (305,402) (30,221)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (14,671) (1,204,739) (297,307) (110,883)
Proceeds from notes receivable...................... 26,826 22,948 19,948 3,000
Distributions from affiliated entities.............. 297,000 246,144 -- --
---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities................................ 309,155 (935,647) (277,359) (107,883)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................ 745,000 300,000 300,000 185,000
Repayment of long-term debt......................... (731,144) (549,347) (159,075) (181,301)
Net change in line of credit payable................ (143,000) 768,100 (57,000) (146,767)
Distributions to owners............................. (208,449) (532,000) (292,500) (346,250)
Sales (purchases) of stock.......................... 1,304 (165) (32) (917)
---------- ---------- ---------- ----------
Net cash used in financing activities....... (336,289) (13,412) (208,607) (490,235)
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH....................... 928,728 (197,886) (791,368) (628,339)
CASH AND CASH EQUIVALENTS, beginning of year.......... 283,807 1,212,535 1,212,535 1,014,649
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year................ $1,212,535 $1,014,649 $ 421,167 $ 386,310
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash interest paid.................................. $ 80,134 $ 73,475 $ 30,773 $ 55,840
Cash income taxes paid.............................. $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-82
<PAGE> 155
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements combine the accounts of three
entities under common ownership: Valley Radiologists Medical Group, Inc.
("Valley"), a California corporation; LXL, Ltd. ("LXL"), a California general
partnership; and LXL Building Partnership ("LXLB"), a California general
partnership (collectively the "Company"), all of which are located in northern
California and specialize in the practice of radiological medicine and the
ownership and operation of diagnostic imaging equipment. All intercompany
transactions have been eliminated.
The accompanying financial statements have been prepared on the accrual
basis of accounting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts.
Property and Equipment
Property and equipment are recorded at cost. Depreciation on furniture,
fixtures and equipment is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the noncancelable lease term or
estimated useful life of the asset. However, if the noncancelable lease term
expires in the near future and if the lease contains a renewal option of which
management is reasonably assured of exercising, the amortization period is the
shorter of the lease term including the renewal option period or the estimated
useful life.
Investments in Affiliated Entities
Investments in affiliated entities are accounted for using the equity
method.
Other Assets
Other assets are comprised of organization costs, noncompete agreements and
security deposits. Organization costs are being amortized on a straight-line
basis over a five-year period. Noncompete agreements are amortized on a
straight-line basis over the life of the agreements.
Medical Service Revenues
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third party payors and others. Provisions for estimated
third party payor adjustments are estimated and recorded in the period in which
the related services are provided. Any adjustment to the amounts is recorded in
the period in which the revised amount is determined. A significant portion of
the Company's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. Additionally, the Company participates in agreements with
managed care organizations to provide services at negotiated rates.
F-83
<PAGE> 156
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
Costs of Affiliated Physician Services
Costs of Affiliated Physician Services include physician compensation and
benefits paid or payable to owner and non-owner physicians during the period.
Income Taxes
Valley accounts for income taxes under the liability method which states
that deferred income taxes are determined based on the estimated future tax
effects of differences between the financial reporting and income tax basis of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions are based on the changes to the asset or liability from period to
period. LXL and LXLB are partnerships, and accordingly, there is no provision
for income taxes related to these entities. The individual owners include their
respective share of profits and losses in their tax returns.
Concentration of Credit Risk
The Company extends credit to patients covered by programs such as Medicare
and Medicaid and private insurers. The Company manages credit risk with the
various public and private insurance providers, as appropriate. Allowances for
bad debts have been made for potential losses when appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting." Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to APB Opinion No. 28; nevertheless, management of the Company
believes that the disclosures herein are adequate to prevent the information
presented from being misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company with respect to the results of its operations
for the interim periods from January 1, 1996, to June 30, 1996, and from January
1, 1997, to June 30, 1997, have been included herein. The results of operations
for the interim periods are not necessarily indicative of the results for the
full year.
3. NOTES RECEIVABLE:
Notes receivable primarily consist of a $400,000 note receivable from a
third party, due July 18, 1999 with monthly interest only payments until that
date. The note bears interest of 8.0%.
4. INVESTMENTS IN AFFILIATED ENTITIES:
Investments in affiliated entities primarily consist of 40% interests in
two partnerships (Santa Clara Valley MRI ("Santa Clara") and Sunnyvale MRI
("Sunnyvale"), each of which perform radiology and
F-84
<PAGE> 157
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
imaging healthcare services. These investments are being accounted for under the
equity method of accounting. Balances at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Santa Clara................................................. $387,564 $ --
Sunnyvale................................................... (20,734) 98,089
Other....................................................... 2,342 5,942
-------- --------
$369,172 $104,031
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS) 1995 1996
---------------- ---------- ----------
<S> <C> <C> <C>
Equipment................................... 5 $4,236,818 $4,056,426
Leasehold improvements...................... 5-13 370,130 413,604
Furniture and fixtures...................... 5-7 109,415 113,561
---------- ----------
4,716,363 4,583,591
Less -- Accumulated depreciation and
amortization.............................. (4,518,100) (3,330,166)
---------- ----------
Property and equipment, net....... $ 198,263 $1,253,425
========== ==========
</TABLE>
F-85
<PAGE> 158
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
6. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Note payable to Bank, bearing interest at prime plus .5%
(8.75% on December 31, 1996), due March 1, 2000, secured
by accounts receivable and certain property and equipment.
Monthly payments of $12,420 plus interest. ............... $ 606,700 $ 244,962
Note payable to Bank, bearing interest at prime plus .5%
(8.75% on December 31, 1996), due May 1, 2001, secured by
accounts receivable and certain property and equipment.
Monthly payments of $5,000 including interest. ........... -- 261,649
Note payable to physician, bearing interest at prime,
adjustable every April 1 and October 1, (8.75% on December
31, 1995), due March 31, 1996. Monthly payments of $4,201
plus interest. ........................................... 12,604 --
Note payable to physician, bearing interest at prime,
adjustable every May 1 and November 1, (8.75% on December
31, 1995), due April 30, 1996. Monthly payments of $4,167
plus interest. ........................................... 16,666 --
Note payable to physician, noninterest bearing, due December
31, 1998. Monthly payments of $6,250. .................... 225,000 150,000
Note payable to physician, noninterest bearing, due June 30,
1998. Monthly payments of $3,749. ........................ 112,470 67,482
--------- ---------
Total long-term debt........................................ 973,440 724,093
Less -- Current maturities.................................. (298,298) (329,028)
--------- ---------
Total long-term debt, net of current portion................ $ 675,142 $ 395,065
========= =========
</TABLE>
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.................................................... $329,028
1998.................................................... 253,416
1999.................................................... 60,000
2000.................................................... 60,000
2001.................................................... 21,649
--------
$724,093
========
</TABLE>
During 1995, the Company maintained a $300,000 line of credit for working
capital purposes bearing interest at the prime rate (8.5% on December 31, 1995).
The amount outstanding at December 31, 1995 was $57,000. The Company currently
maintains a $900,000 line of credit bearing interest at the prime rate (8.25% on
December 31, 1996). The amount outstanding at December 31, 1996 was $825,100.
Under the terms of the physician employment agreements, any physician who
is a shareholder in the Company and has been employed as a full-time
professional for a continuous four year period is entitled to a payout upon
retirement or when they cease to be employees of the Company. The payout is
equal to the physician's pro rata share of 80% of accounts receivable less
amounts owed to former shareholders. Payments are made in forty-eight equal
monthly amounts beginning the month after employment ceases. At December 31,
1996, the Company had $217,482 payable under these arrangements.
F-86
<PAGE> 159
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
Notes payable to physicians outstanding at December 31, 1995 represents
amounts paid to two former physicians for non-compete agreements.
7. INCOME TAXES:
The provisions for income taxes for the years ended December 31, consist of
the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current income tax expense................................. $ -- $ --
Deferred income tax expense (benefit)...................... (110,919) 132,901
--------- ---------
Total income tax expense (benefit)............... $(110,919) $ 132,901
========= =========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current:
Deferred tax assets --
Accounts payable and accrued salaries and benefits.... $ 398,993 $ 289,672
Deferred tax (liabilities) --
Accounts receivable, net.............................. (554,997) (549,660)
--------- ---------
Total net current deferred tax liabilities....... $(156,004) $(259,988)
========= =========
Noncurrent:
Deferred tax liabilities --
Depreciation.......................................... $ (8,344) $ (37,261)
========= =========
</TABLE>
The differences between the provision (benefit) for income taxes and the
amounts computed by applying the statutory Federal income tax rate to income
before income taxes are due to disallowed passive losses from certain
investments.
8. EMPLOYEE BENEFIT PLAN:
The Company sponsors a profit sharing plan for employees of the Company,
who have completed one year of service. The plan provides for discretionary
employer contributions. The Company's contributions for 1995 and 1996 were
$480,858 and $500,000, respectively.
9. OPERATING LEASES:
The Company leases various facilities under noncancelable operating leases
that expire at various dates through 1999. Future minimum lease payments under
noncancelable leases are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 348,256
1998..................................................... 293,206
1999..................................................... 220,521
2000..................................................... 156,802
2001..................................................... 156,802
Thereafter............................................... 370,016
----------
$1,545,603
==========
</TABLE>
F-87
<PAGE> 160
VALLEY RADIOLOGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
10. RELATED-PARTY TRANSACTIONS:
As indicated in Note 4, the Company has 40% partnership interests in Santa
Clara and Sunnyvale. Under agreements with these partnerships, the Company
performs professional and management services. Management fees are billed to the
partnership based primarily upon agreed-upon rates per case. Management and
professional fees earned from these partnerships are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Santa Clara................................................. $198,327 $ 25,664
Sunnyvale................................................... 343,698 266,338
-------- --------
$542,025 $292,002
======== ========
</TABLE>
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. The carrying amounts of accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short maturity of these
instruments. The carrying amount of the Company's long-term debt also
approximates fair value.
12. CONTINGENCIES:
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
13. SUBSEQUENT EVENTS:
On March 6, 1997, the Company entered into a letter of intent with American
Physician Partners, Inc. (APPI) under which APPI will acquire certain assets and
liabilities of the Company in exchange for common stock and cash. Completion of
the transaction is subject to certain conditions, including the execution of a
forty-year service agreement, stockholder approval by both parties and
successful completion of an initial public offering by APPI. Under the terms of
the service agreement, APPI will provide practice management, administration and
other services to the physicians for a negotiated service fee. All
nonprofessional employees shall become employees of APPI. In addition, APPI will
assume responsibility for all maintenance, repairs, improvements, lease and
other general operating expenses.
In 1997, the Company refinanced its $900,000 line of credit with a term
note. The term note provides for borrowings of $925,000 due February 2002.
Effective January 1, 1997, the Company and Pacific Imaging Consultants, a
group of radiologists in Oakland, California, formed a management services
organization to manage their operations.
F-88
<PAGE> 161
================================================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 19
Dividend Policy........................ 19
Capitalization......................... 20
Dilution............................... 21
American Physician Partners, Inc.
Unaudited Pro Forma Combined Balance
Sheet................................ 22
Selected Financial Data................ 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 26
Business............................... 29
Management............................. 46
Certain Transactions................... 53
Principal Stockholders................. 62
Description of Capital Stock........... 64
Shares Eligible For Future Sale........ 67
Underwriting........................... 69
Legal Matters.......................... 70
Experts................................ 70
Additional Information................. 71
Index to Financial Statements.......... F-1
</TABLE>
UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
5,000,000 SHARES
[AMERICAN PHYSICIAN PARTNERS, INC. LOGO]
COMMON STOCK
------------
PROSPECTUS
, 1997
-------------------
SMITH BARNEY INC.
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY
PIPER JAFFRAY INC.
- --------------------------------------------------------------------------------
<PAGE> 162
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be paid by the Company
(other than underwriting compensation expected to be incurred) in connection
with the offering described in this Registration Statement.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 27,879
NASD filing................................................. 9,700
Blue Sky Fees and Expenses.................................. 5,000
Printing and Engraving Costs................................ 350,000
Legal Fees and Expenses..................................... 1,952,625
Accounting Fees and Expenses................................ 1,253,296
Transfer Agent and Registrar Fees and Expenses.............. 2,500
Miscellaneous............................................... 135,000
----------
Total............................................. $3,736,000
==========
</TABLE>
- ---------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended Bylaws provide that the Company shall, to the fullest
extent permitted by Section 145 of the DGCL, as amended from time to time,
indemnify all persons whom it may indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
Article VI of the Company's Restated Certificate of Incorporation, as
amended, provides that the Company's directors will not be personally liable to
the Company or its stockholders for monetary damages resulting from breaches of
their fiduciary duty as directors except for liability (a) for any breach of the
duty of loyalty to the Company or its stockholders, (b) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) under Section 174 of the DGCL or (d) for any transaction from which
the director derived an improper personal benefit.
Reference is made to Article VIII of the Company's Amended and Restated
Bylaws filed as an Exhibit to this Registration Statement, which provides for
indemnification of directors and officers.
Simultaneous with completion of this offering, the Company entered into an
indemnification agreement with certain of its directors and director nominees,
pursuant to which the Company agreed to indemnify such
II-1
<PAGE> 163
persons for losses arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement of which
this Prospectus forms a part.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years that were not registered under the Securities
Act:
(i) In May 1996, the Company issued 2,000,000 shares of Common Stock
to John Pappajohn, Halkis Ltd., Mary Pappajohn, Thebes Ltd. and Derace L.
Schaffer, M.D. in connection with the initial capitalization of the Company
for an aggregate purchase price of $250,000. This transaction was effected
without registration under the Securities Act in reliance upon the
exemptions provided by Section 4(2) of the Securities Act.
(ii) Between September 30, 1996 and December 31, 1996, the Company
issued an aggregate of $3,500,000 of Convertible Promissory Convertible
Notes to 21 institutional and individual investors. This transaction was
effected without registration of the Convertible Promissory Convertible
Notes under the Securities Act in reliance upon the exemptions provided by
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder.
In relying on the exemptions provided by Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder in connection with the
private placements described above, the Company relied upon written
representations of the persons acquiring the Company's shares of Common Stock
and Convertible Notes, that they were acquiring such shares or notes for
investment purposes and that they had received adequate opportunity to obtain
information, and had reviewed such information, regarding the Company.
Certificates and notes representing the shares and the Convertible Notes,
respectively, issued to these persons contained a legend restricting transfer
thereof absent registration under the Securities Act or the availability of an
exemption therefrom.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and among American Physician Partners,
Inc., Carroll Imaging Associates, P.A., Diagnostic
Imaging Associates, P.A., Drs. Copeland, Hyman and
Shackman, P.A., Drs. Decarlo, Lyon, Hearn & Pazourek,
P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Harbor
Radiologists, P.A., and Perilla, Syndler & Associates,
P.A.**
2.2 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Radiology and Nuclear Medicine, A Professional
Association.**
2.3 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Mid Rockland Imaging Associates, P.C.**
2.4 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Rockland Radiological Group, P.C.**
2.5 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Advanced Imaging of Orange County, P.C.**
2.6 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Central Imaging Associates, P.C.**
</TABLE>
II-2
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
2.7 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Nyack Magnetic Resonance Imaging, P.C.**
2.8 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Pelham Imaging Associates, P.C.**
2.9 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Women's Imaging Consultants, P.C.**
2.10 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Pacific Imaging Consultants, A Medical Group,
Inc.**
2.11 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Total Medical Imaging, Inc.**
2.12 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Valley Radiologists Medical Group, Inc.**
2.13 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and The Ide Group, P.C.**
2.14 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and M & S X-Ray Associates, P.A.**
2.15 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and South Texas MR, Inc.**
2.16 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and San Antonio MR, Inc.**
2.17 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., Lexington
MR, Ltd., and the Sellers.**
2.18 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., Madison
Square Joint Venture and the Sellers.**
2.19 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., South Texas
No. 1 MRI Limited Partnership, a Texas limited
partnership, and the Sellers.**
2.20 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., San Antonio
MRI Partnership No. 2 Ltd., a Texas limited partnership,
and the Sellers.**
2.21 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., and the
Sellers.**
3.1 -- Restated Certificate of Incorporation of American
Physician Partners, Inc.***
3.2 -- Amended and Restated Bylaws of American Physician
Partners, Inc.***
4.1 -- Form of certificate evidencing ownership of Common Stock
of American Physician Partners, Inc.*
4.2 -- Form of Convertible Promissory Note of American Physician
Partners, Inc.**
5.1 -- Opinion of Brobeck, Phleger & Harrison LLP***
10.1 -- American Physician Partners, Inc. 1996 Stock Option
Plan.**
10.2 -- Employment Agreement between American Physician Partners,
Inc. and Gregory L. Solomon.**
10.3 -- Employment Agreement between American Physician Partners,
Inc. and Mark S. Martin.**
10.4 -- Employment Agreement between American Physician Partners,
Inc. and Sami S. Abbasi.**
</TABLE>
II-3
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.5 -- Employment Agreement between American Physician Partners,
Inc. and Paul M. Jolas.**
10.6 -- Form of Indemnification Agreement for certain Directors
and Officers.
10.7 -- Form of Registration Rights Agreement.**
10.8 -- Service Agreement, dated , 1997, by and
among American Physician Partners, Inc., APPI-Advanced
Radiology, Inc. and Carroll Imaging Associates, P.A.,
Diagnostic Imaging Associates, P.A., Drs. Thomas, Wallop,
Kim & Lewis, P.A., Drs. Copeland, Hyman & Shackman, P.A.,
Drs. DeCarlo, Lyon, Hearn & Pazourek, Harbor
Radiologists, P.A., Perilla, Sindler & Associates, P.A.**
10.9 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Ide Admin Corp.
and Ide Imaging Group, P.C.**
10.10 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., M & S X-Ray
Associates, P.A. and M & S Imaging Associates, P.A.**
10.11 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Rockland
Radiological Group, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.12 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Advanced Imaging
of Orange County, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.13 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Central Imaging
Associates, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.14 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Nyack Magnetic
Resonance Imaging, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.15 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Pelham Imaging
Associates, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.16 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Women's Imaging
Consultants, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.17 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., APPI-Pacific
Imaging, Inc. and PIC Medical Group, Inc.**
10.18 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Radiology and
Nuclear Medicine, a Professional Association and RNM
L.L.C.**
10.19 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., APPI-Valley
Radiology, Inc. and Valley Radiology Medical Associates,
Inc.**
10.20 -- Consulting Agreement between American Physician Partners,
Inc. and Michael L. Sherman, M.D.
10.21 -- Office Building Lease Agreement between Dallas Main
Center Limited Partnership and American Physician
Partners, Inc.
10.22 -- First Amendment to Office Building Lease Agreement
between Dallas Main Center Limited Partnership and
American Physician Partners, Inc.
10.23 -- Credit Agreement by and among American Physician
Partners, Inc., GE Capital Corporation and the other
credit parties signatory thereto.
11.1 -- Statement re computation of per share earnings.****
21.1 -- Subsidiaries.*
</TABLE>
II-4
<PAGE> 166
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of DeJoy, Knauf & Blood, LLP.
23.4 -- Consent of Brobeck, Phleger & Harrison LLP (contained in
its opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney.***
</TABLE>
- ---------------
* To be filed by amendments.
** Incorporated by reference to the corresponding Exhibit number to the
Registrant's Registration Statement No. 333-31611 on Form S-4.
*** Previously filed.
**** Not Applicable.
(b) Financial Statement Schedules.
Schedules are omitted because they are not required, are not applicable, or
the information is included in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registration pursuant to the provisions described in Item 14 hereof, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE> 167
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, as amended,
American Physician Partners, Inc. has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on October 10, 1997.
AMERICAN PHYSICIAN PARTNERS, INC.
By: /s/ GREGORY L. SOLOMON
-------------------------------------
Gregory L. Solomon
President and Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GREGORY L. SOLOMON President, Chief Executive October 10, 1997
- ----------------------------------------------------- Officer, and Director
Gregory L. Solomon (Principal Executive
Officer)
/s/ GREGORY L. SOLOMON* Chairman of the Board of October 10, 1997
- ----------------------------------------------------- Directors and Senior Vice
Lawrence R. Muroff, M.D. President of Physician
Affairs
/s/ GREGORY L. SOLOMON* Senior Vice President and October 10, 1997
- ----------------------------------------------------- Chief Financial Officer
Sami S. Abbasi (Principal Financial
Officer)
/s/ GREGORY L. SOLOMON* Controller and Treasurer October 10, 1997
- ----------------------------------------------------- (Principal Accounting
Steve W. Ratton, Jr. Officer)
/s/ GREGORY L. SOLOMON* Director October 10, 1997
- -----------------------------------------------------
John W. Colloton
/s/ GREGORY L. SOLOMON* Director October 10, 1997
- -----------------------------------------------------
John Pappajohn
/s/ GREGORY L. SOLOMON* Director October 10, 1997
- -----------------------------------------------------
Derace L. Schaffer, M.D.
</TABLE>
* By Power of Attorney
II-6
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and among American Physician Partners,
Inc., Carroll Imaging Associates, P.A., Diagnostic
Imaging Associates, P.A., Drs. Copeland, Hyman and
Shackman, P.A., Drs. Decarlo, Lyon, Hearn & Pazourek,
P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Harbor
Radiologists, P.A., and Perilla, Syndler & Associates,
P.A.**
2.2 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Radiology and Nuclear Medicine, A Professional
Association.**
2.3 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Mid Rockland Imaging Associates, P.C.**
2.4 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Rockland Radiological Group, P.C.**
2.5 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Advanced Imaging of Orange County, P.C.**
2.6 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Central Imaging Associates, P.C.**
2.7 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Nyack Magnetic Resonance Imaging, P.C.**
2.8 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Pelham Imaging Associates, P.C.**
2.9 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Women's Imaging Consultants, P.C.**
2.10 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Pacific Imaging Consultants, A Medical Group,
Inc.**
2.11 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Total Medical Imaging, Inc.**
2.12 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and Valley Radiologists Medical Group, Inc.**
2.13 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and The Ide Group, P.C.**
2.14 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and M & S X-Ray Associates, P.A.**
2.15 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and South Texas MR, Inc.**
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
2.16 -- Agreement and Plan of Reorganization and Merger, dated
June 27, 1997 by and between American Physician Partners,
Inc., and San Antonio MR, Inc.**
2.17 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., Lexington
MR, Ltd., and the Sellers.**
2.18 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., Madison
Square Joint Venture and the Sellers.**
2.19 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., South Texas
No. 1 MRI Limited Partnership, a Texas limited
partnership, and the Sellers.**
2.20 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., San Antonio
MRI Partnership No. 2 Ltd., a Texas limited partnership,
and the Sellers.**
2.21 -- Agreement and Plan of Exchange, dated June 27, 1997 by
and among American Physician Partners, Inc., and the
Sellers.**
3.1 -- Restated Certificate of Incorporation of American
Physician Partners, Inc.***
3.2 -- Amended and Restated Bylaws of American Physician
Partners, Inc.***
4.1 -- Form of certificate evidencing ownership of Common Stock
of American Physician Partners, Inc.*
4.2 -- Form of Convertible Promissory Note of American Physician
Partners, Inc.**
5.1 -- Opinion of Brobeck, Phleger & Harrison LLP***
10.1 -- American Physician Partners, Inc. 1996 Stock Option
Plan.**
10.2 -- Employment Agreement between American Physician Partners,
Inc. and Gregory L. Solomon.**
10.3 -- Employment Agreement between American Physician Partners,
Inc. and Mark S. Martin.**
10.4 -- Employment Agreement between American Physician Partners,
Inc. and Sami S. Abbasi.**
10.5 -- Employment Agreement between American Physician Partners,
Inc. and Paul M. Jolas.**
10.6 -- Form of Indemnification Agreement for certain Directors
and Officers.
10.7 -- Form of Registration Rights Agreement.**
10.8 -- Service Agreement, dated , 1997, by and
among American Physician Partners, Inc., APPI-Advanced
Radiology, Inc. and Carroll Imaging Associates, P.A.,
Diagnostic Imaging Associates, P.A., Drs. Thomas, Wallop,
Kim & Lewis, P.A., Drs. Copeland, Hyman & Shackman, P.A.,
Drs. DeCarlo, Lyon, Hearn & Pazourek, Harbor
Radiologists, P.A., Perilla, Sindler & Associates, P.A.**
10.9 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Ide Admin Corp.
and Ide Imaging Group, P.C.**
10.10 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., M & S X-Ray
Associates, P.A. and M & S Imaging Associates, P.A.**
10.11 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Rockland
Radiological Group, P.C. and The Greater Rockland
Radiological Group, P.C.**
</TABLE>
<PAGE> 170
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
10.12 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Advanced Imaging
of Orange County, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.13 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Central Imaging
Associates, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.14 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Nyack Magnetic
Resonance Imaging, P.C. and The Greater Rockland
Radiological Group, P.C.**
10.15 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Pelham Imaging
Associates, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.16 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Women's Imaging
Consultants, P.C. and The Greater Rockland Radiological
Group, P.C.**
10.17 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., APPI-Pacific
Imaging, Inc. and PIC Medical Group, Inc.**
10.18 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., Radiology and
Nuclear Medicine, a Professional Association and RNM
L.L.C.**
10.19 -- Service Agreement dated , 1997, by and
among American Physician Partners, Inc., APPI-Valley
Radiology, Inc. and Valley Radiology Medical Associates,
Inc.**
10.20 -- Consulting Agreement between American Physician Partners,
Inc. and Michael L. Sherman, M.D.
10.21 -- Office Building Lease Agreement between Dallas Main
Center Limited Partnership and American Physician
Partners, Inc.
10.22 -- First Amendment to Office Building Lease Agreement
between Dallas Main Center Limited Partnership and
American Physician Partners, Inc.
10.23 -- Credit Agreement by and among American Physician
Partners, Inc., GE Capital Corporation and the other
credit parties signatory thereto.
11.1 -- Statement re computation of per share earnings.****
21.1 -- Subsidiaries.*
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of DeJoy, Knauf & Blood, LLP.
23.4 -- Consent of Brobeck, Phleger & Harrison LLP (contained in
its opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney.***
</TABLE>
- ---------------
* To be filed by amendments.
** Incorporated by reference to the corresponding Exhibit number to the
Registrant's Registration Statement No. 333-31611 on Form S-4.
*** Previously filed.
**** Not Applicable.
<PAGE> 1
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this
____ day of _______________, 1997 between American Physician Partners, Inc., a
Delaware corporation (the "Company") and ____________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company;
and
WHEREAS, the Board of Directors of the Company have adopted a
Restated Certificate of Incorporation (the "Certificate") permitting the Board
of Directors to indemnify the officers and directors of the Company; and
WHEREAS, the Certificate and Section 145 of the Delaware General
Corporation Law, as amended ("Law"), by their nonexclusive nature permit
contracts between the Company and the officers and directors of the Company
with respect to indemnification of such officers and directors; and
WHEREAS, in accordance with the authorization as provided by the
Law, the Company may purchase and maintain a policy or policies of directors'
and officers' liability insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its officers and directors in the
performance of their obligations as officers and directors of the Company; and
WHEREAS, as a result of recent developments affecting the terms,
scope and availability of D & O Insurance there exists general uncertainty as
to the extent of protection afforded the Company's officers and directors by
such D & O Insurance and said uncertainty also exists under statutory and bylaw
indemnification provisions; and
WHEREAS, in recognition of past services and in order to induce
Indemnitee to continue to serve as an officer and/or a director of the Company,
the Company has determined and agreed to enter into this contract with
Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued
service as an officer and/or a director after the date hereof, the parties
hereto agree as follows:
1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to
hold harmless and indemnify Indemnitee to the full extent authorized or
permitted by the provisions of the Law, as such may be amended from time to
time, and Article VI of the Certificate, as such may be amended. In
furtherance of the foregoing indemnification, and without limiting the
generality thereof:
(a) Proceedings Other Than Proceedings by or in the
Right of the Company. Indemnitee shall be entitled to the rights of
indemnification provided in this
<PAGE> 2
Section 1(a) if, by reason of his Corporate Status (as hereinafter defined), he
is, or is threatened to be made, a party to or participant in any Proceeding
(as hereinafter defined) other than a Proceeding by or in the right of the
Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified
against all Expenses (as hereinafter defined), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such Proceeding or any claim, issue or matter
therein, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company and, with respect to any
criminal Proceeding, had no reasonable cause to believe his conduct was
unlawful.
(b) Proceedings by or in the Right of the Company.
Indemnitee shall be entitled to the rights of indemnification provided in this
Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to
be made, a party to or participant in any Proceeding brought by or in the right
of the Company to procure a judgment in its favor. Pursuant to this Section
1(b), Indemnitee shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection with such Proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company; provided, however, that, if
applicable law so provides, no indemnification against such Expenses shall be
made in respect of any claim, issue or matter in such Proceeding as to which
Indemnitee shall have been adjudged to be liable to the Company unless and to
the extent that the Court of Chancery of the State of Delaware, or the court in
which such Proceeding shall have been brought or is pending, shall determine
that such indemnification may be made.
(c) Indemnification for Expenses of a Party Who is
Wholly or Partly Successful. Notwithstanding any other provision of this
Agreement, to the extent that Indemnitee is, by reason of his Corporate Status,
a party to and is successful, on the merits or otherwise, in any Proceeding, he
shall be indemnified to the maximum extent permitted by law against all
Expenses actually and reasonably incurred by him or on his behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf in connection with each successfully resolved claim, issue or
matter. For purposes of this Section and without limitation, the termination
of any claim, issue or matter in such a Proceeding by dismissal, with or
without prejudice, shall be deemed to be a successful result as to such claim,
issue or matter.
2.
<PAGE> 3
2. ADDITIONAL INDEMNITY.
(a) Subject only to the exclusions set forth in Section
2(b) hereof, the Company hereby further agrees to hold harmless and indemnify
Indemnitee against any and all Expenses, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by Indemnitee in
connection with any Proceeding (including an action by or on behalf of the
Company) to which Indemnitee is, was or at any time becomes a party, or is
threatened to be made a party, by reason of his Corporate Status; provided,
however, that with respect to actions by or on behalf of the Company,
indemnification of Indemnitee against any judgments shall be made by the
Company only as authorized in the specific case upon a determination that
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company; and
(b) No indemnity pursuant to this Section 2 shall be
paid by the Company:
(i) In respect to remuneration paid to
Indemnitee if it shall be determined by a final judgment or other final
adjudication that such remuneration was in violation of law;
(ii) On account of any suit in which judgment is
rendered against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Company pursuant to the provisions
of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto
or similar provisions of any federal, state or local statutory law;
(iii) On account of Indemnitee's conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct; or
(iv) If a final decision by a court having
jurisdiction in the matter shall determine that such indemnification is not
lawful.
3. CONTRIBUTION. If the indemnification provided in
Sections 1 and 2 is unavailable and may not be paid to Indemnitee for any
reason other than those set forth in paragraphs (i), (ii) and (iii) of Section
2(b), then in respect to any Proceeding in which the Company is jointly liable
with Indemnitee (or would be if joined in such Proceeding), the Company shall
contribute to the amount of Expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Indemnitee
in such proportion as is appropriate to reflect (i) the relative benefits
received by the Company on the one hand and by the Indemnitee on the other hand
from the transaction from which such Proceeding arose, and (ii) the relative
fault of the Company on the one hand and of the Indemnitee on the other hand in
connection with the events which resulted in such Expenses, judgments, fines or
settlement amounts, as well as any other relevant equitable
3.
<PAGE> 4
considerations. The relative fault of the Company on the one hand and of the
Indemnitee on the other hand shall be determined by reference to, among other
things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such Expenses,
judgments, fines or settlement amounts. The Company agrees that it would not
be just and equitable if contribution pursuant to this Section 3 were
determined by pro rata allocation or any other method of allocation which does
not take account of the foregoing equitable considerations.
4. INDEMNIFICATION FOR EXPENSES OF A WITNESS.
Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding
to which Indemnitee is not a party, he shall be indemnified against all
Expenses actually and reasonably incurred by him or on his behalf in connection
therewith.
5. ADVANCEMENT OF EXPENSES. Notwithstanding any other
provision of this Agreement, the Company shall advance all reasonable Expenses
incurred by or on behalf of Indemnitee in connection with any Proceeding by
reason of Indemnitee's Corporate Status within ten days after the receipt by
the Company of a statement or statements from Indemnitee requesting such
advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by Indemnitee and shall include or be preceded
or accompanied by an undertaking by or on behalf of Indemnitee to repay any
Expenses advanced if it shall ultimately be determined that Indemnitee is not
entitled to be indemnified against such Expenses. Any advances and
undertakings to repay pursuant to this Section 5 shall be unsecured and
interest free. Notwithstanding the foregoing, the obligation of the Company to
advance Expenses pursuant to this Section 5 shall be subject to the condition
that, if, when and to the extent that the Company determines that Indemnitee
would not be permitted to be indemnified under applicable law, the Company
shall be entitled to be reimbursed, within thirty (30) days of such
determination, by Indemnitee (who hereby agrees to reimburse the Company) for
all such amounts theretofore paid; provided, however, that if Indemnitee has
commenced or thereafter commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, any determination made by the Company that Indemnitee
would not be permitted to be indemnified under applicable law shall not be
binding and Indemnitee shall not be required to reimburse the Company for any
advance of Expenses until a final judicial determination is made with respect
thereto (as to which all rights of appeal therefrom have been exhausted or
lapsed).
4.
<PAGE> 5
6. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO
INDEMNIFICATION.
(a) To obtain indemnification (including, but not
limited to, the advancement of Expenses and contribution by the Company) under
this Agreement, Indemnitee shall submit to the Company a written request,
including therein or therewith such documentation and information as is
reasonably available to Indemnitee and is reasonably necessary to determine
whether and to what extent Indemnitee is entitled to indemnification. The
Secretary of the Company shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has
requested indemnification.
(b) Upon written request by Indemnitee for
indemnification pursuant to the first sentence of Section 6(a) hereof, a
determination, if required by applicable law, with respect to Indemnitee's
entitlement thereto shall be made in the specific case: (i) if a Change in
Control (as hereinafter defined) shall have occurred, by Independent Counsel
(as hereinafter defined) in a written opinion to the Board of Directors, a copy
of which shall be delivered to Indemnitee (unless Indemnitee shall request that
such determination be made by the Board of Directors or the stockholders, in
which case the determination shall be made in the manner provided in Clause
(ii) below), or (ii) if a Change in Control shall not have occurred, (A) by the
Board of Directors by a majority vote of a quorum consisting of Disinterested
Directors (as hereinafter defined), or (B) if a quorum of the Board of
Directors consisting of Disinterested Directors is not obtainable or, even if
obtainable, if said Disinterested Directors so direct, by Independent Counsel
in a written opinion to the Board of Directors, a copy of which shall be
delivered to Indemnitee, or (C) if so directed by said Disinterested Directors,
by the stockholders of the Company; and, if it is determined that Indemnitee is
entitled to indemnification, payment to Indemnitee shall be made within ten
(10) days after such determination. Indemnitee shall cooperate with the
person, persons or entity making such determination with respect to
Indemnitee's entitlement to indemnification, including providing to such
person, persons or entity upon reasonable advance request any documentation or
information which is not privileged or otherwise protected from disclosure and
which is reasonably available to Indemnitee and reasonably necessary to such
determination. Any Independent Counsel, member of the Board of Directors, or
stockholder of the Company shall act reasonably and in good faith in making a
determination under the Agreement of the Indemnitee's entitlement to
indemnification. Any costs or expenses (including attorneys' fees and
disbursements) incurred by Indemnitee in so cooperating with the person,
persons or entity making such determination shall be borne by the Company
(irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(c) If the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b)
hereof, the Independent Counsel shall be selected as provided in this Section
6(c). If a Change in Control shall not have occurred, the Independent Counsel
shall be selected by the Board of Directors, and the
5.
<PAGE> 6
Company shall give written notice to Indemnitee advising him of the identity of
the Independent Counsel so selected. If a Change in Control shall have
occurred, the Independent Counsel shall be selected by Indemnitee (unless
Indemnitee shall request that such selection be made by the Board of Directors,
in which event the preceding sentence shall apply), and Indemnitee shall give
written notice to the Company advising it of the identity of the Independent
Counsel so selected. In either event, Indemnitee or the Company, as the case
may be, may, within 10 days after such written notice of selection shall have
been given, deliver to the Company or to Indemnitee, as the case may be, a
written objection to such selection; provided, however, that such objection may
be asserted only on the ground that the Independent Counsel so selected does
not meet the requirements of "Independent Counsel" as defined in Section 14 of
this Agreement, and the objection shall set forth with particularity the
factual basis of such assertion. Absent a proper and timely objection, the
person so selected shall act as Independent Counsel. If a written objection is
made and substantiated, the Independent Counsel selected may not serve as
Independent Counsel unless and until such objection is withdrawn or a court has
determined that such objection is without merit. If, within 20 days after
submission by Indemnitee of a written request for indemnification pursuant to
Section 6(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the Company or Indemnitee may petition the Court of
Chancery of the State of Delaware or other court of competent jurisdiction for
resolution of any objection which shall have been made by the Company or
Indemnitee to the other's selection of Independent Counsel and/or for the
appointment as Independent Counsel of a person selected by the court or by such
other person as the court shall designate, and the person with respect to whom
all objections are so resolved or the person so appointed shall act as
Independent Counsel under Section 6(b) hereof. The Company shall pay any and
all reasonable fees and expenses of Independent Counsel incurred by such
Independent Counsel in connection with acting pursuant to Section 6(b) hereof,
and the Company shall pay all reasonable fees and expenses incident to the
procedures of this Section 6(c), regardless of the manner in which such
Independent Counsel was selected or appointed. Upon the due commencement of
any judicial proceeding or arbitration pursuant to Section 8(a)(iii) of this
Agreement, Independent Counsel shall be discharged and relieved of any further
responsibility in such capacity (subject to the applicable standards of
professional conduct then prevailing).
(d) The Company shall not be required to obtain the
consent of the Indemnitee to the settlement of any Proceeding which the Company
has undertaken to defend if the Company assumes full and sole responsibility
for such settlement and the settlement grants the Indemnitee a complete and
unqualified release in respect of the potential liability.
7. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
(a) In making a determination with respect to
entitlement to indemnification hereunder, the person or persons or entity
making such determination shall presume that Indemnitee is entitled to
indemnification under this Agreement if Indemnitee
6.
<PAGE> 7
has submitted a request for indemnification in accordance with Section 6(a) of
this Agreement, and the Company shall have the burden of proof to overcome that
presumption in connection with the making by any person, persons or entity of
any determination contrary to that presumption.
(b) If the person, persons or entity empowered or
selected under Section 6 of this Agreement to determine whether Indemnitee is
entitled to indemnification shall not have made a determination within thirty
(30) days after receipt by the Company of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact, or an omission of a material
fact necessary to make Indemnitee's statement not materially misleading, in
connection with the request for indemnification, or (ii) a prohibition of such
indemnification under applicable law; provided, however, that such 30-day
period may be extended for a reasonable time, not to exceed an additional
fifteen (15) days, if the person, persons or entity making the determination
with respect to entitlement to indemnification in good faith requires such
additional time for the obtaining or evaluating documentation and/or
information relating thereto; and provided, further, that the foregoing
provisions of this Section 7(b) shall not apply (i) if the determination of
entitlement to indemnification is to be made by the stockholders pursuant to
Section 6(b) of this Agreement and if (A) within fifteen (15) days after
receipt by the Company of the request for such determination the Board of
Directors or the Disinterested Directors, if appropriate, resolve to submit
such determination to the stockholders for their consideration at an annual
meeting thereof to be held within seventy five (75) days after such receipt and
such determination is made thereat, or (B) a special meeting of stockholders is
called within fifteen (15) days after such receipt for the purpose of making
such determination, such meeting is held for such purpose within sixty (60)
days after having been so called and such determination is made thereat, or
(ii) if the determination of entitlement to indemnification is to be made by
Independent Counsel pursuant to Section 6(b) of this Agreement.
(c) The termination of any Proceeding or of any claim,
issue or matter therein, by judgment, order, settlement (with or without court
approval), conviction, or upon a plea of nolo contendere or its equivalent,
shall not (except as otherwise expressly provided in this Agreement) of itself
adversely affect the right of Indemnitee to indemnification or create a
presumption that Indemnitee did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company or, with respect to any criminal Proceeding, that Indemnitee had
reasonable cause to believe that his conduct was unlawful.
(d) For purposes of any determination of good faith,
Indemnitee shall be deemed to have acted in good faith if Indemnitee's action
is based on the records or books of account of the Enterprise (as hereinafter
defined), including financial statements, or on information supplied to
Indemnitee by the officers and directors of the Enterprise in the course of
their duties, or on the advice of legal counsel for the Enterprise
7.
<PAGE> 8
or on information or records given or reports made to the Enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Enterprise. In addition, the knowledge
and/or actions, or failure to act, of any director, officer, agent or employee
of the Enterprise shall not be imputed to Indemnitee for purposes of
determining the right to indemnification under this Agreement. The provisions
of this Section 7(d) shall not be deemed to be exclusive or to limit in any way
the other circumstances in which the Indemnitee may be deemed to have met the
applicable standard of conduct set forth in this Agreement.
8. REMEDIES OF INDEMNITEE.
(a) In the event that (i) a determination is made
pursuant to Section 6 of this Agreement that Indemnitee is not entitled to
indemnification under this Agreement, (ii) advancement of Expenses is not
timely made pursuant to Section 5 of this Agreement, (iii) no determination of
entitlement to indemnification shall have been made pursuant to Section 6(b) of
this Agreement within 90 days after receipt by the Company of the request for
indemnification, (iv) payment of indemnification is not made pursuant to
Section 3 or 4 of this Agreement within ten (10) days after receipt by the
Company of a written request therefor, or (v) payment of indemnification is not
made within ten (10) days after a determination has been made that Indemnitee
is entitled to indemnification or such determination is deemed to have been
made pursuant to Section 6 or 7 of this Agreement, Indemnitee shall be entitled
to an adjudication in an appropriate court of the State of Delaware, or in any
other court of competent jurisdiction, of his entitlement to such
indemnification. Alternatively, Indemnitee, at his option, may seek an award
in arbitration to be conducted by a single arbitrator pursuant to the
Commercial Arbitration Rules of the American Arbitration Association.
Indemnitee shall commence such proceeding seeking an adjudication or an award
in arbitration within 180 days following the date on which Indemnitee first has
the right to commence such proceeding pursuant to this Section 8(a). The
Company shall not oppose Indemnitee's right to seek any such adjudication or
award in arbitration.
(b) In the event that a determination shall have been
made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled
to indemnification, any judicial proceeding or arbitration commenced pursuant
to this Section 8 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination.
(c) If a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is entitled to indemnification,
the Company shall be bound by such determination in any judicial proceeding or
arbitration commenced pursuant to this Section 8, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification
under applicable law.
8.
<PAGE> 9
(d) In the event that Indemnitee, pursuant to this
Section 8, seeks a judicial adjudication of or an award in arbitration to
enforce his rights under, or to recover damages for breach of, this Agreement,
Indemnitee shall be entitled to recover from the Company, and shall be
indemnified by the Company against, any and all expenses (of the types
described in the definition of Expenses in Section 16 of this Agreement)
actually and reasonably incurred by him in such judicial adjudication or
arbitration, but only if he prevails therein. If it shall be determined in
said judicial adjudication or arbitration that Indemnitee is entitled to
receive part but not all of the indemnification sought, the expenses incurred
by Indemnitee in connection with such judicial adjudication or arbitration
shall be appropriately prorated. The Company shall indemnify Indemnitee
against any and all expenses and, if requested by Indemnitee, shall (within ten
(10) days after receipt by the Company of a written request therefor) advance
such expenses to Indemnitee, which are incurred by Indemnitee in connection
with any action brought by Indemnitee to recover under any directors' and
officers' liability insurance policies maintained by the Company, regardless of
whether Indemnitee ultimately is determined to be entitled to such
indemnification, advancement of expenses or insurance recovery, as the case may
be.
(e) The Company shall be precluded from asserting in
any judicial proceeding or arbitration commenced pursuant to this Section 8
that the procedures and presumptions of this Agreement are not valid, binding
and enforceable and shall stipulate in any such court or before any such
arbitrator that the Company is bound by all the provisions of this Agreement.
9. NONEXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE;
SUBROGATION.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which Indemnitee
may at any time be entitled under applicable law, the Certificate, any
agreement, a vote of stockholders or a resolution of directors, or otherwise.
No amendment, alteration or repeal of this Agreement or of any provision hereof
shall limit or restrict any right of Indemnitee under this Agreement in respect
of any action taken or omitted by such Indemnitee in his Corporate Status prior
to such amendment, alteration or repeal. To the extent that a change in the
Law, whether by statute or judicial decision, permits greater indemnification
than would be afforded currently under the Certificate and this Agreement, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits so afforded by such change. No right or remedy
herein conferred is intended to be exclusive of any other right or remedy, and
every other right and remedy shall be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other right or remedy.
(b) To the extent that the Company maintains an
insurance policy or policies providing liability insurance for directors,
officers, employees, or agents or fidu-
9.
<PAGE> 10
ciaries of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such person serves at
the request of the Company, Indemnitee shall be covered by such policy or
policies in accordance with its or their terms to the maximum extent of the
coverage available for any such director, officer, employee or agent under such
policy or policies.
(c) In the event of any payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
take all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.
(d) The Company shall not be liable under this
Agreement to make any payment of amounts otherwise indemnifiable hereunder if
and to the extent that Indemnitee has otherwise actually received such payment
under any insurance policy, contract, agreement or otherwise.
10. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding
any other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors or (b)
such Proceeding is being brought by the Indemnitee to assert his rights under
this Agreement.
11. DURATION OF AGREEMENT. All agreements and obligations of
the Company contained herein shall continue during the period Indemnitee is an
officer and/or a director of the Company (or is or was serving at the request
of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise) and shall
continue thereafter so long as Indemnitee shall be subject to any Proceeding
(or any proceeding commenced under Section 8 hereof) by reason of his Corporate
Status, whether or not he is acting or serving in any such capacity at the time
any liability or expense is incurred for which indemnification can be provided
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or
assets of the Company), assigns, spouses, heirs, executors and personal and
legal representatives. This Agreement shall continue in effect regardless of
whether Indemnitee continues to serve as an officer and/or a director of the
Company or any other enterprise at the Company's request.
12. SECURITY. To the extent requested by the Indemnitee and
approved by the Board of Directors, the Company may at any time and from time
to time provide security to the Indemnitee for the Company's obligations
hereunder through an irrevocable
10.
<PAGE> 11
bank line of credit, funded trust or other collateral. Any such security, once
provided to the Indemnitee, may not be revoked or released without the prior
written consent of the Indemnitee.
13. ENFORCEMENT.
(a) The Company expressly confirms and agrees that it
has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce Indemnitee to serve as an officer and/or a director
of the Company, and the Company acknowledges that Indemnitee is relying upon
this Agreement in serving as an officer and/or a director of the Company.
(b) This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied,
between the parties hereto with respect to the subject matter hereof.
14. DEFINITIONS. For purposes of this Agreement:
(a) "Change in Control" means a change in control of
the Company occurring after the date of this Agreement of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1934 (the "Act"),
whether or not the Company is then subject to such reporting requirement;
provided, however, that, without limitation, such a Change in Control shall be
deemed to have occurred if after the date of this Agreement (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Act, as amended) other
than a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Act), directly or indirectly, of securities of
the Company representing 15% or more of the combined voting power of the
Company's then outstanding securities (other than any such person or any
affiliate thereof that is such a 15% beneficial owner as of the date hereof)
without the prior approval of at least two-thirds of the members of the Board
of Directors in office immediately prior to such person attaining such
percentage interest; (ii) there occurs a proxy contest, or the Company is a
party to a merger, consolidation, sale of assets, plan of liquidation or other
reorganization, as a consequence of which members of the Board of Directors in
office immediately prior to such transaction or event constitute less than a
majority of the Board of Directors thereafter; or (iii) during any period of
two consecutive years, other than as a result of an event described in clause
(a)(ii) of this Section 16, individuals who at the beginning of such period
constituted the Board of Directors (including for this purpose any new director
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors
11.
<PAGE> 12
then still in office who were directors at the beginning of such period) cease
for any reason to constitute at least a majority of the Board of Directors. A
Change in Control shall not be deemed to have occurred under item (i) above if
the "person" described under item (i) is entitled to report its ownership on
Schedule 13G promulgated under the Act and such person is able to represent
that it acquired such securities in the ordinary course of its business and not
with the purpose nor with the effect of changing or influencing the control of
the Company, nor in connection with or as a participant in any transaction
having such purpose or effect. If the "person" referred to in the previous
sentence would at any time not be entitled to continue to report such ownership
on Schedule 13G pursuant to Rule 13d-1(b)(3)(i)(B) of the Act, then a Change in
Control shall be deemed to have occurred at such time.
(b) "Corporate Status" describes the status of a person
who is or was a director, officer, employee or agent or fiduciary of the
Company or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such person is or was serving
at the express written request of the Company.
(c) "Disinterested Director" means a director of the
Company who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(d) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the express written request
of the Company as a director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or
expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, participating, or
being or preparing to be a witness in a Proceeding.
(f) "Independent Counsel" means a law firm, or a member
of a law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent: (i)
the Company or Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under this Agreement, or
of other indemnitees under similar indemnification agreements), or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee's rights
under this Agreement. The Company agrees to pay the reasonable fees of the
Independent Counsel referred to above
12.
<PAGE> 13
and to fully indemnify such counsel against any and all Expenses, claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto.
(g) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in
which Indemnitee was, is or will be involved as a party or otherwise, by reason
of the fact that Indemnitee is or was an officer and/or a director of the
Company, by reason of any action taken by him or of any inaction on his part
while acting as an officer and/or a director of the Company, or by reason of
the fact that he is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise; in each case whether or not he is acting or serving
in any such capacity at the time any liability or expense is incurred for which
indemnification can be provided under this Agreement; including one pending on
or before the date of this Agreement; and excluding one initiated by an
Indemnitee pursuant to Section 8 of this Agreement to enforce his rights under
this Agreement.
15. SEVERABILITY. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of
any section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested thereby.
16. MODIFICATION AND WAIVER. No supplement, modification,
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
17. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to
notify the Company in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to any
Proceeding or matter which may be subject to indemnification covered hereunder.
The failure to so notify the Company shall not relieve the Company of any
obligation which it may have to the Indemnitee under this Agreement or
otherwise.
13.
<PAGE> 14
18. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to:
-----------------------
-----------------------
-----------------------
-----------------------
(b) If to the Company, to:
American Physician Partners, Inc.
2301 NationsBank Plaza
901 Main Street Dallas, Texas 75202-3721
Attention: President and Secretary
or to such other address as may have been furnished to Indemnitee by the
Company or to the Company by Indemnitee, as the case may be.
19. IDENTICAL COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall for all purposes be deemed to be
an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this
Agreement.
20. HEADINGS. The headings of the paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction thereof.
21. GOVERNING LAW. The parties agree that this Agreement
shall be governed by, and construed and enforced in accordance with, the laws
of the State of Delaware without application of the conflict of laws principles
thereof.
14.
<PAGE> 15
22. GENDER. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
AMERICAN PHYSICIAN PARTNERS, INC., a Delaware
corporation
By
-----------------------------------------
Its
-----------------------------------------
---------------------------------------------
-------------------------------, Indemnitee
15.
<PAGE> 1
EXHIBIT 10.20
CONSULTING AGREEMENT
This CONSULTING AGREEMENT (the "Agreement") is entered into as of
August 21, 1997, by and between American Physician Partners, Inc., a Delaware
corporation (the "Company"), and Michael L. Sherman, M.D., a resident of the
state of Maryland (the "Consultant").
RECITALS
The Consultant has gained valuable management knowledge and experience
as the President of Advanced Radiology, L.L.C. and as a radiologist.
The Company desires to benefit from such knowledge and experience by
obtaining consulting services from the Consultant, and the Consultant is
willing to provide such consulting services to the Company.
AGREEMENT
Based on the recitals set forth above and the mutual promises
contained herein, the parties agree as follows:
ARTICLE 1
1.1 Engagement. The Company hereby engages the Consultant as
consultant and advisor, effective as of the date immediately following
the consummation of the Company's initial public offering (the
"Effective Time"), with respect to the matters specified herein,
subject to the terms and conditions hereof, and for the compensation
provided herein. The Consultant accepts this engagement, effective as
of the Effective Time, as a consultant and advisor to the Company,
subject to the terms and conditions hereof.
1.2 Tasks and Duties.
(a) Commitment. Throughout the Term (defined below), the
Consultant, on a part-time basis, shall devote his
professional time, energy, skill and efforts to the
performance of the Consultant's tasks and duties hereunder in
a manner that will faithfully and diligently further the
business and interests of the Company, its subsidiaries and
the medical practices, diagnostic imaging centers and other
entities affiliated or that potentially may be affiliated
with the Company. The Company recognizes that the Consultant
(i) shall continue as the President of the professional
entity that succeeds Advanced Radiology, L.L.C. (the
"Advanced Professional Entity") following the Effective Time,
(ii) shall continue to provide medical services, and (iii)
(so long as there is not any breach of any restrictive
covenant between the Company and the Consultant including,
<PAGE> 2
but not limited to, (i) the restrictions regarding
non-solicitation and non-competition set forth in this
Agreement and the exhibit hereto, (ii) the Consultant's
employment agreement with the Advanced Professional Entity,
(iii) the Service Agreement between the Company and the
Advanced Professional Entity or (iv) the Agreement and Plan
of Reorganization and Merger by and between Advanced
Radiology, L.L.C. and the Company (collectively, the
"Restrictive Covenants") may pursue other professional and
business efforts. The Consultant, without his prior written
consent, shall not be required to commit more than twenty
percent (20%) of his annual professional time providing
services under this Agreement.
(b) Tasks and Responsibilities of Parties. During the Term
hereof, Consultant will be subject to the general direction
of the Company and will perform the consulting services
requested by the Company, at times and places as are mutually
agreed upon by Consultant and the Company; provided, however,
that Consultant, subject to his other responsibilities and
long-standing commitments, shall be available for
assignments, meetings, and other projects during reasonable
business hours with reasonable advance notice from the
Company. Consultant's duties shall include, but not be
limited to, assisting the Company in recruiting, screening,
evaluating and recommending radiology practices and imaging
centers for affiliation with or acquisition by the Company.
In addition, Consultant shall assist the Company in its
efforts to develop and expand its (i) networks through the
addition of hospitals and/or managed care organizations, (ii)
strategic alliances with other health care providers and
payors, (iii) relationships with equipment and supply vendors
and (iv) plan for outsourcing imaging services from
hospitals.
(c) Standards of Duty. During the Term, the Consultant shall
apply reasonable efforts and skills to his duties hereunder
and shall make available to the Company his judgment and
experience in the areas of radiology and radiology management
services.
(d) Cooperation. The Consultant shall use diligent efforts to aid
the Company, its subsidiaries, and the medical practices they
affiliate with in establishing and maintaining the Company's
and its subsidiaries' goodwill and reputation with other
medical groups, suppliers, customers, creditors, and the
investment and business communities generally.
1.3 Term. The Term (herein so called) hereof shall be for a period of
three years, commencing on the date immediately following the
consummation of the Company's initial public offering.
2
<PAGE> 3
1.4 Compensation and Expenses.
(a) Compensation. Subject to the terms and conditions hereof, in
consideration of the consulting services to be rendered by
the Consultant to the Company hereunder, and in consideration
of the covenants of the Consultant set forth herein, the
Company hereby agrees to pay the Consultant as compensation
$100,000 per annum, payable monthly. The Consultant shall be
responsible for all federal, state and local income taxes,
Social Security, FICA, FUTA and other amounts required by
law.
(b) Payment and Reimbursement of Expenses. During the Term, the
Company shall pay or reimburse the Consultant for all
reasonable travel and other expenses incurred by the
Consultant in performing the Consultant's obligations
hereunder in accordance with the policies and procedures of
the Company for its consultants, provided that the Consultant
properly accounts therefor in accordance with the regular
policies of the Company. Any single expense (other than an
air fare shown to be the best rate then available) in excess
of the greater of (i) the threshold amount established by the
Company immediately following the commencement of the
Consultant's duties hereunder and on or near the annual
anniversary of such date during the Term or (ii) $1,000
individually shall be approved in advance by the Company in
writing.
(c) Annual Review. On each anniversary of the date of this
Agreement, the Board of Directors will review Consultant's
performance and establish assignments for the Consultant
hereunder for the up-coming year.
(d) Stock Options for Board of Directors. The compensation
provided to the Consultant by this Agreement shall be
distinct and separate from any stock option grants or other
compensation hereafter committed to be made by the Company to
the Consultant for service upon the Company's Board of
Directors or any committee thereof.
1.5 Independent Contractor. While serving as a Consultant, the
Consultant shall at all times be an independent contractor rather than
a co-venturer, agent, employee or representative of the Company or its
subsidiaries and, as a result, Consultant shall have no authority to
bind the Company.
1.6 Termination. This Agreement will terminate upon the occurrence of
any of the following events:
(a) the Consultant dies;
(b) the Company, by written notice to the Consultant or his
court-appointed guardian, after a determination by the
Company's Board of Directors, terminates this Agreement due
to the inability of the Consultant to perform the duties,
tasks and responsibilities under this Agreement for a period
exceeding 90 days by reason of injury, physical or mental
illness
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or other disability, which condition has been certified by a
physician; provided, however, that prior to terminating this
Agreement due to such disability, the Company shall give a
written statement of findings to the Consultant or his
court-appointed guardian setting forth specifically the
nature of the disability and the resulting performance
failures, and the Consultant shall have a period of twenty
(20) days thereafter to respond in writing to the Board of
Directors' findings;
(c) the Consultant is convicted of (or pleads guilty or nolo
contendre to) a felony or any misdemeanor involving
dishonesty or moral turpitude; after a determination by the
Company's Board of Directors, provided, however, that prior
to terminating this Agreement pursuant to this subsection,
the Company shall give a written statement of findings to the
Consultant setting forth specifically the grounds on which
cause is based, and the Consultant shall have a period of
twenty (20) days thereafter to respond in writing to the
Board of Directors' findings;
(d) the willful and continued failure of the Consultant to
substantially perform his services pursuant to the terms of
this Agreement (other than any such failure resulting from
illness or disability) after a written demand for substantial
performance is requested by the Company's Board of Directors,
which demand specifically identifies the manner in which it
is claimed that (i) the Consultant has not substantially
performed his duties or (ii) the Consultant is willfully
engaged in misconduct which has, or can reasonably be
expected to have, a direct and material adverse monetary
effect on the Company.
(e) The Consultant terminates this Agreement due to the default by
the Company in the performance of any of its obligations
hereunder and such default remains unremedied by the Company
for a period of twenty (20) days following its receipt of
written notice thereof from the Consultant;
(f) The Consultant voluntarily terminates this Agreement for any
reason upon at least 30 days advance written notice;
(g) The Consultant breaches any Restrictive Covenant; or
(h) For purposes of this section, no act or failure to act on the
Consultant's part shall be considered "willful" if done, or
omitted to be done by the Consultant in good faith and with
reasonable belief that the Consultant's action or omission
was in the best interest of the Company. No termination shall
be effected under subsections (d) or (g) unless the
Consultant has been provided with specific information in the
form of a notice as to the acts or omissions which form the
basis of the allegation of the reasons for termination and
the Consultant has had an opportunity to be heard, with
counsel if so desired, before the Board of Directors and
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such Board determines, by majority vote, in good faith that
the Consultant (i) for purposes of subsection (g), breached a
Restrictive Convenant and failed to cure such breach within
20 days of such notice or (ii) for purposes of subsection
(c), was guilty of conduct resulting in the basis of
termination under such subsection, specifying the particulars
thereof in detail.
1.7 Effects of Termination.
(a) Upon termination of this Agreement for any reason, the
Company will pay the Consultant all compensation owed to the
Consultant and unpaid through the date of termination
(including expense reimbursements).
(b) In addition, if this Agreement is terminated under Section
1.6 (e), then the Company shall also pay the Consultant a
lump sum equal to the number of months remaining in the
original Term from the termination date at the
then-applicable annual rate.
(c) Upon termination of this Agreement for any reason (other
than under Section 1.6(e)), the Consultant agrees that for
the one-year period following the termination of this
Agreement:
(i) The Consultant shall not directly or indirectly, whether
as an individual, employee, director, consultant or
advisor, or in any other capacity whatsoever, provide
services to any person, firm, corporation or other
business enterprise (other than the Advanced
Professional Entity or its affiliated entities;
provided, that the Advanced Professional Entity or any
of its affiliated entities remains a party to and is in
compliance with a service agreement with the Company)
which is involved in the acquisition or management of
radiology physician practices or other service company
that provides management services in the area of
radiology where the Company is operating at the time of
termination, unless the Consultant obtains the prior
written consent of the Company's Board of Directors.
(ii) The Consultant will not directly or indirectly encourage
or solicit, or attempt to encourage or solicit, any
individual to leave the Company's employ for any reason
or materially interfere with the employment
relationships at the time existing between the Company
and its current or prospective (individuals involved in
discussions with the Company regarding employment
arrangements) employees.
(iii) The Consultant will not induce or attempt to induce any
provider, payor, customer, supplier, distributor,
licensee or other business relation of the Company to
cease doing business with the Company or materially
interfere with the existing business relationship
between any
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such customer, supplier, distributor, licensee or other
business relation and the Company.
The Consultant acknowledges that monetary damages may not be
sufficient to compensate the Company for any economic loss which may
be incurred by reason of breach of the foregoing restrictive
covenants. Accordingly, in the event of any such breach, the Company
shall, in addition to any remedies available to the Company at law, be
entitled to obtain equitable relief in the form of an injunction
precluding the Consultant from continuing to engage in such breach. If
any restriction set forth in this paragraph is held to be
unreasonable, then the Consultant and the Company agree, and hereby
submit, to the reduction and limitation of such prohibition to such
area or period as shall be deemed reasonable.
1.8 General Provisions.
(a) Assignment. Neither party may assign or delegate any of his
or its rights or obligations under this Agreement without the
prior written consent of the other party.
(b) Entire Agreement. This Agreement, including Exhibit 1
attached hereto, contains the entire agreement between the
parties with respect to the subject matter hereof and
supersedes any and all prior agreements between the parties
relating to such subject matter.
(c) Modifications. This Agreement may be changed or modified
only by an agreement in writing signed by both parties
hereto.
(d) Period of Limitations. No legal action shall be brought and
no cause of action shall be asserted by or on behalf of the
Consultant, the Consultant's spouse, heirs, assigns,
executors or personal or legal representatives (collectively,
the "Consultant's Affiliates") against the Company or any
Company Affiliate (defined below) after the expiration of two
years from the date of accrual of such cause of action, and
any claim or cause of action of the Consultant or any
Consultant Affiliate shall be extinguished and deemed
released unless asserted by the timely filing of a legal
action within such two-year period.
(e) Indulgences, Etc. Neither the failure nor any delay on the
part of either party to exercise any right, remedy, power or
privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, remedy,
power or privilege preclude any other or further exercise of
the same or of any right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power, or privilege
with respect to any occurrence be construed as a waiver of
such right, remedy, power or privilege with respect to any
other occurrence.
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(f) Successors and Assigns. The provisions of this Agreement
shall inure to the benefit of, and be binding upon the
Company, its successors and permitted assigns, and the
purchaser of all or substantially all of the assets of the
Company and the Consultant whether or not any such person
shall have become a party to this Agreement and have agreed
in writing to join and be bound by the terms and conditions
hereof.
(g) Governing Law. This Agreement shall be governed by and
construed, interpreted and applied in accordance with the
laws of the State of Maryland, excluding any choice-of-law
rules that would refer the matter to the laws of another
jurisdiction.
(h) Provisions Separable. The provisions hereof are independent
of and separable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of
the fact that for any reason any other or others of them may
be invalid or unenforceable in whole or in part. If any
provision hereof, or the application thereof to any situation
or circumstance, shall be invalid or unenforceable in whole
or in part, then the parties shall seek in good faith to
replace any such legally invalid provision or portion thereof
with a valid provision that, in effect, will most nearly
effectuate the parties' intentions in entering into this
Agreement.
(i) The Consultant's Sole Remedy. The Consultant's sole remedy
shall be against the Company (or any assignee or successor to
all or substantially all the assets of the Company or any
transferee in receipt of material assets of the Company
transferred in fraud of creditors (collectively, "Assigns"))
for any Consultant Claim (defined below). The Consultant
shall have no claim or right of any nature whatsoever against
any of the Company's or any of its subsidiaries' directors,
officers, employees, direct and indirect stockholders,
owners, trustees, beneficiaries or agents, irrespective of
when any such person held such status (collectively, the
"Company Affiliates") (other than Assigns) arising out of any
Consultant Claim (unless the conduct of such persons
constitutes intentional or grossly negligent conduct on the
part of such persons). The Consultant, on his own behalf and
on behalf of the Consultant Affiliates, hereby releases and
covenants not to sue any person other than the Company or its
Assigns over any Consultant Claim. The Company Affiliates
shall be third-party beneficiaries of this Agreement for
purposes of enforcing the terms of this Section 1.8(i)
("Consultant's Sole Remedy") against the Consultant and the
Consultant Affiliates. Except as set forth in the immediately
preceding sentence, nothing herein, express or implied, is
intended to confer upon any party, other than the parties
hereto, any rights, remedies, obligations or liabilities
under or by reason hereof and no person who is not a party
hereto may rely on the terms hereof.
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Upon termination of the Consultant's engagement, the
sole claim of the Consultant and the Consultant Affiliates
against the Company and its Assigns for the Consultant Claims
will be for the amounts described in Section 1.4
(Compensation and Expenses) and Section 1.7, as applicable,
and the Consultant and the Consultant Affiliates shall have
no claim against the Company or its Assigns for any
Consultant Claim, other than those set forth in Sections 1.4
and 1.7 or against any Company Affiliate (other than Assigns)
for the Consultant Claims, including without limitation any
claim for damages of any nature, be they actual, direct,
indirect, special, punitive or consequential. The Consultant,
on his own behalf and on behalf of the Consultant Affiliates,
hereby releases and covenants not to sue for, collect or
otherwise recover any amount against the Company or its
Assigns for any Consultant Claim, other than the amounts set
forth in Sections 1.4 and 1.7, or against any Company
Affiliate (other than Assigns) for any Consultant Claim.
"The Consultant Claim" shall mean any claim,
liability or obligation of any nature whatsoever arising out
of this Agreement or an alleged breach of this Agreement or
the termination of this Agreement; provided, however, that
the term "The Consultant Claim" shall not include claims
arising in favor of creditors of the Company generally,
including claims arising out of any fraudulent conveyance or
other transfer of assets in fraud of creditors or claims not
directly relating to this Agreement.
(j) Indemnification by the Company.
(a) The Company shall indemnify the Consultant who was or
is a party or is threatened to be made a party to any
threatened, pending or completed action, suit, or proceeding,
whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Company) by
reason of the fact that he is or was a Consultant against
expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit, or proceeding if
he acted in good faith and a manner he reasonably believed to
be in or not opposed to the best interests of the Company,
and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The
determination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the Consultant did not act in good faith and
in a manner which he reasonably believed to be in or not
opposed to the best interests of the Company, and with
respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
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(b) Any indemnification under this subsection (j) shall
be made by the Company only as authorized in the specific
case upon its determination that indemnification of the
Consultant is proper in the circumstances because he has met
the applicable standard of conduct set forth in the preceding
paragraph. Such determination shall be made (1) by a majority
vote of the directors who are not parties to such action,
suit, or proceeding, even though less than a quorum, or (2)
if there are no such directors or if such directors so
direct, by independent legal counsel in a written opinion or
(3) by the stockholders. Expenses (including attorneys' fees)
incurred by the Consultant in defending any civil, criminal,
administrative or investigative action, suit or proceeding
shall be paid by the Company following final disposition of
such action, suit or proceeding if it is determined that he
is entitled to indemnification by the Company as specified in
this subsection (j).
1.9 Notices, Etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by
certified or registered mail, postage prepaid with return receipt
requested, telecopy (with hardcopy delivered by overnight courier
service), or delivered by hand, messenger or overnight courier service
(if appropriate receipt or other evidence of delivery is obtained),
and shall be deemed given when received at the addresses of the
parties set forth below, or at such other address furnished in writing
to the other parties hereto.
If to the Consultant: Michael L. Sherman, M.D.
101 Old Crossing Drive
Baltimore, Maryland 21208
with a copy to : William E. Carlson, Esq.
Shapiro and Olander
2000 Charles Center South
36 South Charles Street
Baltimore, Maryland 21201
(410) 539-7611
If to Company: American Physician Partners, Inc.
2301 NationsBank Plaza
901 Main Street
Dallas, Texas 75202-3721
Attention: Paul M. Jolas
(214) 761-3150 (fax)
2.0 Headings; Index. The headings of paragraphs and Sections herein
are included solely for convenience of reference and shall not control
the meaning or interpretation of any of the provisions hereof. The
words "herein," "hereof," "hereto" and "hereunder" and other words of
similar import refer hereto as a whole and not to any particular
Article, Section or other subdivision.
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2.1 Authorization and Voluntary Agreement. The Company represents that
this Agreement has been duly authorized by its Board of Directors and
is binding on the Company in accordance with its terms. The Consultant
acknowledges that he has had sufficient time and opportunity to read
and understand this Agreement and to consult with his legal counsel
and other advisors regarding the terms and conditions set forth
herein.
2.2 Further Assurances. The parties will execute such further
instruments and take such further actions as may be reasonably
necessary to carry out the intent of this Agreement.
2.3 Legal Fees and Expenses. In the event of any disputes under this
Agreement, each party shall be responsible for their own legal fees
and expenses which it may incur in resolving such dispute, unless
otherwise prohibited by applicable law or a court of competent
jurisdiction.
2.4 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Sherman have executed this
Consulting Agreement, effective as of the day and year first above
written.
COMPANY SHERMAN
AMERICAN PHYSICIAN PARTNERS, INC.
-----------------------------
a Delaware corporation Michael L. Sherman, M.D.
Address:
-----------------------------
-----------------------------
By:
---------------------------
Gregory L. Solomon
President & CEO
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EXHIBIT 1
CONFIDENTIALITY, PROPRIETARY INFORMATION AND
INVENTIONS AGREEMENT
This Agreement (the "Agreement"), is made and entered into as of August 21,
1997 by and between American Physician Partners, Inc., a Delaware corporation
(hereafter together with its affiliates known as the "Company"), and Michael L.
Sherman, M.D. (the "Consultant"), a resident of the State of Maryland as of the
date of this Agreement. In consideration of the Consultant's continued
retention by the Company and in further consideration of the mutual covenants,
promises and conditions set forth in this Agreement and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Treatment of Confidential Information. The Consultant
recognizes and acknowledges that the trade secrets and confidential information
of the Company (the "Proprietary Information"), as they may exist from time to
time, are valuable, special and unique assets of the Company's Business (as
defined below). The Consultant further acknowledges that access to such
Proprietary Information is essential to the performance of the Consultant's
duties as a Company consultant. Therefore, in order to obtain access to such
Proprietary Information, the Consultant agrees that the Consultant will not in
whole or in part, disclose such Proprietary Information to any person, firm,
corporation, association or any other entity for any reason or purpose
whatsoever (other than in furtherance of his duties as Consultant, e.g.,
negotiations with other parties), nor will the Consultant make use of any
such information for the Consultant's own purposes or for the benefit of any
person, firm, corporation, association, or other entity (except the Company,
its directors, officers, employees, attorneys, accountants and other advisors)
under any circumstances. For purposes of this Agreement, the term "trade
secrets" means the whole or any portion of any scientific or technical or
non-technical information, design, process, procedure, formula, computer
software product, documentation or improvement relating to the Company's
Business which (1) derives economic value, actual or potential, from not being
generally known to other persons who can obtain economic value from its
disclosure or use and (2) is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy or confidentiality, including, but
not limited to: (i) any technical or non-technical data, design, process,
procedure, formula, pattern, compilation, program, device, method, technique,
drawing, financial data, financial plan, product plan; (ii) computer software
programs including application operating system, data base, communication and
other computer software whether now or hereafter existing or developed for use
on any operating system; (iii) all modifications, enhancements and all options
available with respect thereto, and all future products developed or derived
therefrom; (iv) source and object codes, flow charts, coding sheets, routines,
subroutines, compilers, assemblers, designs, and related documentation and
manuals; (v) production processes, marketing techniques, arrangements, and
plans, mailing lists, purchasing information, pricing policies, quoting
procedures, financial information, strategies, forecasts, the compensation and
terms of employment of other consultants, customer and prospect names and
requirements,
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consultant, customer, supplier, and distributor data and other materials or
information; and (vi) results of research and development activities, including
new processes, formulas, inventions, computer related equipment or technology,
and design drawings and specifications.
The term "confidential information" means any and all data and information
relating to the Company's Business, other than trade secrets (1) which has
value to the company; (2) is not generally known by its competitors or the
public; and (3) is treated as confidential by the Company. The provisions of
this Section 1 will apply during the Consultant's retention by the Company and
for a three (3)-year period thereafter with respect to confidential
information, and during the Consultant's retention by the Company and at any
and all times thereafter with respect to trade secrets.
The restrictions of this Section 1 will not apply to any Proprietary
Information which, (a) is, at the time of disclosure, in the public domain,
provided that the Consultant was not responsible, directly or indirectly, for
such Proprietary Information entering the public domain without the Company's
prior written consent, or (b) such Proprietary Information as was known to the
Consultant upon the signing of this Agreement (excluding Proprietary
Information obtained from the Company) or becomes so known to the Consultant
solely from other sources. This Section 1, along with Sections 2, 3, and 4 of
this Agreement will survive any termination of this Agreement.
All documents, charts, graphs, notebooks, customer lists, computer disks, tapes
or printouts and other printed, typewritten or handwritten documents, whether
or not pertaining to Proprietary Information (collectively, "Company
Materials") furnished to the Consultant by the Company or the Business or
produced by the Consultant or others in connection with the Consultant's
retention shall be and remain the sole property of the Company. The Consultant
agrees that during the Consultant's retention by the Company, the Consultant
will not remove any Company Materials from the business premises of the Company
or deliver any Company Materials to any person or entity outside the Company,
except in connection with performing the duties of the Consultant's retention
by the Company.
The Consultant acknowledges, warrants and agrees to return to the Company all
Company assets, apparatus, equipment, other physical property, and Proprietary
Information, and Company Materials, in the Consultant's possession or to which
the Consultant has access including, without limitation, documents, drawings,
manuals, specifications, notes, computer programs, and other proprietary
materials, and any copies or excerpts thereof, and any other properties, client
lists, client contracts, files or documents obtained as a result of the
Consultant's retention by the Company immediately upon the termination of the
Consultant's consulting agreement with the Company by the Consultant or the
Company for any reason (or no reason) or during the term of the Consultant's
retention by the Company if requested by the Company; provided, however, that
the Consultant shall not be required to return (i) the Consultant's personal
copies of records relating to the Consultant's compensation, (ii) the
Consultant's personal copies of any materials previously distributed generally
to stockholders of the
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Company, and (iii) the Consultant's copy of this Agreement. The Company
recognizes that the Consultant is considerably experienced in the Company's
line of business and, while engaged with the Company, shall continue to pursue
compatible endeavors which are reviewed and approved in advance by the
Company's Board of Directors.
If the Consultant is requested or becomes compelled pursuant to a
civil lawsuit or any criminal investigation, indictment, or proceeding (by oral
questions, interrogatories, requests for information or documents, subpoena,
civil investigative demand or similar process) to disclose any of the
Confidential Information, the Consultant shall provide the Company with prompt
written notice prior to such request or demand for disclosure so that the
Company may seek a protective order or other appropriate remedy and the
Consultant agrees to use his best efforts to assist the Company in such matter.
In the event that such protective order or other remedy is not obtained, the
Company shall furnish only that portion of the Confidential Information that is
legally required, in the opinion of legal counsel reasonably acceptable to the
Company and shall exercise his best efforts to obtain reliable assurance that
confidential treatment will be accorded the Confidential Information.
2.A. Non-Solicitation Covenants. The Consultant agrees that, during the
Consultant's retention by the Company and for a period of one (1) year
following the termination of the Consultant's consulting agreement for whatever
reason (other than as set forth in Section 1.6(e) therein), the Consultant will
not directly or indirectly, on the Consultant's own behalf or in the service or
on behalf of any other individual or entity, with respect to the business of
the Company, (i) divert, solicit, or attempt to solicit any individual or
entity (a) who is a Client of the Company at any time during the twelve
(12)-month period prior to the Consultant's termination with the Company, or
was within such period actively sought by the Company as a prospective client,
and (b) with whom the Consultant had material contact while retained by the
Company, to provide Business services to such Clients or prospects; or (ii)
divert, solicit or hire away, or attempt to divert, solicit or hire away, to or
for any individual or entity which is engaged in providing Business services,
any person employed by the Company, whether or not such consultant is a
full-time consultant or temporary consultant, whether or not such consultant is
retained pursuant to written agreement and whether or not such consultant is
retained for a determined period or at will. For purposes of this Agreement,
"material contact" exists between the Consultant and each Client or actively
sought prospective client (i) with whom the Consultant dealt on behalf of the
Company; (ii) whose dealings with the Company were coordinated or supervised by
the Consultant; or (iii) about whom the Consultant obtained confidential
information in the course of the Consultant's retention by the Company.
For purposes of this Agreement, (i) "Business" means rendering billing,
accounts receivable, management and collection services, financial management
services, and practice management services to physicians and physician groups;
(ii) "Client" means any individual or entity to whom the Consultant has
provided services at any time during the period of the Consultant's retention
by the Company, as well as any entity employing or made up in part of an
individual who was the recipient (whether directly or indirectly
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through another entity) of the Company's Business services provided by the
Consultant at any time during the Consultant's retention.
2.B. Non-Interference. During the Consultant's retention by the Company and
for a one (1)-year period thereafter, the Consultant will not, directly or
indirectly, on the Consultant's own behalf or in the service of or on behalf of
any other individual or entity, interfere with, impair, disrupt, or attempt to
disrupt the Business, for the purpose of assisting a competitor of the Company
or for the purpose of intentionally harming the Company, whether by way of
interfering with (i) or raiding its consultants or employees, (ii) past,
present, or prospective relationships, contractual or otherwise, between the
Company and any supplier, vendor, consultant, distributor, representative, or
(iii) a Client of the Company with whom the Consultant had material contact
during the Consultant's retention. The term "prospective relationship" means
any relationship where the Company has actively sought an individual or entity
as a prospective supplier, consultant or client.
2.C. Construction. It is the primary goal of the Company to protect its
interests while preserving the Consultant's ability to earn a livelihood in the
Consultant's present domicile and to continue performing the approved
activities set forth in the Consultant's Consulting Agreement with the Company
and such other professional endeavors subject to review and approval in advance
by the Company's Board of Directors. Accordingly, this Section 2 will not
prohibit the Consultant from establishing the Consultant's own company,
provided however, that the Consultant, in any event is bound by Sections 2A and
2B above and by Sections 3 and 4 below. For purposes of these covenants, the
Consultant acknowledges that (i) the Company's business is or may become
national or international in scope, (ii) the number of potential persons and
entities for whom the Consultant can provide Business services (other than
Clients and prospective clients) is vast and consequently these covenants will
not unreasonably impair the Consultant's ability to engage in Business
activities after the termination of the Consultant's retention by the Company,
and (iii) the Consultant's training experience or technical skills are of such
breadth that they can be employed to advantage in other ways and consequently
the foregoing obligation will not unreasonably impair the Consultant's ability
to engage in business activities after the termination of the Consultant's
retention by the Company. The Company recognizes the Consultant's present
professional endeavors. Furthermore, the parties hereto agree that any judicial
authority construing all or any portion of this Section 2 will be empowered to
sever any portion of the applicable area, client base, prospective relationship
or prospect list of any prohibited business activity from the coverage of this
Section and to apply the provisions of this Section to the remaining portion of
the applicable area, the client base or the prospective relationship or
prospect list, or the remaining business activities not so severed by such
judicial authority. In addition, it is the intent of the parties that the
judicial authority replace each severed provision with a provision as similar
in terms to such severed provision as may be possible and be legal, valid, and
enforceable. It is the intent of the parties that this Section be enforced to
the maximum extent permitted by law. In the event that any provision of this
Section is determined not to be specifically enforceable, the Company
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will nevertheless be entitled to recover monetary damages as a result of the
breach of such provision by the Consultant.
3. Existing Restrictive Covenants. The Consultant represents and warrants
that the Consultant's retention by the Company, including the performance of
and compliance with all of the terms and provisions of this Agreement, do not
and will not breach any agreement which the Consultant has with any person,
entity, or former employer to keep in confidence confidential information or
not to compete with any such person, entity, or former employer. The Consultant
will not disclose to the Company or use on its behalf any confidential
information of any other party required to be kept confidential by the
Consultant.
4. Proprietary Rights. During the course of the Consultant's retention by
the Company and in the fulfillment of the Consultant's services to the Company,
and for a period of one (1) year thereafter, the Consultant may, either alone
or jointly with others, make, develop, or have developed or conceive or reduce
to practice any useful process, machine, composition of matter, computer
software or program, algorithm, work of authorship expressing such algorithm,
or any other discovery, document, invention, design, data or improvement which
relates to or is useful to the Company's Business (the "Inventions") whether or
not subject to copyright or patent protection, which relate to or are useful in
the business activities of the Company and which may or may not be considered
Proprietary Information. The Consultant acknowledges that all such Inventions
will be promptly disclosed to the Company's President and will be "works made
for hire" and will remain the sole and exclusive property of the Company. The
Consultant also hereby assigns and agrees to assign to the Company, in
perpetuity, all right, title and interest the Consultant may have in and to
such Inventions, including without limitation, all copyrights, and the right to
apply for any form of patent, utility model, industrial design or similar
proprietary right recognized by any state, country, or jurisdiction. The
Consultant further agrees, at the Company's request and expense, to do all
things and sign all documents or instruments necessary, in the opinion of the
Company, to eliminate any ambiguity as to the ownership of, and rights of the
Company to, such Inventions, including filing copyright and patent
registrations and defending and enforcing in litigation or otherwise all such
rights. The Company shall compensate the Consultant at a reasonable rate after
termination of the consulting agreement for time actually spent by the
Consultant at the Company's request on such assistance. In the event that the
Company is unable for any reason whatsoever to secure the Consultant's
signature to any lawful and necessary documents required to apply for or
execute any patent, copyright, or other applications with respect to such
Inventions and improvements (including renewals, extensions, continuations,
divisions or continuations in part thereof), the Consultant hereby irrevocably
designates and appoints the Company and its duly authorized officers and
agents, and each of them, as the Consultant's agents and attorneys-in-fact to
act for and in the Consultant's behalf and instead of the Consultant, to
execute and file any such application and to do all other lawfully permitted
acts to further the prosecution and issuance of patents, copyrights or other
rights thereof with the same legal force and effect as if executed by the
Consultant. The Consultant will not be obligated to assign to the Company any
Invention made by the Consultant while engaged
5
<PAGE> 16
by the Company which does not relate to any business or activity in which the
Company is or may become engaged, except that the Consultant is so obligated if
the same relates to or is based on Proprietary Information to which the
Consultant will have had access during and by virtue of the Consultant's
employment or which arises out of work assigned to the Consultant by the
Company. The Consultant will not be obligated to assign any Invention which may
be wholly conceived by the Consultant after the Consultant's consulting
agreement with the Company is terminated, except that the Consultant is so
obligated if such Invention involves the utilization of Proprietary Information
obtained while retained by the Company. The Consultant is not obligated to
assign any Invention which relates to or would be useful in any business or
activities in which the Company is engaged if such Invention was conceived and
reduced to practice by the Consultant prior to the Consultant's retention by
the Company.
5. Remedies. The Consultant agrees and acknowledges that the violation of
any of the covenants or agreements contained in Sections 1, 2, 3 and 4 of this
Agreement would cause irreparable injury to the Company, that the remedy at law
for any such violation or threatened violation thereof would be inadequate and
that the Company will be entitled, in addition to any other remedy, temporary
and permanent injunctive or other equitable relief without the necessity of
proving actual damages or posting a bond. The Consultant also acknowledges that
a breach of any of the terms of this agreement may result in action against the
Consultant, including immediate termination of the Consultant's retention by
the Company.
6. The Consultant's Status. Nothing in this Agreement will be construed
constituting a commitment, guarantee, agreement, or understanding of any kind
or nature that the Company will continue to retain the Consultant, nor will
this Agreement affect in any way the right of the Company, as expressly
provided therein, to terminate the consulting agreement of the Consultant at
any time and for any reason whatsoever. No change of the Consultant's duties as
a consultant of the Company will result in, or be deemed to be, a modification
of the terms of this Agreement.
7. Severability. Subject to the application of Section 2.C. to the
interpretation of Section 2, in case one or more of the provisions contained in
this Agreement is for any reason held to be invalid, illegal or unenforceable
in any respect, the same will not affect any other provision in this Agreement,
and this Agreement will be construed as if such invalid or illegal or
unenforceable provision had never been contained herein. It is the intent of
the parties that this Agreement be enforced to the maximum extent permitted by
law.
8. Miscellaneous. This Agreement and the Consulting Agreement executed
contemporaneously herewith embody the entire Agreement of the parties relating
to the narrow subject matter of this Agreement and specifically supersedes any
previously existing written or verbal, express or implied consulting agreements
between the Consultant and the Company. No amendment or modification of this
Agreement will be valid or binding upon the parties until made in writing and
signed by the parties. This Agreement will be binding upon the parties and
their respective heirs, representatives,
6
<PAGE> 17
successive transferees and permitted assigns. This Agreement is one for
personal service and will not be assigned by the Consultant. The Company may
assign this Agreement to any of its subsidiaries or affiliated companies,
provided that parent or any subsidiary or Affiliate fulfills the obligations of
the Company under the Consulting Agreement. This Agreement is entered into and
will be interpreted and enforced pursuant to the laws of the State of Texas
(without regard for conflicts of law), as of the date of this Agreement, as
first reflected above.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
AMERICAN PHYSICIAN PARTNERS, INC. CONSULTANT:
By: By:
------------------------------ -------------------------
Title: President and CEO
7
<PAGE> 1
EXHIBIT 10.21
OFFICE LEASE AGREEMENT
- --------------------------------------------------------------------------------
This Lease Agreement (this "Lease") is made this_____ day of________ ,
between DALLAS MAIN CENTER LIMITED PARTNERSHIP, a Delaware limited partnership
(hereinafter called "Landlord"), and AMERICAN PHYSICIAN PARTNERS, INC., a
Delaware corporation a (hereinafter called "Tenant"). This Lease consists of
this paragraph, the Basic Lease Provisions, the Supplemental Lease Provisions
and each exhibit, rider, schedule and addendum attached to the Basic Lease
Provisions and Supplemental Lease Provisions. Each capitalized term used, but
not defined, in the Supplemental Lease Provisions shall have the meaning
assigned to such term in the Basic Lease Provisions.
BASIC LEASE PROVISIONS
1. Building and Property:
a. The "BUILDING" is the office building and related retail shopping
area known as "NATIONSBANK PLAZA" situated on a tract of land in the
City and County of Dallas, Texas, bounded by Main, Griffin, Elm and
Lamar Streets and which is more particularly described in EXHIBIT A
attached hereto, and having a postal address of NationsBank Plaza,
901 Main Street, Dallas, Texas 75202. The "TOWER" includes (i) those
floors of the Building above the ground level, (ii) the ground floor
of the Building, (iii) the Executive Parking Garage (hereinafter
defined), and (iv) the portions of the basement area actually
occupied for office or office-related purposes. The "CONCOURSE" is
the retail shopping and service portion of the Building.
b. The "AGREED RENTABLE AREA OF THE BUILDING" is 1,844,608 square feet.
The "AGREED RENTABLE AREA OF THE TOWER" is 1,800,773 square feet.
c. The Building, the Land, the single level underground parking garage
beneath the Building (the "EXECUTIVE PARKING GARAGE") and the main
parking garage serving the Building and located on the land in the
City and County of Dallas, Texas, bounded by Main, Lamar, Commerce
and Austin Street (the "PARKING GARAGE" and together with the
Executive Parking Garage, the "PARKING FACILITIES"), all other
improvements located on the land described in EXHIBIT A and on the
land upon which the Parking Garage is located and all appurtenances
to the Building, the Parking Facilities and the Land are referred to
collectively in this Lease as the "PROPERTY".
2. Premises:
a. The "PREMISES" consist of the portion of the portion of the 23rd
floor of the Building, as more particularly described on EXHIBIT B
attached to the Supplemental Lease Provisions.
b. The "AGREED RENTABLE AREA OF THE PREMISES" is 10,475 square feet.
3. a. Basic Rent (See Article 2, Supplemental Lease Provisions):
<TABLE>
<CAPTION>
Rate Per Square Basic Basic
--------------------------------------------------------------------
Foot of Agreed Annual Monthly
Rentable Area Rent Rent
------------- ---- ----
<S> <C> <C>
$15.00 $157,125.00 $13,093.75
</TABLE>
b. A "MONTHLY ANNIVERSARY OF THE COMMENCEMENT DATE" shall mean the
numeric day of any calendar month that is the same numeric day as
the Commencement Date. The first "LEASE MONTH" shall commence on the
Commencement Date and end on and include the day preceding the first
Monthly Anniversary of the Commencement Date. Each other "LEASE
MONTH" shall commence on a Monthly Anniversary of the Commencement
Date and end on and include the day preceding the next occurring
Monthly Anniversary of the Commencement Date. Each "LEASE YEAR"
shall be twelve (12) Lease Months, but with
1
<PAGE> 2
the understandings that the first through fifth Lease Years shall
commence with the first day of the 1st, 13th, 25th, 37th, and 49th
Lease Months, respectively.
c. The "BASIC ANNUAL RENT" is the Basic Rent payable in respect of each
Lease Year. The "BASIC MONTHLY RENT" is the applicable Basic Annual
Rent, divided by 12. The Basic Annual Rent and Basic Monthly Rent
shall be increased at such time as the Premises are expanded in
accordance with the terms of this Lease or by the mutual written
agreement of Landlord and Tenant.
4. "LANDLORD'S ANNUAL OPERATING COSTS CONTRIBUTION" shall be equal to per
square foot Operating Costs (as defined in the Supplemental Lease
Provisions) for the calendar year 1996, MULTIPLIED BY the square feet of
Agreed Rentable Area of the Premises.
5. "LANDLORD'S ANNUAL REAL ESTATE TAXES CONTRIBUTION" shall be equal to the
per square foot Real Estate Taxes (as defined in the Supplemental Lease
Provisions) for the calendar year 1996, MULTIPLIED BY the square feet of
Agreed Rentable Area of the Premises.
6. The "TERM" of this Lease shall be equal to five (5) Lease Years and shall
commence on the Commencement Date (hereinafter defined); provided,
however, if the Commencement Date is a day other than the first day of a
calendar month, the Term shall be automatically extended to and shall
include the last day of the calendar month in which the last day of the
60th Lease Month occurs and Tenant shall pay Basic Monthly Rent and
Additional Rent then in effect.
7. The "COMMENCEMENT DATE" shall be October 12, 1996, but is subject to
adjustment as provided in Section 3 of the Work Letter (herein so called)
attached to the Supplemental Lease Provisions as EXHIBIT D.
8. The "EXPIRATION DATE" shall be the last day of the Term.
9. "SECURITY DEPOSIT": $13,093.75.
10. a. "TENANT'S BROKER": Mohr Partners.
b. "LANDLORD'S BROKER": Premisys Real Estate Services, Inc.
11. "PERMITTED USE: General Office Purposes Only.
12. All payments shall be sent to Landlord in care of Premisys Real Estate
Services, Inc. ("Property Manager") at the address set forth in Item 14
below or such other place as Landlord may designate from time to time.
All payments shall be in the form of check, provided that Landlord shall
have the right to require a different form of payment if Tenant ever
defaults in the payment of rent under this Lease and further provided
that payment by check shall not be deemed made if the check is not duly
honored with good funds.
13. Parking: Tenant shall have the parking rights set forth in EXHIBIT F, if
any, attached to the Supplemental Lease Provisions.
14. Addresses for notices due under this Lease (see Article 14, Supplemental
Lease Provisions):
2
<PAGE> 3
<TABLE>
<S> <C>
TO TENANT: TO LANDLORD FOR PAYMENT OF RENT:
To the Premises DALLAS MAIN CENTER LIMITED PARTNERSHIP
Attention: Paul Jolas c/o Premisys Real Estate Services, Inc.
4110 NationsBank Plaza
901 Main Street
Dallas, Texas 75202
Attn: Accounting Department
TO LANDLORD FOR NOTICES:
DALLAS MAIN CENTER LIMITED PARTNERSHIP
c/o Premisys Real Estate Services, Inc.
4110 NationsBank Plaza
901 Main Street
Dallas, Texas 75202
Attn: General Manager
WITH A COPY TO:
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
One Prudential Plaza, Suite 1300
Chicago, Illinois 60601
Attention: Vice President of Realty Group
</TABLE>
Landlord and Tenant are initialing these Basic Lease Provisions in the
appropriate space provided below as an acknowledgment that they are a part of
this Lease.
3
<PAGE> 4
LIST OF EXHIBITS AND RIDERS
TO
SUPPLEMENTAL LEASE PROVISIONS
<TABLE>
<S> <C>
Exhibit A Land Legal Description
Exhibit B Floor Plans
Exhibit C Operating Costs and Exclusions From Operating Costs
Exhibit D Work Letter
Exhibit E Acceptance of Premises Memorandum
Exhibit F Parking Agreement
Exhibit G Rules and Regulations
Exhibit H Hazardous Materials
Exhibit I Right of First Opportunity
</TABLE>
Initial:
Landlord:
------------
September 23, 1996
Tenant:
------------
<PAGE> 5
TABLE OF CONTENTS
FOR
SUPPLEMENTAL LEASE PROVISIONS
<TABLE>
<CAPTION>
Description Page
<S> <C>
ARTICLE 1--TERM AND POSSESSION....................................................................................1
SECTION 1.1 LEASE OF PREMISES, COMMENCEMENT AND EXPIRATION..................................................1
1.101 Lease of Premises.................................................................................1
1.102 Agreed Rentable Area..............................................................................1
1.103 Initial Term and Commencement.....................................................................1
SECTION 1.2 INSPECTION AND DELIVERY OF PREMISES, CONSTRUCTION OF
LEASE SPACE IMPROVEMENTS AND POSSESSION...................................................................1
1.201 Delivery..........................................................................................1
1.202 Tenant's Improvements.............................................................................1
1.203 Acceptance of Premises Memorandum.................................................................2
SECTION 1.3 REDELIVERY OF THE PREMISES.............................................................2
1.301 Obligation to Redeliver...........................................................................2
1.302 Failure to Deliver................................................................................3
SECTION 1.4 HOLDING OVER...........................................................................3
ARTICLE 2--RENT...................................................................................................4
SECTION 2.1 BASIC RENT.............................................................................4
SECTION 2.2 ADDITIONAL RENT........................................................................4
2.201 Definitions.......................................................................................4
2.202 Payment of Additional Rent........................................................................5
2.203 Billing Disputes..................................................................................7
2.204 Revisions in Estimated Additional Rent............................................................8
2.205 Tenant's Audit Right..............................................................................8
SECTION 2.3 RENT DEFINED AND NO OFFSETS...........................................................8
SECTION 2.4 LATE CHARGES...........................................................................8
ARTICLE 3--SECURITY DEPOSIT.......................................................................................9
ARTICLE 4--OCCUPANCY AND USE......................................................................................9
SECTION 4.1 USE OF PREMISES........................................................................9
4.101 General...........................................................................................9
4.102 Hazardous and Toxic Materials....................................................................10
SECTION 4.2 PERMITS...............................................................................10
SECTION 4.3 COMPLIANCE WITH LAWS..................................................................11
4.301 Tenant's Compliance Obligation...................................................................11
4.302 Landlord's Compliance Obligation.................................................................11
SECTION 4.4 RULES AND REGULATIONS................................................................12
SECTION 4.5 ACCESS...............................................................................12
SECTION 4.6 QUIET POSSESSION.....................................................................12
ARTICLE 5--UTILITIES AND SERVICES................................................................................12
</TABLE>
i
<PAGE> 6
<TABLE>
<S> <C> <C>
SECTION 5.1 SERVICES TO BE PROVIDED.............................................................12
5.101 Elevator Service.................................................................................12
5.102 Heat and Air Conditioning........................................................................12
5.103 Electricity......................................................................................13
5.104 Water............................................................................................14
5.105 Janitorial Services..............................................................................14
5.106 Common Areas.....................................................................................14
5.107 Bulbs and Ballasts...............................................................................14
5.108 Security Guard and Access System.................................................................15
SECTION 5.2 ADDITIONAL SERVICES..................................................................15
SECTION 5.3 TENANT'S OBLIGATION..................................................................15
SECTION 5.4 SERVICE INTERRUPTION.................................................................15
5.401 SERVICE INTERRUPTION/WAIVER OF LANDLORD LIABILITY................................................15
5.402 Limited Right to Abatement of Rent...............................................................16
SECTION 5.5 MODIFICATIONS........................................................................16
ARTICLE 6--MAINTENANCE, REPAIRS, ALTERATIONS AND IMPROVEMENTS....................................................16
SECTION 6.1 LANDLORD'S OBLIGATION TO MAINTAIN AND REPAIR.........................................16
SECTION 6.2 TENANT'S OBLIGATION TO MAINTAIN AND REPAIR...........................................16
6.201 Tenant's Obligation..............................................................................16
6.202 Rights of Landlord. ............................................................................16
SECTION 6.3 IMPROVEMENTS AND ALTERATIONS.........................................................17
6.301 Landlord's Construction Obligation...............................................................17
6.302 Alteration of Building. ........................................................................17
6.303 Alterations, Additions, Improvements and Installations by Tenant.................................18
6.304 Approvals........................................................................................18
ARTICLE 7--INSURANCE, FIRE AND CASUALTY..........................................................................19
SECTION 7.1 TOTAL OR PARTIAL DESTRUCTION OF THE BUILDING OR THE
PREMISES.................................................................................................19
SECTION 7.2 TENANT'S INSURANCE...................................................................20
7.201 Types of Coverage................................................................................20
7.202 Other Requirements of Insurance..................................................................20
7.203 Proof of Insurance. ............................................................................20
SECTION 7.3 LANDLORD'S INSURANCE.................................................................21
7.301 Types of Coverage................................................................................21
7.302 Self Insurance and Blanket Insurance. ...........................................................21
SECTION 7.4 WAIVER OF SUBROGATION................................................................21
SECTION 7.5 INDEMNITY............................................................................22
7.501 Tenant's Indemnity...............................................................................22
7.502 Landlord's Indemnity. ..........................................................................22
ARTICLE 8--CONDEMNATION..........................................................................................23
SECTION 8.1 CONDEMNATION--CONTINUED USE NOT FEASIBLE.............................................23
SECTION 8.2 TOTAL CONDEMNATION OF PREMISES.......................................................23
SECTION 8.3 CONDEMNATION WITHOUT TERMINATION. ...................................................23
SECTION 8.4 CONDEMNATION PROCEEDS................................................................24
</TABLE>
ii
<PAGE> 7
<TABLE>
<S> <C> <C>
ARTICLE 9--LIENS.................................................................................................24
ARTICLE 10--TAXES ON TENANT'S PROPERTY...........................................................................24
ARTICLE 11--SUBLETTING AND ASSIGNING.............................................................................25
SECTION 11.1 SUBLEASE AND ASSIGNMENT..............................................................25
11.101 General Prohibition on Assignment and Subleasing...............................................25
SECTION 11.2 LANDLORD'S RIGHTS.....................................................................26
11.201 Landlord's Termination and Consent Rights. ...................................................26
11.202 Effect of Termination..........................................................................27
SECTION 11.3 LANDLORD'S RIGHTS RELATING TO ASSIGNEE OR SUBTENANT...................................28
SECTION 11.4 ASSIGNMENT AND BANKRUPTCY.............................................................29
11.401 Assignments after Bankruptcy...................................................................29
11.402 Bankruptcy of Assignee.........................................................................29
ARTICLE 12--TRANSFERS BY LANDLORD, SUBORDINATION AND
TENANT'S ESTOPPEL CERTIFICATE................................................................................29
SECTION 12.1 SALE OF THE PROPERTY. ..............................................................29
SECTION 12.2 SUBORDINATION, ATTORNMENT AND NOTICE. ...............................................30
SECTION 12.3 TENANT'S ESTOPPEL CERTIFICATE. ......................................................30
ARTICLE 13--DEFAULT..............................................................................................31
SECTION 13.1 DEFAULTS BY TENANT. ................................................................31
13.101 Failure to Pay Rent. .........................................................................31
13.102 Failure to Perform. ..........................................................................31
13.103 Continual Failure to Perform. ................................................................31
13.104 Bankruptcy, Insolvency, Etc. .................................................................31
13.105 Loss of Right to do Business...................................................................32
13.106 Dissolution or Liquidation. ..................................................................32
SECTION 13.2 REMEDIES OF LANDLORD.................................................................32
13.201 Termination of the Lease. ....................................................................32
13.202 Repossession and Re-Entry. ...................................................................33
13.203 Cure of Default. .............................................................................33
13.204 Continuing Obligations. ......................................................................34
SECTION 13.3 DEFAULTS BY LANDLORD. ..............................................................34
SECTION 13.4 LANDLORD'S LIABILITY.................................................................34
13.401 Tenant's Rights in Respect of Landlord Default. ..............................................34
13.402 Certain Limitations on Landlord's Liability. .................................................34
SECTION 13.5 WAIVER OF TEXAS DECEPTIVE TRADE PRACTICES ACT. ......................................35
SECTION 13.6 LANDLORD'S LIEN. ....................................................................35
SECTION 13.7 CUMULATIVE REMEDIES...................................................................36
SECTION 13.8 VACATING PREMISES.....................................................................36
ARTICLE 14--NOTICES..............................................................................................36
</TABLE>
iii
<PAGE> 8
<TABLE>
<S> <C> <C>
ARTICLE 15--MISCELLANEOUS PROVISIONS.............................................................................36
SECTION 15.1 BUILDING NAME AND ADDRESS. ..........................................................36
SECTION 15.2 SIGNAGE. ............................................................................37
SECTION 15.3 NO WAIVER. ..........................................................................37
SECTION 15.4 APPLICABLE LAW. .....................................................................37
SECTION 15.5 COMMON AREAS, SERVICE CORRIDORS AND SERVICE AREAS.....................................37
SECTION 15.6 SUCCESSORS AND ASSIGNS. .............................................................38
SECTION 15.7 BROKERS. ............................................................................38
SECTION 15.8 SEVERABILITY. .......................................................................38
SECTION 15.9 EXAMINATION OF LEASE. ...............................................................38
SECTION 15.10 INTEREST ON TENANT'S OBLIGATIONS. ...................................................38
SECTION 15.11 TIME. ...............................................................................39
SECTION 15.12 DEFINED TERMS AND MARGINAL HEADINGS. ................................................39
SECTION 15.13 AUTHORITY OF TENANT. ................................................................39
SECTION 15.14 FORCE MAJEURE. ......................................................................39
SECTION 15.15 RECORDING. ..........................................................................39
SECTION 15.16 NO REPRESENTATIONS. .................................................................40
SECTION 15.17 PARKING. ............................................................................40
SECTION 15.18 ATTORNEYS' FEES. ....................................................................40
SECTION 15.19 NO LIGHT, AIR OR VIEW EASEMENT. .....................................................40
SECTION 15.20 RELOCATION. .........................................................................40
SECTION 15.21 SURVIVAL OF INDEMNITIES. ............................................................40
SECTION 15.22 ENTIRE AGREEMENT. ...................................................................40
</TABLE>
iv
<PAGE> 9
SUPPLEMENTAL LEASE PROVISIONS
ARTICLE 1--TERM AND POSSESSION
SECTION 1.1 LEASE OF PREMISES, COMMENCEMENT AND EXPIRATION.
1.101 LEASE OF PREMISES. In consideration of the mutual covenants herein and
subject to all the terms and conditions of this Lease, Landlord hereby
leases, demises and lets to Tenant and Tenant hereby leases and takes
from Landlord, the Premises (herein so called) as described as defined
in Item 2 of the Basic Lease Provisions.
1.102 AGREED RENTABLE AREA. The agreed rentable area of the Premises is hereby
stipulated to be the "Agreed Rentable Area of the Premises" set forth in
Item 2b of the Basic Lease Provisions and shall not be changed for any
reason other than an agreed upon addition or reduction of rentable area
of the Premises after the date hereof. The agreed rentable area of the
Tower and the agreed rentable area of the Building are hereby stipulated
to be the "Agreed Rentable Area of the Tower" and the "Agreed Rentable
Area of the Building", respectively, set forth in Item 1b of the Basic
Lease Provisions and shall not be changed for any reason other than an
agreed upon addition or reduction of rentable area of the Building after
the date hereof.
1.103 INITIAL TERM AND COMMENCEMENT. The initial term of this Lease shall be
the period of time specified in Item 6 of the Basic Lease Provisions.
The initial term shall commence on the Commencement Date set forth in
Item 7 of the Basic Lease Provisions (as such Commencement Date may be
adjusted pursuant to Section 3 of the Work Letter (herein so called)
attached hereto as EXHIBIT D) and, unless sooner terminated pursuant to
the terms of this Lease, the initial term of this Lease shall expire,
without notice to Tenant, on the Expiration Date set forth in Item 8 of
the Basic Lease Provisions.
SECTION 1.2 INSPECTION AND DELIVERY OF PREMISES, CONSTRUCTION OF
LEASE SPACE IMPROVEMENTS AND POSSESSION.
1.201 DELIVERY. Tenant hereby accepts delivery of the Premises. Tenant
acknowledges that Tenant has inspected the Premises and the Common Areas
(as hereinafter defined) and, except for latent defects discovered and
reported to Landlord by Tenant within 180 days from the Commencement
Date and subject to Landlord's obligations under this Lease, hereby (i)
accepts the Common Areas in "as is" condition for all purposes and (ii)
subject to Landlord's completion of its obligations under the Work
Letter, Tenant hereby accepts the Premises (including the suitability of
the Premises for the Permitted Use) for all purposes.
1.202 TENANT'S IMPROVEMENTS. Landlord will perform or cause to be performed
the work and/or construction of Tenant's Improvements (as defined in the
Work Letter) in accordance with the terms of the Work Letter and will
use reasonable efforts to Substantially Complete (as defined in the Work
Letter) Tenant's Improvements by the Commencement Date. If Tenant's
Improvements are not Substantially Complete by the Commencement Date set
forth in Item 7 of the Basic Lease Provisions for any reason whatsoever,
Tenant's sole and exclusive remedy shall be an adjustment of the
Commencement Date to the extent permitted under Section 3 of the Work
Letter.
1
<PAGE> 10
1.203 ACCEPTANCE OF PREMISES MEMORANDUM. Upon Substantial Completion (as
defined in the Work Letter) of Tenant's Improvements, Landlord and
Tenant shall execute the Acceptance of Premises Memorandum (herein so
called) attached hereto as EXHIBIT E. If Tenant occupies the Premises
and commences business therein without executing an Acceptance of
Premises Memorandum, Tenant shall be deemed to have accepted the
Premises for all purposes and Substantial Completion shall be deemed to
have occurred on the earlier to occur of (i) actual occupancy or (ii)
the Commencement Date set forth in Item 7 of the Basic Lease Provisions.
SECTION 1.3 DELIVERY OF THE PREMISES.
1.301 OBLIGATION TO REDELIVER. Upon the expiration or earlier termination of
this Lease or upon the exercise by Landlord of its right to re-enter the
Premises pursuant to subsection 13.202 below and subject to Tenant's
remaining obligations under this Section, Tenant shall immediately
deliver to Landlord the Premises free of offensive odors and in a safe,
clean, neat, sanitary and operational condition (ordinary wear and tear
and damage caused by condemnation or casualty excepted), together with
all keys and parking and access cards (it being understood that each
parking card not returned to Landlord shall be treated as a lost card
and Tenant shall pay Landlord an amount determined in accordance with
EXHIBIT F attached to these Supplemental Lease Provisions). Tenant
shall, upon the expiration or earlier termination of this Lease or
Landlord's re-entry of the Premises pursuant to subsection 13.202,
remove from the Premises, at the sole expense of Tenant, all equipment,
appliances, machinery, trade fixtures, furnishings and personalty
installed or placed in the Premises by or on behalf of Tenant.
Notwithstanding the foregoing, if Landlord is exercising its lien rights
against any such equipment, machinery, fixtures, furnishings and
personalty, then Tenant shall not remove same from the Premises. If
requested by Landlord in writing within thirty (30) days after the
expiration or earlier termination of this Lease or Landlord's re-entry
of the Premises pursuant to subsection 13.202, Tenant shall remove all
improvements made to the Premises by or on behalf of Tenant (other than
Tenant's Improvements and Installations approved by Landlord without the
written requirement that same be removed upon expiration or earlier
termination of the Lease) and restore the Premises to the condition
existing prior to the installation of such improvements (ordinary wear
and tear and damage caused by condemnation or casualty excepted). All
removals and work described above shall be accomplished in a good and
workmanlike manner and shall be conducted in a fashion so as not to
damage the Premises or the Building or any portion thereof or the
plumbing, electrical lines or other utilities serving the Building.
Tenant shall, at its expense, promptly repair any damage caused by any
such removal or work. If Tenant fails to deliver the Premises in the
condition aforesaid, then Landlord may restore the Premises to such a
condition at Tenant's expense. All property required to be removed
pursuant to this Section not removed within the time period required
hereunder shall thereupon be conclusively presumed to have been
abandoned by Tenant and Landlord may, at its option, take over
possession of such property and either (x) declare the same to be the
property of Landlord by written notice to Tenant at the address provided
herein or at such other address which Tenant provides to Landlord in
accordance with the provisions of Article
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14 below or (y) at the sole cost and expense of Tenant, remove and store
and/or dispose of the same or any part thereof in any manner that
Landlord shall choose without incurring liability to Tenant or any other
person on account thereof, including damage to such property (EVEN IF
SUCH DAMAGE IS CAUSED BY THE NEGLIGENCE OF LANDLORD, LANDLORD'S MOVERS
OR ANY STORAGE FACILITY).
1.302 FAILURE TO DELIVER. Notwithstanding any provision or inference to the
contrary herein contained, in the event that Tenant fails to deliver to
Landlord (and surrender possession of) all of the Premises upon the
expiration or earlier termination of this Lease (or the applicable
portion of the Premises if this Lease expires or terminates as to only a
portion of the Premises), then Landlord may, without judicial process
and without notice of any kind, immediately enter upon and take absolute
possession of the Premises or applicable portion thereof, expel or
remove Tenant and any other person or entity who may be occupying the
Premises or applicable portion thereof, change the locks to the Premises
or applicable portion thereof(in which event, Tenant shall have no right
to any key for the new locks), limit elevator access to the Premises or
applicable portion thereof, and take any other actions as are necessary
for Landlord to take absolute possession of the Premises or applicable
portion thereof. The foregoing rights are without prejudice and in
addition to, and shall not in any way limit Landlord's rights under,
Section 1.4 below or Landlord's remedies under Article 13 below.
SECTION 1.4 HOLDING OVER. In the event Tenant or any party under Tenant
claiming rights to this Lease, retains possession of the Premises after the
expiration or earlier termination of this Lease without the express written
consent of Landlord (each such retention of possession, a "HOLDOVER"), such
Holdover shall constitute and be construed as a tenancy at will only, subject,
however, to all of the terms, provisions, covenants and agreements on the part
of Tenant hereunder. In the event of any such Holdover, the parties holding
over shall be subject to immediate eviction and removal and Tenant or any such
party shall pay Landlord as rent for the period of such holdover an amount
equal to (i) the greater of the fair market rental value of the Premises (as
reasonably determined by Landlord) or one and one-half (1 1/2) times the Basic
Annual Rent in effect immediately preceding expiration or termination of this
Lease, plus (ii) Additional Rent (as hereinafter defined) in effect immediately
preceding expiration or termination of this Lease. Tenant shall also pay any
and all damages (including, without limitation, consequential damages)
sustained by Landlord as a result of such Holdover. The rent during such
Holdover period shall be payable to Landlord from time to time on demand;
provided, however, if no demand is made during a particular month, holdover
rent accruing during such month shall be paid in accordance with the provisions
of Article 2. No holding over by Tenant, whether with or without consent of
Landlord, shall operate to extend the term of this Lease; no payments of money
by Tenant to Landlord after the expiration or earlier termination of this Lease
shall reinstate, continue or extend the Term of this Lease; and no extension of
this Lease after the expiration or earlier termination thereof shall be valid
unless and until the same shall be reduced to writing and signed by both
Landlord and Tenant. If Landlord elects to cause Tenant to be ejected from the
Premises through judicial process and without in any way limiting Landlord's
rights under subsection 1.302 above, Tenant agrees that Landlord will not be
required to deliver Tenant more than one (1) day's notice to vacate prior to
Landlord's filing a forcible detainer suit. In addition, Tenant agrees that
Landlord shall be entitled to the payment of its reasonable legal fees in the
event that Landlord prevails in a forcible detainer action
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brought by Landlord. Landlord agrees that Tenant shall be entitled to payment
of its reasonable legal fees in the event that Tenant prevails in a forcible
detainer action brought by Landlord.
ARTICLE 2--RENT
SECTION 2.1 BASIC RENT. Tenant shall pay as annual rent for the Premises the
applicable Basic Annual Rent shown in Item 3 of the Basic Lease Provisions. The
Basic Annual Rent shall be payable in monthly installments equal to the
applicable Basic Monthly Rent shown in Item 3 of the Basic Lease Provisions in
advance, without offset, deduction or, except as otherwise expressly provided
herein, demand. The monthly installments of Basic Monthly Rent shall commence
on the Commencement Date and shall continue on the first (1st) day of each
calendar month thereafter. If the Commencement Date occurs on a day other than
the first day of a calendar month or the Expiration Date occurs on a day other
than the last day of a calendar month, the Basic Monthly Rent for such partial
month shall be prorated based on a fraction, the numerator of which shall be
the number of days from the first day of such month through and including the
day of termination and the denominator of which shall be the total number of
days in such month.
SECTION 2.2 ADDITIONAL RENT.
2.201 DEFINITIONS. For purposes of this Lease, the following definitions shall
apply:
(a)"OPERATING COSTS" shall mean costs and expenses that Landlord incurs,
pays or becomes obligated to pay in connection with operating,
maintaining, insuring and managing the Property, computed on an
accrual basis in accordance with generally accepted accounting
principles ("GAAP"), save and except those costs and expenses which
(i) are incurred by Landlord in respect to the Concourse or (ii)
are listed as Exclusions from Operating Costs in EXHIBIT F attached
hereto. Operating Costs shall include, but not be limited to, the
costs described in EXHIBIT F attached hereto as Operating Costs.
"FIXED OPERATING COSTS" shall mean those Operating Costs which, in
the reasonable judgment of Landlord, do not vary with occupancy
levels of the Tower and "VARIABLE OPERATING COSTS" shall mean those
Operating Costs which, in the reasonable judgment of Landlord, do
vary with the occupancy levels of the Tower. "VARIABLE OPERATING
COSTS ATTRIBUTABLE TO All TENANTS" shall mean those Variable
Operating Costs which, in the reasonable judgment of Landlord, are
allocable to all occupied rentable area of the Tower.
(b)"ENERGY COSTS" shall mean the costs incurred by Landlord for (i) any
and all forms of fuel or energy utilized in connection with the
operation, maintenance and use of the Property, (ii) sales, use,
excise and other taxes assessed by governmental authorities on
energy sources, (iii) other costs of providing energy to the
Property, and (iv) the reasonable costs of any and all audits or
reports of energy usage conducted by Landlord or any public utility
for a purpose other than auditing the electrical usage by a
specific tenant, all computed on an accrual basis by Landlord in
accordance with GAAP. "FIXED ENERGY COSTS" shall mean those Energy
Costs which, in the reasonable judgment of Landlord, do not vary
with occupancy levels of the Tower. "VARIABLE ENERGY COSTS" shall
mean those Energy Costs which, in the reasonable judgment of
Landlord, vary with the occupancy levels of the Tower. "VARIABLE
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ENERGY COSTS ATTRIBUTABLE TO ALL TENANTS" shall mean those Variable
Energy Costs which, in the reasonable judgment of Landlord, are
attributable to all occupied rentable area of the Tower.
(c)"REAL ESTATE TAXES" shall mean (i) all real estate taxes, assessments,
excises, and any other governmental levies and charges of every kind and
nature whatsoever, general and special, extraordinary and ordinary,
foreseen and unforeseen, which may during the Term be levied or assessed
against, or arising in connection with the use, occupancy, operation or
possession of the Property or any portion thereof, (ii) any tax,
surcharge or assessment which shall be levied by any authority having
the direct or indirect power to tax as a supplement to or in lieu of
real estate taxes, assessments, excises and other governmental charges
and levies theretofore in existence, (iii) interest on installment
payments of any such real estate taxes, assessments, excises, charges
and levies, and (iv) any rental, excise, sales, transaction, privilege
or other tax or levy, however denominated, imposed upon or measured by
the rental reserved hereunder or on Landlord's business of leasing the
Premises, excepting only Landlord's income, franchise, death, gift and
transfer taxes. In the event that Landlord pays any portion of the
foregoing as rental under a ground lease arrangement with the fee
simple titleholder to the land upon which the Building is, or is to be,
constructed, Landlord shall have the right to include same in Real
Estate Taxes. In no event will Real Estate Taxes include interest or
late charges or other costs attributable to Landlord's failure to pay
taxes prior to delinquency, unless such interest, late charges or
other costs are the result of Landlord's good faith contest of the
amount, validity or applicability of such taxes.
(d)"ADDITIONAL PASS THROUGH COSTS" shall mean the following costs and expenses
incurred by Landlord from and after January 1, 1996: (i) subject
to the limitations of clause (ii) following, the cost of any improvement
made to the Property by Landlord that is required under any governmental
law or regulation which was not promulgated, or which was promulgated
but was not applicable to the Building, at the date of this Lease,
amortized on a straight line basis over its useful life, together with
an amount equal to interest at the rate of ten percent (10%) per annum
(the "AMORTIZATION RATE") on the unamortized balance thereof; (ii) the
cost of any improvement made to the Common Areas of the Property that is
required under interpretations or regulations issued after the
Commencement Date under, or amendments made after the Commencement Date
to, the provisions of Tex. Rev. Civ. Stat. Ann. art. 9102 and the
provisions of the Americans With Disabilities Act of 1990, 42
U.S.C.ss.ss.12101-12213 (collectively, the "DISABILITY ACTS"), amortized
on a straight-line basis over its useful life, together with an amount
equal to interest at the Amortization Rate on the unamortized balance
thereof; (iii) the cost of any labor-saving or energy-saving device or
other equipment installed in the Building (provided Landlord reasonably
anticipates that the installation thereof will reduce Operating Costs),
amortized on a straight-line basis over its useful life, together with
an amount equal to interest at the Amortization Rate on the unamortized
balance thereof; and (iv) all other capital costs which are amortizable
over a period of five (5) years or less, and which would generally be
viewed as an operating cost.
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2.202 Payment of Additional Rent.
(a) For each calendar year during the Term of this Lease (including any
extensions thereof), Tenant shall (in accordance with the
provisions of paragraphs (c), (d),and (e) of this subsection) pay
to Landlord Additional Rent, which is hereby defined to mean the
following:
(i) the amount by which (a) the sum of the per square foot Fixed
Operating Costs for the applicable calendar year and the per
square foot Variable Operating Costs Attributable to All
Tenants for such calendar year, MULTIPLIED BY the square feet
of Agreed Rentable area of the Premises exceeds (b) Landlord's
Annual Operating Costs Contribution set forth in Item 4 of the
Basic Lease Provisions; plus
(ii) the sum of (a) the per square foot Fixed Energy Costs and the
per square foot Variable Energy Costs Attributable to All
Tenants for the applicable calendar year, multiplied by (b) the
square feet of Agreed Rentable Area of the Premises; plus
(iii) the amount by which the per square foot Real Estate Taxes for
the applicable calendar year MULTIPLIED BY the square feet of
Agreed Rentable Area of the Premises exceeds Landlord's Annual
Real Estate Taxes Contribution; plus
(iv) the per square foot Additional Pass Through Costs for the
applicable calendar year, MULTIPLIED BY the square feet of
Agreed Rentable Area of the Premises, plus
(v) Tenant's Share of Variable Operating and Energy Costs Allocable
to Some Rentable Area (hereinafter defined).
To arrive at the per square foot Fixed Operating Costs and per
square foot Fixed Energy Costs, Landlord will divide the applicable
costs by the Agreed Rentable Area of the Tower. To arrive at the
per square foot Variable Operating Costs Attributable to All
Tenants and Variable Energy Costs Attributable to All Tenants,
Landlord will divide the applicable costs by the average occupied
rentable area of the Tower for the applicable period.
(b) At least thirty (30) days prior to January 1 of each calendar year
during the term of this Lease (or as soon thereafter as is
reasonably possible), Landlord shall give Tenant written notice of
Tenant's reasonably estimated Additional Rent (other than Tenant's
Share of Variable Operating and Energy Costs Allocable to Some
Rentable Area) for the applicable calendar year and the amount of
the monthly installment due for each month during such year.
(c) Tenant shall pay to Landlord on the Commencement Date and on the first
day of each month thereafter the amount of the applicable monthly
installment of Additional
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Rent (other than Tenant's Share of Variable Operating and Energy
Costs Allocable to Some Rentable Area, which shall be controlled by
paragraph (d) following).
(d) Landlord will invoice Tenant monthly for "TENANT'S SHARE OF
VARIABLE OPERATING AND ENERGY COSTS ALLOCABLE TO SOME RENTABLE
AREA", which is hereby defined to mean the sum of Tenant's share of
each Variable Operating Cost and Variable Tower Energy Cost
incurred at the request of Tenant during the applicable month that
is attributable both to a portion (but not all) of the Premises and
to a portion (but not all) of other premises within the Tower.
Tenant's share of each such Variable Operating Cost and each such
Variable Tower Energy Cost shall be equal to the applicable costs,
multiplied by a fraction, the numerator of which shall be the
Agreed Rentable Area of the Premises to which such cost is
attributable and the denominator of which shall be the average
occupied rentable area of the Tower (for the applicable period) to
which such cost is attributable.
(e) Within ninety (90) days after the end of each calendar year, or as soon
thereafter as is reasonably possible, Landlord shall prepare and
deliver to Tenant a statement showing (i) Tenant's actual
Additional Rent for the applicable calendar year, and (ii) a
reasonable breakdown of the component elements in determining such
Additional Rent. Landlord's obligation to deliver such an annual
statement for the year during which this Lease expires or is
terminated shall survive the expiration or earlier termination of
this Lease. If Tenant's monthly payments of Additional Rent are
less than Tenant's actual Additional Rent reflected in the
applicable annual statement, Tenant shall pay the amount of the
underpayment to Landlord within thirty (30) days after such annual
statement is furnished to Tenant. If Tenant's total monthly
payments of Additional Rent for the applicable year are more than
Tenant's actual Additional Rent reflected in the applicable annual
statement, then Landlord shall credit against the next Rent payment
or payments due from Tenant the amount of such overpayment,
provided, however, with respect to the year in which this Lease
expires or is terminated, (i) Tenant's Additional Rent shall be
deemed to be an amount equal to the actual Additional Rent set
forth in the annual statement for such year, multiplied by a
fraction, the numerator of which is the number of days occurring
from and including January 1 of such year and ending on and
including the date of termination and the denominator of which
shall be 365, (ii) Landlord shall forward to Tenant the annual
statement for such year at the same time as Landlord forwards such
annual statement to tenants of the Building, (iii) Landlord shall
pay to Tenant the amount of any overpayment of Additional Rent for
such year (less any amounts Tenant then owes Landlord) within
thirty (30) days after Landlord delivers the annual statement to
Tenant, and (iv) Tenant shall pay Landlord the amount of any
underpayment of Additional Rent for such year within thirty (30)
days after Tenant receives such annual statement. Unless Tenant
takes written exception to any item within ninety (90) days after
the furnishing of an annual statement, such statement shall be
considered as final and accepted by Tenant.
2.203 BILLING DISPUTES. If there exists any dispute as to (i) the amount
of Additional Rent, (ii) whether a particular expense is properly
included in Additional Rent or (iii) Landlord's calculation of Additional
Rent (each an "ADDITIONAL RENT DISPUTE"), the events, errors, acts
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or omissions giving rise to such Additional Rent Dispute shall not
constitute a breach or default by Landlord under this Lease and even if a
judgment resolving the Additional Rent Dispute is entered against
Landlord, this Lease shall remain in full force and effect and Landlord
shall not be liable for any consequential damages resulting from the
event, error, act or omission giving rise to such Additional Rent
Dispute. Notwithstanding the existence of an Additional Rent Dispute,
Tenant shall pay timely the amount of Additional Rent which is in dispute
and will continue to make all subsequent payments of Additional Rent as
and when required under this Lease, provided that the payment of such
disputed amount and other amounts shall be without prejudice to Tenant's
position. If an Additional Rent is resolved in favor of Tenant, Landlord
shall forthwith pay to Tenant the amount of Tenant's overpayment of
Additional Rent, together with interest from the time of such overpayment
at the annual rate of ten percent (10%).
2.204 REVISIONS IN ESTIMATED ADDITIONAL RENT. If Real Estate Taxes,
Insurance Premiums, Utility Expenses or Additional Pass Through Costs
increase during a calendar year or if the number of square feet of
rentable area in the Premises increases, Landlord may revise the
estimated Additional Rent during such year by giving Tenant written
notice to that effect and thereafter Tenant shall pay to Landlord, in
each of the remaining months of such year, an additional amount equal to
the amount of such increase in the estimated Additional Rent divided by
the number of months remaining in such year.
2.205 TENANT'S AUDIT RIGHT. Subject to the remaining terms of this
subsection, if Landlord does not audit the Operating Expenses and other
components of Additional Rent for a given calendar year and Tenant timely
objects to the calculation of the Additional Rent reflected on the
applicable Annual Statement, Tenant shall have the right, at Tenant's
sole cost and expense, to perform an annual audit on Landlord's books and
records which reflect Additional Rent for such year to verify Landlord's
calculation of actual Additional Rent for such prior year, provided that
such audit shall be conducted, if at all, (i) within the ninety (90) days
period following Tenants receipt of the Annual Statement for the
Additional Rent which Tenant elects to audit, (ii) during Landlord's
normal business hours, (iii) at the Property or such other place in
Dallas, Texas where Landlord maintains its records and (iv) only after
Landlord has received thirty (30) days prior written notice. Tenant shall
require its auditors to use reasonable efforts to complete its audit
within thirty (30) days after Landlord makes available its books and
records reflecting the Additional Rent for the applicable calendar
year(s). Tenant shall reimburse Landlord for any actual out-of-pocket
costs incurred by Landlord as result of complying with the requests of
Tenant's auditor. Tenant shall bear the cost of any audit performed on
behalf of Tenant pursuant to this subsection. No audit conducted pursuant
to this paragraph shall be binding on Landlord. If Landlord agrees with
Tenant's audit and such audit reflects that the Additional Rent reflected
in the applicable Annual Statement is more than 105% of the Additional
Rent reflected in Tenant's audit approved by Landlord or if Tenant's
auditor determines that the Additional Rent reflected in the applicable
Annual Statement is more than 105% of the actual Additional Rent that
should have been charged to Tenant for the applicable calendar year and a
final non-appealable judgment agreeing with Tenant's auditor's
determination is entered against Landlord, then in either such event
Landlord will pay the reasonable cost of Tenant's audit.
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SECTION 2.3 RENT DEFINED AND NO OFFSETS. Basic Annual Rent, Additional Rent and
all other sums (whether or not expressly designated as rent) required to be
paid to Landlord by Tenant under this Lease (including, without limitation, any
sums payable to Landlord under any addendum, exhibit, rider or schedule
attached hereto) shall constitute rent and are sometimes collectively referred
to as "Rent". Each payment of Rent shall be paid by Tenant when due, without
deduction, setoff or, except as otherwise expressly provided in this Lease,
prior demand.
SECTION 2.4 LATE CHARGES. If any installment of Basic Annual Rent or Additional
Rent or any other payment of Rent under this Lease shall not be paid when due,
a "Late Charge" of five cents ($.05) per dollar so overdue may be charged by
Landlord to defray Landlord's administrative expense incident to the handling
of such overdue payments. Each Late Charge shall be payable on demand.
ARTICLE 3--SECURITY DEPOSIT
Tenant will pay Landlord on the date this Lease is executed by Tenant the
Security Deposit set forth in Item 9 of the Basic Lease Provisions as security
for the performance of the terms hereof by Tenant. Tenant shall not be entitled
to interest thereon and Landlord may commingle such Security Deposit with any
other funds of Landlord. The Security Deposit shall not be considered an
advance payment of rental or a measure of Landlord's damages in case of default
by Tenant. If Tenant defaults with respect to any provision of this Lease,
Landlord may, but shall not be required to, from time to time, without
prejudice to any other remedy, use, apply or retain all or any part of this
Security Deposit for the payment of any Rent or any other sum in default or for
the payment of any other amount which Landlord may spend or become obligated to
spend by reason of Tenant's default or to compensate Landlord for any other
loss or damage which Landlord may suffer by reason of Tenant's default,
including, without limitation, costs and reasonable attorneys' fees incurred by
Landlord to recover possession of the Premises. If Tenant shall fully and
faithfully perform every provision of this Lease to be performed by it, the
Security Deposit shall be returned to Tenant within thirty (30) days after the
Expiration Date. Tenant agrees that it will not assign or encumber or attempt
to assign or encumber the monies deposited herein as the Security Deposit and
that Landlord and its successors and assigns shall not be bound by any such
actual or attempted assignment or encumbrance. Regardless of any assignment of
this Lease by Tenant, Landlord may return the Security Deposit to the original
Tenant, in the absence of evidence satisfactory to Landlord of an assignment of
the right to receive the Security Deposit or any part of the balance thereof.
ARTICLE 4--OCCUPANCY AND USE
SECTION 4.1 USE OF PREMISES.
4.101 GENERAL. The Premises shall, subject to the remaining provisions of this
Section, be used solely for the Permitted Use (herein so called)
specified in Item 11 of the Basic Lease Provisions. Without in any way
limiting the foregoing, Tenant will not use, occupy or permit the use or
occupancy of the Premises for any purpose (and the Permitted Use shall
not include any use) which is forbidden by or in violation of any law,
ordinance or governmental or municipal regulation, order, or certificate
of occupancy, or which may be dangerous to life, limb or property; or
permit the maintenance of any public or private nuisance; or do or permit
any other thing which may unreasonably disturb the quiet enjoyment of any
other tenant of the Property; or keep any substance or carry on or permit
any operation which
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could be reasonably expected to emit offensive odors or conditions from
the Premises; or commit or suffer or permit any waste in or upon the
Premises; or sell, purchase or give away, or permit the sale, purchase or
gift of food in any form by or to any of Tenant's agents or employees or
other parties in the Premises except through vending machines in employee
lunch or rest areas within the Premises for use by Tenant's employees
only; or use any apparatus which might make undue noise or set up
vibrations in the Building; or permit anything to be done which would
increase the fire and extended coverage insurance rate on the Building or
Building contents and, if there is any increase in such rate by reason of
acts of Tenant, then Tenant agrees to pay such increase upon demand
therefor by Landlord. Payment by Tenant of any such rate increase shall
not be a waiver of Tenant's duty to comply herewith. Tenant shall keep
the Premises neat and clean at all times.
4.102 HAZARDOUS AND TOXIC MATERIALS.
(a) For purposes of this Lease, hazardous or toxic materials shall mean
asbestos containing materials ("ACM") and all other materials,
substances, wastes and chemicals classified as hazardous or toxic
substances, materials, wastes or chemicals under then-current
applicable governmental laws, rules or regulations or that are
subject to any right-to- know laws or requirements.
(b) Tenant shall not knowingly incorporate into, or use or otherwise place
or dispose of any hazardous or toxic materials at or on the
Premises or the Property except for use and storage of cleaning and
office supplies used in the ordinary course of Tenant's business
and then only if (i) such materials are in small quantities,
properly labeled and contained, (ii) such materials are handled and
disposed of in accordance with the generally accepted industry
standards for safety, storage, use and disposal, (iii) notice of
and a copy of the current material safety data sheet is provided to
Landlord for each such hazardous or toxic material and (iv) such
materials are used, transported, stored, handled and disposed of in
accordance with all applicable governmental laws, rules and
regulations. Landlord shall have the right to periodically inspect,
take samples for testing and otherwise investigate the Premises for
the presence of hazardous or toxic materials. Landlord shall not
knowingly dispose of any hazardous or toxic materials on the
Property and shall otherwise deal with all hazardous or toxic
materials at the Property in a manner that will not materially and
adversely affect Tenant's access, use or occupancy of the Premises.
If Landlord or Tenant ever has knowledge of the presence of
hazardous or toxic materials on the Property that affect the
Premises, the party having knowledge shall notify the other party
thereof in writing promptly after obtaining such knowledge.
(c) If Tenant or its employees, agents or contractors shall ever violate
the provisions of paragraph (b) of this subsection 4.102 or
otherwise contaminate the Premises or the Property with hazardous
or toxic materials, then Tenant shall clean-up, remove and dispose
of the material causing the violation, in compliance with all
applicable governmental standards, laws, rules and regulations and
then prevalent industry practice and standards and shall repair any
damage to the Premises or Building within such period of time as
may be reasonable under the circumstances after written notice by
Landlord. Tenant shall notify Landlord of its method, time and
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procedure for any clean-up or removal and Landlord shall have the
right to require reasonable changes in such method, time or
procedure or to require the same to be done after normal business
hours. Tenant's obligations under this subsection 4.102(c) shall
survive the termination of this Lease. Tenant represents to
Landlord that, except as has been disclosed to Landlord, Tenant has
never been cited for or convicted of any hazardous or toxic
materials violations under applicable laws, rules or regulations.
SECTION 4.2 PERMITS. Tenant shall obtain the certificate of occupancy, if any,
required for occupancy of the Premises following construction of Tenant
Improvements. Tenant shall pay for the cost of any such certificate of
occupancy, provided that Tenant shall be entitled to have such cost funded from
the Finish Allowance, if any, provided for in the Work Letter. If any
governmental license or permit shall be required for the proper and lawful
conduct of Tenant's business in the Premises or any part thereof, Tenant, at
its expense, shall procure and thereafter maintain such license or permit.
Additionally, if Tenant's Improvements or any subsequent alteration or
improvement made to the Premises by Tenant or Tenant's use of the Premises
require any modification or amendment of any certificate of occupancy for the
Building or the issuance of any other permit of any nature whatsoever, Tenant
shall, at its expense, take all actions to procure any such modification or
amendment or additional permit.
SECTION 4.3 COMPLIANCE WITH LAWS.
4.301 TENANT'S COMPLIANCE OBLIGATION.
(a) Tenant shall comply with all laws, statutes, ordinances, orders,
permits and regulations (collectively "Laws") affecting (i)
Tenant's use and occupancy of the Premises, (ii) any improvements
constructed within the Building by Tenant or by a party other than
Landlord on behalf of Tenant and (iii) any furniture, fixtures,
equipment, materials or goods installed or placed within the
Building by Tenant or installed or placed within the Building by a
party other than Landlord on behalf of Tenant, provided, however,
Tenant's compliance obligations with respect to the Disability Acts
shall be governed by paragraph (b) following and the applicable
provisions of the Work Letter.
(b) From and after the Commencement Date, Tenant shall be obligated to
see that the Premises comply with all existing requirements of and
regulations issued under the Disability Acts for each of the
following: (i) alterations or improvements to any portion of the
Premises performed after the Commencement Date; (ii) obligations or
complaints arising under or out of Title I of the Americans With
Disabilities Act or Tenant's employer-employee obligations; (iii)
obligations or complaints arising under or out of the conduct or
operations of Tenant's business, including any obligations or
requirements for barrier removal to customers or invitees as a
commercial facility or as a public accommodation (as defined in the
Disability Acts); and (iv) any change in the nature of Tenant's
business, or its employees, or financial net worth, or Tenant's
business operations that triggers an obligation under the
Disability Acts.
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(c) If any Law with which Tenant is required to comply pursuant to this
Lease is violated, Tenant shall take such corrective action as is
necessary to cause compliance.
4.302 LANDLORD'S COMPLIANCE OBLIGATION.
(a) Except for Laws with which Tenant is required to comply under
subsection 4.301, Landlord shall comply with all laws, statutes,
ordinances, orders and regulations (including, without limitation,
environmental laws) (i) relating to the Property and (ii)
non-compliance with which would materially and adversely affect
Tenant's access to use or occupancy of the Premises.
(b) From and after the Commencement Date, Landlord shall cause the Common
Areas to comply with the Disability Acts.
SECTION 4.4 RULES AND REGULATIONS. Tenant will comply with such rules and
regulations (the "RULES AND REGULATIONS") generally applying to tenants in the
Building as may reasonably be adopted from time to time by Landlord for the
management, safety, care and cleanliness of, and the preservation of good order
and protection of property in, the Premises and the Building and at the
Property. All such Rules and Regulations are hereby made a part hereof. The
Rules and Regulations in effect on the date hereof are attached hereto as
EXHIBIT G. All changes and amendments to the Rules and Regulations sent by
Landlord to Tenant in writing and conforming to the foregoing standards shall
be carried out and observed by Tenant. Landlord hereby reserves all rights
necessary to implement and enforce the Rules and Regulations and each and every
provision of this Lease.
SECTION 4.5 ACCESS. Without being deemed guilty of an eviction of Tenant and
without abatement of Rent, Landlord and its authorized agents shall have the
right to enter the Premises, upon reasonable notice, to inspect the Premises,
to show the Premises to prospective lenders or purchasers or, during the last
six months of the term of the term of this Lease, prospective tenants and to
fulfill Landlord's obligations or exercise its rights (including without
limitation Landlord's Reserved Right [as hereinafter defined]) under this
Lease. Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises and any other loss occasioned thereby. For
each of the aforesaid purposes, Landlord shall at all times have and retain a
key with which to unlock the doors to and within the Premises, excluding
Tenant's vaults and safes. Landlord shall have the right to use any and all
means which Landlord may deem proper to enter the Premises in an emergency
without liability therefor.
SECTION 4.6 QUIET POSSESSION. Provided Tenant timely pays Rent and observes and
performs all of the covenants, conditions and provisions on Tenant's part to be
observed and performed hereunder, Tenant shall have the quiet possession of the
Premises for the entire term hereof, subject to all of the provisions of this
Lease and all deeds of trust, mortgages, security agreements, laws and
restrictive covenants (provided Tenant has been delivered a copy of such
restrictive covenants) which now or hereafter affect the Property.
<PAGE> 21
ARTICLE 5--UTILITIES AND SERVICES
SECTION 5.1 SERVICES TO BE PROVIDED.
Landlord agrees to furnish or cause to be furnished to the Premises, the
utilities and services described in subsections 5.101 through 5.107 below,
subject to all other provisions of this Lease.
5.101 ELEVATOR SERVICE. Except for Recognized Holidays (as defined in the Rules
and Regulations) and emergencies, Landlord shall provide during Normal
Business Hours (as defined in the Rules and Regulations) automatic
passenger elevator facilities to all floors of the Building and have at
least one (1) passenger elevator available for use to all floors of the
Building at all other times (including Recognized Holidays).
5.102 HEAT AND AIR CONDITIONING. Except for Recognized Holidays and
emergencies, Landlord shall during Normal Business Hours ventilate the
Premises and furnish heat or air conditioning, at such temperatures and
in such amounts as is customary in buildings of comparable size, quality
and in the general vicinity of the Building, with such adjustments as
Landlord reasonably deems necessary for the comfortable occupancy of the
Premises, subject to events of force majeure and any governmental
requirements, ordinances, rules, regulations, guidelines or standards
relating to, among other things, energy conservation. Upon request and
provided Tenant is not then in breach of its obligation to pay Rent as
and when required hereunder, Landlord shall make available, at Tenant's
expense, after hours heat or air conditioning. The minimum charge and the
hourly rate for the use of after hours heat or air conditioning shall be
determined from time to time by Landlord and confirmed in writing to
Tenant.
5.103 ELECTRICITY.
(a) Landlord shall furnish to the Premises electric current not in excess
of that required by the office lighting and receptacles included in
Tenant's Improvements, provided, however, Tenant shall be solely
responsible for the costs of electrical consumption (without
duplication) (i) by equipment which requires a voltage other than
120 volts single phase, (ii) in excess of that currently supplied
to the Premises or (iii) by any single piece of equipment in excess
of 0.5 kilowatts at rated capacity (any such consumption, "EXCESS
CONSUMPTION" and the costs of such Excess Consumption, "EXCESS
CONSUMPTION COSTS").
(b) Landlord may, from time to time, engage a reputable consultant to
conduct a survey of electrical usage within the Premises or install
one or more submeters to measure electrical usage within the
Premises or a particular floor of the Premises. If the survey or
submeters reflect Excess Consumption, then (i) Tenant shall be
responsible for the costs of any such surveys and submeters, (ii)
Landlord shall have the right to install permanent submeters to
measure the electrical consumption within the Premises (which
permanent submeters shall constitute a part of Tenant's Submeters,
as hereinafter defined), and (iii) Tenant shall pay for the cost of
acquiring, maintaining, repairing and reading such submeters.
(c) Tenant shall not (i) without the express prior written consent of
Landlord (which consent shall not be unreasonably withheld) install
or use or permit the installation or use of
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any computer or electronic data processing equipment or any other
electrical equipment which (singly) consumes more than 0.5
kilowatts at rated capacity or requires a voltage other than 120
volts single phase or otherwise has high electrical consumption,
(ii) use electric current in excess of the capacity of the feeders
or lines to the Building or the risers or wiring installation of
the Building or the Premises, or (iii) without the prior written
consent of Landlord (which consent shall not be unreasonably
withheld) install any electrical plugs, connections or outlets
which supply a voltage greater than 120 volts single phase. As a
condition to obtaining Landlord's consent to any equipment
described in clause (i) or any plugs, connections or outlets
described in clause (iii), Tenant shall arrange for the
installation of a permanent submeter (all submeters installed as
part of or in connection with Tenant's Improvements or
Installations or pursuant to this paragraph are herein collectively
referred to as "TENANT'S SUBMETERS"), at Tenant's expense, to
measure the electrical power consumed by the equipment and/or
machinery hooked or plugged into such plugs, connections or
outlets. Without in any way limiting the meaning of reasonable,
Landlord shall be deemed to have reasonably withheld its consent to
the matters described in clauses (i) and (ii) if the installation
of the applicable equipment or the use of the plugs, outlets or
connections could, in Landlord's judgment, interfere with
Landlord's ability to provide Building standard electricity to any
other tenant of the Building or Landlord's ability to fulfill any
of its obligations under any other lease.
(d) On or about the first day of each month thereafter during the Term of
this Lease, Landlord will, at Tenant's cost, read Tenant's
Submeters and record such readings for purposes of determining
Metered Electrical Expenses pursuant to paragraph (e) immediately
following. Landlord will maintain and repair Tenant's Submeters, at
Tenant's cost.
(e) The cost of electricity consumed within each separately metered
portion of the Premises and by each separately metered piece of
equipment within the Premises ("METERED ELECTRICAL EXPENSES") shall
be equal to the sum of (i) the kilowatts of electricity consumed
within the separately metered portions of the Premises (as measured
by the applicable Tenant's Submeters) during the applicable month
(or other applicable period) and (ii) the kilowatts of electricity
consumed by each separately metered equipment within the Premises
(as measured by the applicable Tenant's Submeters), MULTIPLIED BY
(iii) the cost per kilowatt of electricity charged to Landlord by
the public utility for electricity consumed within the Building
during the applicable month (or other applicable period). Landlord
may, from time to time, invoice Tenant for Metered Electrical
Expenses (as well as any Excess Consumption Costs determined by a
reputable consultant) and Tenant shall, within ten (10) days after
receiving an invoice therefor, pay Landlord the amount of the
Metered Electrical Expenses (and/or, as applicable, any Excess
Consumption Costs determined by a reputable consultant) covered by
such invoice. Each such invoice submitted by Landlord to Tenant
shall include (i) the period of consumption covered by such
invoice, (ii) the beginning and ending readings for each of
Tenant's Submeters for such period, (iii) Landlords calculation of
the Metered Electrical Expenses covered
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by such invoice, and (iv) if applicable, the independent electrical
consultant's calculation of Excess Consumption and the Excess
Consumption Costs.
5.104 WATER. Landlord shall furnish water for drinking, cleaning and lavatory
purposes only.
5.105 JANITORIAL SERVICES. Landlord shall provide janitorial services to the
Premises, comparable to that provided in other office buildings of
similar size, quality and in the general vicinity of the Building,
provided the Premises are used exclusively as offices and further
provided Tenant complies with subsection 6.201 below.
5.106 COMMON AREAS. Landlord shall perform routine maintenance in the Common
Areas (hereinafter defined) and otherwise maintain the Common Areas in a
state of repair that is comparable to that provided in other comparable
buildings in the general vicinity of the portion of the Dallas Central
Business District in which the Building is located, but in no event will
the foregoing standard be interpreted to require Landlord to perform
renovations of or make capital improvements to the Common Areas (other
than those in the nature of repairs).
5.107 BULBS AND BALLASTS. Landlord shall provide Building standard bulbs and
ballasts as necessary in the Premises. Landlord shall also provide
non-building standard bulbs and ballasts provided Tenant shall pay the
cost thereof, together with an administrative fee equal to ten percent
(10%) of such cost. All amounts due under this subsection for such
non-building standard bulbs shall be paid to Landlord within thirty (30)
days after receipt of an invoice therefor.
5.108 SECURITY GUARD AND ACCESS SYSTEM. Landlord shall provide Building
standard security to the Property on a 24-hour basis on all days of the
year, which security may include limited access entry cards to the
Building and Parking Facilities and security personnel in stationary
locations or in mobile patrols. Tenant acknowledges that the security
services to be provided by Landlord hereunder are not a guaranty or a
representation of the safety of Tenant or Tenant's employees, invitees,
guests or any other person or of any property, or that the Property is
secure.
SECTION 5.2 ADDITIONAL SERVICES. Landlord may impose a reasonable charge for
any utilities and services, including without limitation, air conditioning,
electrical current and water, provided by Landlord by reason of any use of the
services at any time other than the hours set forth in subsection 5.102 above
or beyond the levels or quantities that Landlord agrees herein to furnish or
because of special electrical, cooling or ventilating needs created by Tenant's
hybrid telephone equipment, computers or other equipment. In no event will
Landlord be required to provide any additional services if Tenant is in breach
of its obligation to pay any Rent hereunder as and when due and payable.
SECTION 5.3 TENANT'S OBLIGATION. Tenant agrees to cooperate fully at all times
with Landlord and to abide by all regulations and requirements which Landlord
reasonably prescribes for the use of the above utilities and services.
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SECTION 5.4 SERVICE INTERRUPTION.
5.401 SERVICE INTERRUPTION/WAIVER OF LANDLORD LIABILITY. LANDLORD SHALL NOT BE
LIABLE FOR AND, EXCEPT AS PROVIDED IN SUBSECTION 5.402 BELOW, TENANT
SHALL NOT BE ENTITLED TO ANY ABATEMENT OR REDUCTION OF RENT BY REASON OF
LANDLORD'S FAILURE TO MAINTAIN TEMPERATURE OR ELECTRICAL CONSTANCY LEVELS
OR TO FURNISH ANY OF THE FOREGOING SERVICES when such failure is caused
by accident, breakage, repairs, strikes, lockouts or other labor
disturbance or labor dispute of any character, governmental regulation,
moratorium or other governmental action, inability to obtain electricity,
water or fuel, or by any cause beyond Landlord's reasonable control
(collectively, "UNCONTROLLABLE EVENTS"), NOR SHALL ANY SUCH
UNCONTROLLABLE EVENT OR RESULTS OR EFFECTS THEREOF BE CONSTRUED AS AN
EVICTION (CONSTRUCTIVE OF ACTUAL) OF TENANT OR AS A BREACH OF THE IMPLIED
WARRANTY OF SUITABILITY, OR RELIEVE TENANT FROM THE OBLIGATION TO PERFORM
ANY COVENANT OR AGREEMENT HEREIN AND IN NO EVENT SHALL LANDLORD BE LIABLE
FOR DAMAGE TO PERSONS OR PROPERTY (INCLUDING, WITHOUT LIMITATION,
BUSINESS INTERRUPTION) OR BE IN DEFAULT HEREUNDER, AS A RESULT OF ANY
SUCH UNCONTROLLABLE EVENT OR RESULTS OR EFFECTS THEREOF.
5.402 LIMITED RIGHT TO ABATEMENT OF RENT. If any portion of the Premises
becomes unfit for occupancy and Tenant vacates such portion of the
Premises because Landlord fails to deliver any service as required under
Section 5.1 above for any period (other than a reconstruction period
conducted pursuant to Section 7.1 or Article 8 below) exceeding ten (10)
consecutive days after written notice by Tenant to Landlord and provided
such failure is not caused by Tenant, Tenant's Contractors or any of
their respective agents or employees, Tenant shall be entitled to a fair
partial abatement of Basic Annual Rent and Additional Rent for any such
portion of the Premises from the expiration of such ten (10) day period
until such portion is again fit for occupancy.
SECTION 5.5 MODIFICATIONS. Notwithstanding anything herein to the contrary,
Landlord reserves the right from time to time to make reasonable modifications
to the above standards for utilities and services.
ARTICLE 6--MAINTENANCE, REPAIRS, ALTERATIONS AND IMPROVEMENTS
SECTION 6.1 LANDLORD'S OBLIGATION TO MAINTAIN AND REPAIR. Subject to Sections
7.1 and 7.4 and Article 8 below, Landlord shall, at Landlord's cost and expense
(but subject to Landlord's rights under Section 2.2 above) maintain and repair
the exterior walls and windows and roof and load bearing elements of the
Building. Except for load bearing elements of the Building located within the
Premises, Landlord shall not be required to maintain or repair any portion of
the Premises.
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SECTION 6.2 TENANT'S OBLIGATION TO MAINTAIN AND REPAIR.
6.201 TENANT'S OBLIGATION. Subject to Sections 6.1, 7.1 and 7.4 and Article 8
of this Lease, Tenant shall, at Tenant's sole cost and expense, (i)
maintain and keep the interior of the Premises (including, but not
limited to, all fixtures, walls, ceilings, floors, doors, windows [except
replacement of exterior plate glass], appliances and equipment which are
a part of the Premises) in good repair and condition, (ii) repair or
replace any damage or injury done to the Building or any other part of
the Property caused by Tenant, Tenant's agents, employees, licensees,
invitees or visitors or resulting from a breach of its obligations under
this Section 6.2 and (iii) indemnify and hold Landlord harmless from, and
reimburse Landlord for and with respect to, any and all costs, expenses
(including reasonable attorneys' fees), claims and causes of action
arising from or incurred by and/or asserted in connection with such
maintenance, repairs, replacements, damage or injury. All maintenance,
repairs and replacements performed by or on behalf of Tenant shall be
performed in a good and workmanlike manner and in accordance with the
standards applicable to alterations or improvements performed by Tenant.
Tenant shall continue to pay Rent, without abatement, during any period
that maintenance, repairs or replacements are performed or required to be
performed by Tenant under this Section 6.2.
6.202 RIGHTS OF LANDLORD. Landlord shall have the same rights with respect to
maintenance, repairs and/or replacements performed by Tenant as Landlord
has with respect to Installations performed by Tenant under subsection
6.303 below. In the event Tenant fails, in the reasonable judgment of
Landlord, to maintain the Premises in good order, condition and repair,
or otherwise satisfy its maintenance, repair and replacement obligations
under subsection 6.201 above, Landlord shall have the right to perform
such maintenance, repairs and replacements at Tenant's expense. Tenant
shall pay to Landlord on demand any such cost or expense incurred by
Landlord, together with interest thereon at the rate specified in Section
15.10 below from the date of demand until paid and an administrative fee
equal to ten percent (10%) of the costs incurred by Landlord.
SECTION 6.3 IMPROVEMENTS AND ALTERATIONS.
6.301 LANDLORD'S CONSTRUCTION OBLIGATION. Without in any way limiting
Landlord's other obligations under this Lease, Landlord's sole
construction obligation under this Lease is as set forth in the Work
Letter.
6.302 ALTERATION OF BUILDING. LANDLORD HEREBY RESERVES THE RIGHT AND AT ALL
TIMES SHALL HAVE THE RIGHT TO REPAIR, CHANGE, REDECORATE, ALTER, IMPROVE,
MODIFY, RENOVATE, ENCLOSE OR MAKE ADDITIONS TO ANY PART OF THE PROPERTY
(INCLUDING, WITHOUT LIMITATION, STRUCTURAL ELEMENTS AND LOAD BEARING
ELEMENTS WITHIN THE PREMISES) AND TO ENCLOSE AND/OR CHANGE THE
ARRANGEMENT AND/OR LOCATION OF DRIVEWAYS OR PARKING AREAS OR LANDSCAPING
OR OTHER COMMON AREAS OF THE PROPERTY, ALL WITHOUT BEING HELD GUILTY OF
AN ACTUAL OR CONSTRUCTIVE EVICTION OF TENANT OR BREACH OF THE IMPLIED
WARRANTY OF SUITABILITY AND WITHOUT AN ABATEMENT OF RENT (THE "RESERVED
RIGHT"). WITHOUT IN ANY WAY LIMITING THE GENERALITY OF THE FOREGOING,
LANDLORD'S RESERVED RIGHT SHALL INCLUDE, BUT NOT
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BE LIMITED TO THE RIGHT TO DO ANY OF THE FOLLOWING: (i) erect and
construct scaffolding, pipe, conduit and other structures on and within
and outside of the Premises where reasonably required by the nature of
the changes, alterations, improvements, modifications, renovations
and//or additions being performed, (ii) perform within and outside of the
Premises all work and other activities associated with such changes,
alterations, improvements, modifications, renovations and/or additions
being performed, (iii) repair, change, renovate, remodel, alter, improve,
modify or make additions to the arrangement, appearance, location and/or
size of entrances or passageways, doors and doorways, corridors,
elevators, elevator lobbies, stairs, toilets or other Common Areas or
Service Areas, (iv) temporarily close any Common Area and/or temporarily
suspend Building services and facilities in connection with any repairs,
changes, alterations, modifications, renovations or additions to any part
of the Building, (v) repair, change, alter or improve plumbing, pipes and
conduits located in the Building, including without limitation, those
located within the Premises, the Common Areas, the Service Corridors or
the Service Areas (hereinafter defined) of the Building and (vi) repair,
change, modify, alter, improve, renovate or make additions to the
Building central heating, ventilation, air conditioning, electrical,
mechanical or plumbing systems. When exercising the Reserved Right,
Landlord will interfere with Tenant's use and occupancy of the Premises
as little as is reasonably practicable. Tenant shall be entitled to a
fair and reasonable diminution of Rent during the period and to the
extent that the Premises are (i) unsuitable for use to conduct Tenant's
normal business operation and (ii) not used by Tenant on account of such
unsuitability for more than ten (10) consecutive days, provided that if
the interruption in use is not caused by casualty, condemnation or
applicable laws, then such ten (10) period shall be reduced to five (5)
consecutive days.
6.303 ALTERATIONS, ADDITIONS, IMPROVEMENTS AND INSTALLATIONS BY TENANT.
Tenant shall not, without the prior written consent of Landlord, make any
changes, modifications, alterations, additions or improvements (other
than Tenant's Improvements under the Work Letter) to, or install any
equipment or machinery (other than office equipment and unattached
personal property) on, the Premises (all such changes, modifications,
alterations, additions, improvements (other than Tenant's Improvements
under the Work Letter) and installations approved by Landlord are herein
collectively referred to as "INSTALLATIONS") if any such Installations
would (i) affect any structural or load bearing portions of the Building,
(ii) result in a material increase of electrical usage above the normal
type and amount of electrical current to be provided by Landlord, (iii)
result in an increase in Tenant's usage of heating or air conditioning,
(iv) impact mechanical, electrical or plumbing systems in the Premises or
the Building, (v) affect areas of the Premises which can be viewed from
Common Areas, (vi) require greater or more difficult cleaning work (e.g.,
kitchens, reproduction rooms and interior glass partitions), (vii)
adversely affect Landlord's ability to deliver Building services to other
tenants of the Building or (viii) violate any provision in Article 4
above. As to Installations not covered by the preceding sentence, Tenant
will not perform same without the prior written consent of Landlord,
which consent shall not be unreasonably withheld or delayed. All
Installations shall be at Tenant's sole cost and expense. Without in any
way limiting Landlord's consent rights, Landlord shall not be required to
give its consent until (a) Landlord approves the contractor or person
making such Installations and approves such contractor's insurance
coverage to be provided in connection with the work, (b) if plans and
specifications are reasonably required for the performance of the
applicable work, Landlord
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approves final and complete plans and specifications for such work and
(c) the appropriate governmental agency, if any, has approved the plans
and specifications for such work. All work performed by Tenant or its
contractor relating to the Installations shall conform to applicable
governmental laws, rules and regulations, including, without limitation,
the Disability Acts. Upon completion of the Installations for which plans
and specifications are required, Tenant shall deliver to Landlord "as
built" plans. If Landlord performs such Installations, Tenant shall pay
Landlord, as additional Rent, the cost thereof plus ten percent (10%) as
reimbursement for Landlord's overhead. Each payment shall be made to
Landlord within thirty (30) days after receipt of an invoice from
Landlord. All Installations (other than Tenant's trade fixtures) that
constitute improvements constructed within the Premises shall be
surrendered with the Premises at the expiration or earlier termination of
this Lease, unless Landlord requests that same be removed pursuant to
Section 1.3 above. Tenant shall indemnify and hold Landlord harmless
from, and reimburse Landlord for and with respect to, any and all costs,
expenses (including reasonable attorneys' fees), demands, claims, causes
of action and liens arising from or in connection with any Installations
performed by or on behalf of Tenant.. All Installations performed by or
on behalf of Tenant will be performed diligently and in a first-class
workmanlike manner and in compliance with all applicable laws,
ordinances, regulations and rules of any public authority having
jurisdiction over the Building and/or Tenant's and Landlord's insurance
carriers. Landlord will have the right, but not the obligation, to
inspect periodically the work on the Premises and may require reasonable
changes in the method or quality of the work.
6.304 APPROVALS. Any approval by Landlord (or Landlord's architect and/or
engineers) of any of Tenant's contractors or Tenant's drawings, plans or
specifications which are prepared in connection with any construction of
improvements (including without limitation, Tenant's Improvements) in the
Premises shall not in any way be construed as or constitute a
representation or warranty of Landlord as to the abilities of the
contractor or the adequacy or sufficiency of such drawings, plans or
specifications or the improvements to which they relate, for any use,
purpose or condition.
ARTICLE 7--INSURANCE, FIRE AND CASUALTY
SECTION 7.1 TOTAL OR PARTIAL DESTRUCTION OF THE BUILDING OR THE PREMISES. In
the event that the Building should be totally destroyed by fire or other
casualty or in the event the Building (or any portion thereof) should be so
damaged that rebuilding or repairs cannot be completed, in Landlord's
reasonable opinion, within one hundred eighty (180) days after commencement of
repairs to the Building, Landlord may, at its option, terminate this Lease, in
which event Basic Annual Rent and Additional Rent shall be abated during the
unexpired portion of this Lease effective with the date of such damage.
Landlord shall exercise the termination right pursuant to the preceding
sentence, if at all, by delivering written notice of
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termination to Tenant within ten (10) days after determining that the repairs
cannot be completed within such one hundred eighty (180) day period. In the
event that the Premises should be so damaged by fire or other casualty that
rebuilding or repairs cannot be completed, in Landlord's reasonable opinion,
within one hundred eighty (180) days after the commencement of repairs to the
Premises, Tenant may, at its option terminate this Lease, in which event Basic
Annual Rent and Additional Rent shall be abated during the unexpired portion of
this Lease, effective the date of termination. Tenant shall exercise the
termination right pursuant to the preceding sentence, if at all, by delivering
written notice of termination to Landlord within ten (10) days after being
advised by Landlord that the repairs cannot be completed within such one
hundred eighty (180) day period. In the event the Building or the Premises
should be damaged by fire or other casualty and, in Landlord's reasonable
opinion, the rebuilding or repairs can be completed within one hundred eighty
(180) days after the commencement of repairs to the Building or Premises, as
applicable, or if the damage should be more serious but neither Landlord nor
Tenant elect to terminate this Lease pursuant to this Section, in either such
event Landlord shall, within sixty (60) days after the date of such damage,
commence (and thereafter pursue with reasonable diligence) repairing the
Building and the Premises (including Tenant's Improvements), but only to the
extent of insurance proceeds actually received by Landlord for such repairs, to
substantially the same condition which existed immediately prior to the
happening of the casualty. In no event shall Landlord be required to rebuild,
repair or replace any part of the furniture, equipment, fixtures, inventory,
supplies or any other personalty or any other improvements (except Tenant's
Improvements to the extent set forth in the preceding sentence), which may have
been placed by Tenant within the Building or at the Premises. Landlord shall
allow Tenant a fair diminution of Basic Annual Rent and Additional Rent during
the time the Premises are unfit for the conduct of Tenant's business; provided,
that if such casualty was caused primarily by Tenant, its agents, employees,
licensees, contractors or invitees, Basic Annual Rent and Additional Rent shall
be abated only to the extent Landlord is compensated for such Basic Annual Rent
and Additional Rent by loss of rents insurance, if any. Notwithstanding
Landlord's restoration obligation, in the event any mortgagee under a deed of
trust, security agreement or mortgage on the Building should require that the
insurance proceeds be used to retire or reduce the mortgage debt or if the
insurance company issuing Landlord's fire and casualty insurance policy fails
or refuses to pay Landlord the proceeds under such policy, Landlord shall have
no obligation to rebuild and this Lease shall terminate upon notice by Landlord
to Tenant. Subject to the provisions of subsection 7.201(c) below, any
insurance which may be carried by Landlord or Tenant against loss or damage to
the Building or to the Premises shall be for the sole benefit of the party
carrying such insurance and under its sole control.
SECTION 7.2 TENANT'S INSURANCE.
7.201 TYPES OF COVERAGE. Tenant covenants and agrees that from and after the
date which is ten (10) days prior to Tenant's occupancy of the Premises,
Tenant will carry and maintain, at its sole cost and expense, the
insurance set forth in paragraphs (a), (b) and (c) of this subsection.
(a) Commercial General Liability Insurance covering the Premises and
Tenant's use thereof against claims for personal or bodily injury
or death or property damage occurring upon, in or about the
Premises (including contractual indemnity and liability coverage),
such insurance to insure both Tenant and, as additional named
insureds, Landlord and the Property Manager, and to afford
protection to the limit of not less than $2,000,000.00, combined
single limit, in respect to injury or death to any number of
persons and all property damage arising out of any one (1)
occurrence, with a deductible acceptable to Landlord. This
insurance coverage shall (i) extend to any liability of Tenant
arising out of the indemnities provided for in this Lease and (ii)
be issued on an "occurrence" basis, as opposed to a "claims made"
basis.
(b) Property insurance on an all-risk basis (including, without
limitation, coverage against fire, wind, tornado, vandalism,
malicious mischief, water damage and sprinkler
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leakage) covering all fixtures, equipment and personalty located
in the Premises and endorsed to provide one hundred percent (100%)
replacement cost coverage. Such policy will be written in the names
of Tenant, Landlord and any other parties reasonably designated by
Landlord from time to time, as their respective interests may
appear. The property insurance may, with the consent of the
Landlord, provide for a reasonable deductible.
(c) Worker's compensation insurance insuring against and satisfying
Tenant's obligations and liabilities under the worker's
compensation laws of the State of Texas, together with employer's
liability insurance in an amount not less than $1,000,000.00.
7.202 OTHER REQUIREMENTS OF INSURANCE. All such insurance will be issued and
underwritten by companies reasonably acceptable to Landlord and will
contain endorsements that (a) such insurance may not lapse with respect
to Landlord or Property Manager or be canceled or amended with respect to
Landlord or Property Manager without the insurance company giving
Landlord and Property Manager at least thirty (30) days prior written
notice of such cancellation or amendment, (b) Tenant will be solely
responsible for payment of premiums, (c) in the event of payment of any
loss covered by such policy, Landlord or Landlord's designees will be
paid first by the insurance company for Landlord's loss and (d) Tenant's
insurance is primary in the event of overlapping coverage which may be
carried by Landlord.
7.203 PROOF OF INSURANCE. Tenant shall deliver to Landlord duplicate originals
of all policies of insurance required by this Section 7.2 or duly
executed originals of the evidence of such insurance (on ACORD form 27 or
a similar form) evidencing in-force coverage, stating that Landlord is an
additional insured thereunder, agreeing to give Landlord at least thirty
(30) days written notice prior to termination, cancellation or any
modification adversely affecting Landlord within ten (10) days before
Tenant's occupancy of the Premises and providing such other information
as is required by subsection 7.202 above. Further, Tenant shall deliver
to Landlord renewals thereof at least thirty (30) days prior to the
expiration of the respective policy terms.
SECTION 7.3 LANDLORD'S INSURANCE.
7.301 TYPES OF COVERAGE. Landlord covenants and agrees that from and after the
date of delivery of the Premises from Landlord to Tenant, Landlord will
carry and maintain, at its sole cost and expense, the insurance set forth
in paragraphs (a) and (b) of this subsection.
(a) Commercial General Liability Insurance covering the Building and all
Common Areas, but excluding the Premises, insuring against claims for
personal or bodily injury or death or property damage occurring upon, in
or about the Building or Common Areas to afford protection to the limit
of not less than $2,000,000.00 combined single limit in respect to injury
or death to any number of persons and property damage arising out of any
one (1) occurrence. This insurance coverage shall extend to any liability
of Landlord arising out of the indemnities provided for in this Lease.
(b) Landlord shall at all times during the term hereof maintain in effect
a policy or policies of all risk extended coverage insurance covering the
Building (excluding property required
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to be insured by Tenant) endorsed to provide full replacement cost
coverage and providing protection against perils included within the
standard Texas form of fire and extended coverage insurance policy,
together with insurance against sprinkler damage, vandalism, malicious
mischief and such other risks as Landlord may from time to time determine
and with any such deductibles as Landlord may from time to time
determine.
7.302 SELF INSURANCE AND BLANKET INSURANCE. Any insurance provided for in
subsection 7.301 above may be effected by self-insurance or by a policy
or policies of blanket insurance covering additional items or locations
or assureds, provided that the requirements of this Section 7.3 are
otherwise satisfied. Tenant shall have no rights in any policy or
policies maintained by Landlord.
SECTION 7.4 WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives any
rights it may have against the other (including, but not limited to, a direct
action for damages) on account of any loss or damage occasioned to Landlord or
Tenant, as the case may be (EVEN IF (X) SUCH LOSS OR DAMAGE (A) IS CAUSED BY
THE FAULT, NEGLIGENCE OR OTHER TORTIOUS CONDUCT, ACTS OR OMISSIONS OF THE
RELEASED PARTY OR THE RELEASED PARTY'S DIRECTORS, EMPLOYEES, AGENTS OR INVITEES
AND/OR (B) THE RELEASED PARTY IS STRICTLY LIABLE FOR SUCH LOSS OR DAMAGE), to
their respective property, the Premises, its contents or to any other portion
of the Building or the Property arising from any risk (without regard to the
amount of coverage or the amount of deductible) covered by the property
insurance required to be carried by Tenant and Landlord, respectively, under
subsections 7.201(b) and 7.301(b) above. The foregoing waiver shall be
effective even if either or both parties fail to carry the property insurance
required by Sections 7.201(b) and 7.301(b) above. If a party waiving rights
under this Section is carrying an all risk property insurance policy in the
promulgated form used in the State of Texas and an amendment to such
promulgated form is passed, such amendment shall be deemed not a part of such
promulgated form until it applies to the policy being carried by the waiving
party. Without in any way limiting the foregoing waivers and to the extent
permitted by applicable law, the parties hereto each, on behalf of their
respective insurance companies insuring the property of either Landlord or
Tenant against any such loss, waive any right of subrogation that Landlord or
Tenant or their respective insurers may have against the other party or their
respective officers, directors, employees, agents or invitees and all rights of
their respective insurance companies based upon an assignment from its insured.
Each party to this Lease agrees immediately to give to each such insurance
company written notification of the terms of the mutual waivers contained in
this Section and to have said insurance policies properly endorsed, if
necessary, to prevent the invalidation of said insurance coverage by reason of
said waivers. The foregoing waiver shall be effective whether or not the
parties maintain the required insurance.
SECTION 7.5 INDEMNITY.
7.501 TENANT'S INDEMNITY. Subject to the limitation and exclusions set forth
below in this subsection, Tenant will indemnify and hold harmless
Landlord, Property Manager, their respective officers, directors, and
employees and any other parties for whom Landlord and/or Property Manager
are legally responsible (each a "LANDLORD INDEMNIFIED PARTY") from, and
shall reimburse each Landlord Indemnified Party for and with respect to,
any and all costs, expenses (including, without limitation, reasonable
attorneys fees), claims, demands, actions, proceedings, judgments,
hearings, damages, losses and liabilities brought or asserted by or
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payable to any third party on account of personal injury, death, property
damage or any other form of injury or damage (each a "CLAIM" and
collectively the "CLAIMS") arising out of or relating to (a) an incident
or event which occurred within or on the Premises, EVEN IF THE (X)
INCIDENT OR EVENT IS THE RESULT OF OR CAUSED BY THE NEGLIGENT ACTS OR
OMISSIONS OF ANY LANDLORD INDEMNIFIED PARTY OR (Y) THE LANDLORD
INDEMNIFIED PARTY IS STRICTLY LIABLE FOR ANY CLAIM ARISING FROM SUCH
INCIDENT OR EVENT, (b) the use or occupancy of the Premises, EVEN IF (X)
THE CLAIM IS THE RESULT OF OR CAUSED BY THE NEGLIGENT ACTS OR OMISSIONS
OF ANY LANDLORD INDEMNIFIED PARTY OR (Y) THE LANDLORD INDEMNIFIED PARTY
IS STRICTLY LIABLE FOR SUCH CLAIM, or (c) any breach of this Lease by
Tenant and which resulted in a Claim. The indemnification and
reimbursement obligations of Tenant under this subsection (i) shall be
limited to the greater of the amount of Commercial General Liability
Insurance required to be carried by Tenant under this Lease or $5,000,000
and (ii) shall not apply to a Claim (a) waived by Landlord under Section
7.4 above or any other provision of this Lease, (b) related to hazardous
or toxic materials and caused by an act or omission that does not
constitute a breach by Tenant of the provisions of subsection 4.102 above
or EXHIBIT H attached hereto, (c) arising out of the gross negligence or
intentional misconduct of the Landlord Indemnified Party or (d) resulting
from host liquor liability. If a third party files a lawsuit or brings
any other legal action asserting a Claim against a Landlord Indemnified
Party and that is covered by Tenant's indemnity, then Tenant, upon notice
from the Landlord Indemnified Party, shall resist and defend such Claim
through counsel reasonably satisfactory to the Landlord Indemnified
Party. Tenant's obligations under this subsection shall survive the
termination of this Lease.
7.502 LANDLORD'S INDEMNITY. Subject to the limitation and exclusions set forth
below in this subsection, Landlord will indemnify and hold harmless
Tenant and its officers, directors, and employees and any other parties
for whom Tenant is legally responsible (each a "TENANT INDEMNIFIED
PARTY") from, and shall reimburse each Tenant Indemnified Party for and
with respect to, any and all Claims (as defined in subsection 7.501
preceding) arising out of or relating to (a) an incident or event which
occurred within or on the Common Areas, EVEN IF THE (X) INCIDENT OR EVENT
IS THE RESULT OF OR CAUSED BY THE NEGLIGENT ACTS OR OMISSIONS OF ANY
TENANT INDEMNIFIED PARTY OR (Y) THE TENANT INDEMNIFIED PARTY IS STRICTLY
LIABLE FOR ANY CLAIM ARISING FROM SUCH INCIDENT OR EVENT, (b) the use of
the Common Areas, EVEN IF (X) THE CLAIM IS THE RESULT OF OR CAUSED BY THE
NEGLIGENT ACTS OR OMISSIONS OF ANY TENANT INDEMNIFIED PARTY OR (Y) THE
TENANT INDEMNIFIED PARTY IS STRICTLY LIABLE FOR SUCH CLAIM, or (c) any
breach of this Lease by Landlord and which resulted in a Claim. The
indemnification and reimbursement obligations of Landlord under this
subsection (i) shall be limited to the greater of the amount of
Commercial General Liability Insurance required to be carried by Landlord
under this Lease or $5,000,000 and (ii) shall not apply to a Claim (a)
waived by Tenant under Section 7.4 above or any other provision of this
Lease, (b) related to hazardous or toxic materials and caused by an act
or omission that does not constitute a breach by Landlord of the
provisions of subsection 4.102 above or EXHIBIT H attached hereto, (c)
arising out of the gross negligence or intentional misconduct of the
Tenant Indemnified Party or (d) resulting from host liquor liability. If
a third party files a
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lawsuit or brings any other legal action asserting a Claim against a
Tenant indemnified Party and that is covered by Landlord's indemnity, then
Landlord, upon notice from the Tenant Indemnified Party, shall resist and
defend such Claim through counsel reasonably satisfactory to the Tenant
Indemnified Party. Landlord's obligations under this subsection shall
survive the termination of this Lease.
ARTICLE 8--CONDEMNATION
SECTION 8.1 CONDEMNATION--CONTINUED USE NOT FEASIBLE. If the Property or any
portion thereof that, in Landlord's reasonable opinion, is necessary to the
continued efficient and/or economically feasible use of the Property shall be
taken or condemned in whole or in part for public purposes, or sold to a
condemning authority in lieu of taking, then the term of this Lease shall, at
the option of Landlord, forthwith cease and terminate.
SECTION 8.2 TOTAL CONDEMNATION OF PREMISES. In the event that all or
substantially all of the Premises is taken or condemned or sold in lieu thereof
or Tenant will be unable to use a substantial portion of the Premises for a
period of one hundred eighty (180) consecutive days by reason of a temporary
taking, either Landlord or Tenant may terminate this Lease by delivering
written notice thereof to the other within ten (10) business days after the
taking, condemnation or sale in lieu thereof.
SECTION 8.3 CONDEMNATION WITHOUT TERMINATION. If upon a taking or condemnation
or sale in lieu of the taking of all or less than all of the Property which
gives either Landlord or Tenant the right to terminate this Lease pursuant to
Section 8.1 or 8.2 above and neither Landlord nor Tenant elect to exercise such
termination right, then this Lease shall continue in full force and effect,
provided that, if the taking, condemnation or sale includes any portion of the
Premises, the Basic Annual Rent and Additional Rent shall be redetermined on
the basis of the remaining square feet of Agreed Rentable Area of the Premises.
Landlord, at Landlord's sole option and expense, shall restore and reconstruct
the Building to substantially its former condition to the extent that the same
may be reasonably feasible, but such work shall not be required to exceed the
scope of the work done by Landlord in originally constructing the Building, nor
shall Landlord in any event be required to spend for such work an amount in
excess of the amount received by Landlord as compensation or damages (over and
above amounts going to the mortgagee of the property taken) for the part of the
Building or the Premises so taken.
SECTION 8.4 CONDEMNATION PROCEEDS. Landlord shall receive the entire award
(which shall include sales proceeds) payable as a result of a condemnation,
taking or sale in lieu thereof. Tenant hereby expressly assigns to Landlord any
and all right, title and interest of Tenant now or hereafter arising in and to
any such award. Tenant shall, however, have the right to recover from such
authority through a separate award which does not reduce Landlord's award, any
compensation as may be awarded to Tenant on account of moving and relocation
expenses and depreciation to and removal of Tenant's physical property.
ARTICLE 9--LIENS
Tenant shall keep the Premises and the Property free from all liens arising out
of any work performed, materials furnished or obligations incurred by or for
Tenant and Tenant shall indemnify
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and hold harmless Landlord from and against, and reimburse Landlord for and
with respect to, any and all Claims, arising from or in connection with any
such liens. In the event that Tenant shall not, within ten (10) days following
written notification from Landlord to Tenant of the imposition of any such
lien, cause the same to be released of record by payment or the posting of a
bond in amount, form and substance acceptable to Landlord, Landlord shall have,
in addition to all other remedies provided herein and by law, the right but not
the obligation, to cause the same to be released by such means as it shall deem
proper, including payment of or defense against the claim giving rise to such
lien. All amounts paid or incurred by Landlord in connection therewith shall be
paid by Tenant to Landlord on demand and shall bear interest from the date of
demand until paid at the rate set forth in Section 15.10 below. Nothing in this
Lease shall be deemed or construed in any way as constituting the consent or
request of Landlord, express or implied, by inference or otherwise, to any
contractor, subcontractor, laborer or materialman for the performance of any
labor or the furnishing of any materials for any specific improvement,
alteration or repair of or to the Building or the Premises or any part thereof,
nor as giving Tenant any right, power or authority to contract for or permit
the rendering of any services or the furnishing of any materials that would
give rise to the filing of any mechanic's or other liens against the interest
of Landlord in the Property or the Premises.
ARTICLE 10--TAXES ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, prior to their becoming delinquent,
any and all taxes and assessments levied against, and any increases in Real
Estate Taxes as a result of, any personal property or trade or other fixtures
placed by Tenant in or about the Premises. In the event Landlord pays any such
additional taxes or increases, Tenant will, within thirty (30) days after
demand, reimburse Landlord for the amount thereof. Without in any way limiting
the foregoing provisions, if any authority levying real and personal property
taxes against the Tower as a standard practice for determining the value of the
Tower for tax purposes includes a component for tenant improvements or
non-movable trade fixtures of individual tenants, Tenant will pay Landlord any
portion of such taxes which is equal to the product of (i) the total of such
taxes multiplied by (ii) the fraction the numerator of which is the cost of
tenant improvements or non-movable trade fixtures in the Premises in excess of
the Building standard or existing improvements (collectively, "ABOVE STANDARD
IMPROVEMENTS") and the denominator of which is the cost of all tenant
improvements in the Tower. Upon receipt of any such tax statement, Landlord
will compute Tenant's share of taxes attributable to Above Standard
Improvements, and submit a statement to Tenant evidencing the method of
calculation. Tenant will pay to Landlord together with the next monthly
installment of Base Annual Rent due after the receipt of Landlord's statement
the entire amount due under this Article. The method of calculation of the
share of taxes attributable to Above Standard Improvements will be subject to
adjustment by Landlord from time to time in order to reflect the method
currently utilized by taxing authorities to calculate taxes for Above Standard
Improvements. If Tenant is assessed for taxes for Above Standard Improvements
directly by the taxing authorities, Tenant will pay the same before delinquency
and deliver to Landlord copies of receipts for payment of such taxes and
assessments no later than ten (10) days prior to the deadline for payment
without imposition of penalty.
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ARTICLE 11--SUBLETTING AND ASSIGNING
SECTION 11.1 SUBLEASE AND ASSIGNMENT.
11.101 GENERAL PROHIBITION ON ASSIGNMENT AND SUBLEASING. Except as permitted by
subsection 11.102, Tenant shall not assign this Lease, or allow it to be
assigned, in whole or in part, by operation of law or otherwise (it
being agreed that for purposes of this Lease, assignment shall include,
without limitation, the transfer of a majority interest of stock,
partnership or other forms of ownership interests, merger or
dissolution) or mortgage or pledge the same, or sublet the Premises or
any part thereof or permit the Premises to be occupied by any firm,
person, partnership or corporation or any combination thereof, other
than Tenant, without the prior written consent of Landlord.
Notwithstanding any subletting or assignment by Tenant hereunder or any
provision herein to the contrary, Tenant shall remain fully liable for
the performance of all the covenants, agreements, terms, provisions and
conditions contained in this Lease on the part of Tenant to be
performed, including without limitation, Tenant's obligation to pay
Basic Rent and Additional Rent during the entire Term. Tenant shall
deliver to Landlord a copy of each assignment or sublease entered into
by Tenant promptly after the execution thereof, whether or not
Landlord's consent is required in connection therewith. No assignee or
sublessee of the Premises or any portion thereof may assign or sublet
the Premises or any portion thereof. Consent by Landlord to one or more
assignments or sublettings shall not operate as a waiver of Landlord's
rights as to any subsequent assignments and/or sublettings. Any
assignment made by Tenant shall be in recordable form and shall contain
a covenant of assumption by the assignee running to Landlord. All
reasonable legal fees and expenses incurred by Landlord in connection
with any assignment or sublease proposed by Tenant will be the
responsibility of Tenant and will be paid by Tenant within thirty (30)
days of receipt of an invoice from Landlord.
11.102 ASSIGNMENT TO AFFILIATE AND PERMITTED OFFERINGS.
(a) Notwithstanding the prohibition against assignment and subleasing
contained in subsection 11.101, Tenant may, without the prior
written consent of Landlord, but only after giving Landlord at
least thirty (30) days prior written notice (which notice shall
include the identity of the Affiliate [hereinafter defined], the
relationship of the Affiliate to Tenant and the form of the
proposed assignment or sublease, which shall be in form
reasonably satisfactory to Landlord), sublet the Premises or any
part thereof to an Affiliate or assign this Lease to an Affiliate
or permit occupancy of any portion of the Premises by an
Affiliate. The term "Affiliate" shall mean (i) any corporation
which, directly or indirectly, controls or is controlled by or is
under common control with Tenant or (ii) any corporation not less
than fifty percent (50%) of whose outstanding stock shall, at the
time, be owned directly or indirectly by Tenant or Tenant's
parent corporation, or (iii) any entity which merges with Tenant
or a new entity which results from a merger between Tenant and
another entity, provided such merged entity or new resulting
entity has a financial net worth at least equal to the greater of
(a) the net worth of Tenant on the date of this Lease or (b) the
net worth of Tenant immediately prior to the merger. For purposes
of this subsection (b), "control" shall mean the possession,
directly or indirectly, of the power to direct or cause the
direction of the management and policies of such corporation,
whether
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through the ownership of voting securities or by contract or
otherwise and ownership of the liabilities, losses, profits and
tax benefits for such entity.
(b) Notwithstanding any provision or inference in this Lease to the
contrary, Tenant may issue new stock in connection with any public
offering or private placement of such stock.
SECTION 11.2 LANDLORD'S RIGHTS.
11.201 LANDLORD'S TERMINATION AND CONSENT RIGHTS.
(a) If Tenant desires to assign any portion of this Lease or sublease
any portion of the Premises to any party other than an Affiliate,
Tenant shall submit to Landlord (a) in writing the name of the
proposed assignee or subtenant, as applicable, the nature of the
proposed assignee or subtenant's business and, as applicable, the
portion of this Lease Tenant desires to assign or the portion of
the Premises which Tenant desires to sublease, (b) a current
balance sheet and income statement for such proposed assignee or
subtenant, as applicable, (c) a copy of the proposed form of
sublease (THE "PROPOSED SUBLEASE") or proposed form of assignment
("PROPOSED ASSIGNMENT"), as applicable, (d) recommendations for the
proposed assignee or subtenant, as applicable from two (2) prior
landlords of the proposed assignee or subtenant (with the
understanding that if such proposed assignee or subtenant does not
have two prior landlords, then recommendations will be required
only from such proposed assignee's or subtenant's prior landlord,
if any), (e) the portion of the Premises which Tenant proposes to
sublease or the percentage of Tenant's leasehold estate that Tenant
proposes to assign, as applicable, and (e) such other information
as Landlord may reasonably request (such documents and information,
collectively the "REQUIRED INFORMATION").
(b) Subject to Tenant's right under the next following sentence, Landlord
shall have the right to terminate this Lease as to the Applicable
Portion of the Premises (hereinafter defined), by delivering to
Tenant, within fifteen (15) days after Landlord receives the
Required Information, a written notice in which (i) Landlord elects
to terminate this Lease to the Applicable Portion of the Premises
and (ii) Landlord specifies the date on which this Lease will
terminate as to the Applicable Portion of the Premises (the
"SPECIFIED TERMINATION DATE"), which Specified Termination Date
shall not be sooner than 30 days after the date of the applicable
notice of termination, nor later than 90 days after the date of the
applicable notice of termination. If Landlord forwards a notice of
termination in accordance with the preceding provisions, Tenant
shall have the right to withdraw its request for Landlord's consent
to a Proposed Sublease or Proposed Assignment by delivering
Landlord written notice thereof (each such notice a "NOTICE OF
WITHDRAWAL") within five (5) days after receiving Landlord's
termination notice. If Tenant timely delivers a Notice of
Withdrawal, the applicable termination notice shall be deemed null
and void and this Lease shall not terminate with respect to the
Applicable Portion of the Premises. If Tenant fails to deliver a
Notice of Withdrawal within the required 3-day period, then
Landlord's
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applicable notice of termination shall be and remain in full force
and effect and this Lease shall terminate on the Specified
Termination Date with respect to the Applicable Portion of the
Premises (the Applicable Portion of the Premises covered by each
such notice of termination which remains in full force and effect,
the "TERMINATED SPACE"). The "APPLICABLE PORTION OF THE PREMISES"
shall mean the following: (A) if the applicable Proposed Sublease
is for the entire Premises or the applicable Proposed Assignment
is for Tenant's leasehold estate in all of the Premises, the
Applicable Portion of the Premises shall mean the entire Premises;
(B) if the Proposed Sublease covers less than all of the Premises
or the Proposed Assignment is an assignment of Tenant's leasehold
estate in less than all of the Premises, the Applicable Portion of
the Premises shall mean the portion of the Premises that is the
subject of the applicable Proposed Sublease or the portion of the
Premises with respect to which Tenant proposes to assign its
leasehold estate pursuant to the applicable Proposed Assignment.
(c) If Landlord does not exercise its termination right with respect to
the Applicable Portion of the Premises within the required 15-day
period, then Landlord shall be deemed to have waived its right to
terminate this Lease with respect to the Applicable Portion of the
Premises, but shall have the right to consent or withhold its
consent to the applicable Proposed Assignment or Proposed Sublease
by delivering written notice thereof to Tenant within five (5) days
after such 15-day period. If Landlord does not exercise its right
to consent or withhold its consent in respect of a Proposed
Assignment or Proposed Sublease, as applicable, within such 5-day
period, then Landlord shall be deemed to have consented to the
Proposed Assignment or Proposed Sublease, as applicable.
11.202 EFFECT OF TERMINATION. If the Terminated Space is the entire Premises,
Base Rent and Additional Rent shall be prorated to the Termination Date.
If the Terminated Space is less than the entire Premises, then, from and
after the applicable Specified Termination Date, (i) the Base Rent shall
be reduced by the amount of Base Rent that was being paid in respect of
the Terminated Space as of the applicable Specified Termination Date,
(iii) the Agreed Rentable Area of the Premises shall be decreased by the
square feet of rentable area of the Terminated Space, (iv) Tenant's
estimated payments of Additional Rent shall be recalculated on the basis
of the revised Agreed Rentable Area of the Premises, (v) if the
Terminated Space adjoins another portion of the Premises, Tenant shall,
at Tenant's sole cost and expense, construct and finish such demising
walls as are necessary to physically separate the Premises from the
Terminated Space, and (vi) if the Terminated Space is part of a floor
which is fully included in the Premises, Landlord shall have the right
(a) to construct and finish in accordance with Building standards or to
cause Tenant to construct and finish in accordance with Building
standards such demising walls as are necessary (x) to construct a public
corridor so as to convert the floor to a multi-tenant floor and (y) to
convert the restrooms on such floor (including access thereto) to
restrooms which will serve the entire floor, as opposed to only the
Premises and (b) to make such revisions, if any, are necessary, to
properly light, heat, cool and ventilate the public corridor and public
restrooms. The alterations performed by Tenant pursuant to this
paragraph shall be deemed Installations and therefore subject to the
provisions of subsection 6.303.
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SECTION 11.3 LANDLORD'S RIGHTS RELATING TO ASSIGNEE OR SUBTENANT. Without
limiting Landlord's consent rights and as a condition to obtaining Landlord's
consent, (i) each assignee must assume all obligations under this Lease, and
(ii) each sublessee must confirm that its sublease is subject and subordinate
to this Lease. In addition, each assignee and sublessee shall agree to cause
the Premises to comply at all times with all requirements of the Disability
Acts (as amended), including, but not limited to, obligations arising out of or
associated with such assignee's or subtenant's use of or activities or business
operations conducted within the Premises. No assignee or sublessee of the
Premises or any portion thereof may assign or sublet the Premises or any
portion thereof. To the extent the rentals or income derived from any sublease
or assignment exceed the sum of the rentals payable under this Lease in respect
of the portion of the Premises covered by such sublease or assignment (such
excess, the "EXCESS SUBLEASE RENTS"), Landlord shall be entitled to fifty
percent (50%) of such Excess Sublease Rents and Tenant shall pay Landlord its
share of Excess Sublease Rents promptly after receipt thereof. If this Lease or
any part hereof is assigned or the Premises or any part thereof are sublet,
Landlord may at its option collect directly from such assignee or sublessee all
rents becoming due to Tenant under such assignment or sublease, in which event
Landlord shall first apply such rent against any sums due to Landlord by Tenant
hereunder and Tenant shall be entitled to the remainder, if any, but only to
the extent of Tenant's share of Excess Sublease Rents. Tenant hereby authorizes
and directs any such assignee or sublessee to make such payments of rent direct
to Landlord upon receipt of notice from Landlord and Tenant agrees that any
such payments made by an assignee or sublessee to Landlord shall, to the extent
of the payments so made, be a full and complete release and discharge of rent
owed to Tenant by such assignee or sublessee. No direct collection by Landlord
from any such assignee or sublessee shall be construed to constitute a novation
or a release of Tenant or any guarantor of Tenant from the further performance
of its obligations hereunder. Receipt by Landlord of rent from any assignee,
sublessee or occupant of the Premises or any part thereof shall not be deemed a
waiver of the above covenant in this Lease against assignment and subletting or
a release of Tenant under this Lease. In the event that, following an
assignment or subletting, this Lease or the rights and obligations of Tenant
hereunder are terminated for any reason, including without limitation in
connection with an Event of Default by or bankruptcy of Tenant (which, for the
purposes of this Section 11.3, shall include all persons or entities claiming
by or through Tenant), Landlord may, at its sole option, consider this Lease to
be thereafter a direct lease to the assignee or subtenant of Tenant upon the
terms and conditions contained in this Lease.
SECTION 11.4 ASSIGNMENT AND BANKRUPTCY.
11.401 ASSIGNMENTS AFTER BANKRUPTCY. If, pursuant to applicable bankruptcy law
(as hereinafter defined), Tenant (or its successor in interest
hereunder) is permitted to assign this Lease in disregard of the
restrictions contained in this Article 11 (or if this Lease shall be
assumed by a trustee for such person), the trustee or assignee shall
cure any default under this Lease and shall provide adequate assurance
of future performance by the trustee or assignee including (1) of the
source of payment of Basic Annual Rent and performance of other
obligations under this Lease (for which adequate assurance shall mean
the deposit of cash security with Landlord in an amount equal to the sum
of one (1) year's Basic Annual Rent, Additional Rent and other Rent then
reserved hereunder for the calendar year preceding the year in which
such assignment is intended to become effective, which deposit shall be
held by Landlord,
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without interest, for the balance of the Term as security for the full
and faithful performance of all of the obligations under this Lease on
the part of Tenant yet to be performed) and that any such assignee of
this Lease shall have a net worth exclusive of good will, computed in
accordance with the generally accepted accounting principles, equal to
at least ten (10) times the aggregate of the Basic Annual Rent reserved
hereunder; and (2) that the use of the Premises shall be in accordance
with the requirements of Article 3 hereof and, further, shall in no way
diminish the reputation of the Building as a first-class office building
or impose any additional burden upon the Building or increase the
services to be provided by Landlord. If all defaults are not cured and
such adequate assurance is not provided within sixty (60) days after
there has been an order for relief under applicable bankruptcy law, then
this Lease shall be deemed rejected, Tenant or any other person in
possession shall vacate the Premises, and Landlord shall be entitled to
retain any Basic Annual Rent, Additional Rent and any other Rent,
together with any security deposit previously received from the Tenant,
and shall have no further liability to Tenant or any person claiming
through Tenant or any trustee.
11.402 BANKRUPTCY OF ASSIGNEE. If Tenant assigns this Lease to any party and
such party or its successors or representatives causes termination or
rejection of this Lease pursuant to applicable bankruptcy law, then,
notwithstanding any such termination or rejection, Tenant (A) shall
remain fully liable for the performance of all covenants, agreements,
terms, provisions and conditions contained in this Lease, as though the
assignment never occurred and (B) shall, without in any way limiting the
foregoing, in writing ratify the terms of this Lease, as same existed
immediately prior to the termination or rejection.
ARTICLE 12--TRANSFERS BY LANDLORD, SUBORDINATION AND
TENANT'S ESTOPPEL CERTIFICATE
SECTION 12.1 SALE OF THE PROPERTY. In the event of any transfer of title to the
Building, the transferor shall automatically be relieved and freed of all
obligations of Landlord under this Lease accruing after such transfer, provided
that if a Security Deposit has been made by Tenant, Landlord shall not be
released from liability with respect thereto unless Landlord transfers the
Security Deposit to the transferee.
SECTION 12.2 SUBORDINATION, ATTORNMENT AND NOTICE. This Lease is subject and
subordinate to (i) any lease now or hereafter existing wherein Landlord is the
tenant (each such lease, a "GROUND LEASE") and to the liens of any and all now
or hereafter existing mortgages and deeds of trust affecting the Property or
any portion thereof (each such mortgage and deed of trust, a "MORTGAGE"), (ii)
any and all advances (including interest thereon) to be made under any such
Ground Lease or Mortgage and (iii) all modifications, consolidations, renewals,
replacements and extensions of any such Ground Lease or Mortgage; provided that
the foregoing subordination is conditioned upon and subject to the lessor under
any such Ground Lease and the holder of any such Mortgage delivering to and
entering into with Tenant a non-disturbance (each a "NON-DISTURBANCE
AGREEMENT"). Tenant also agrees that any lessor under a Ground Lease and any
mortgagee or trustee under a Mortgage may elect (which election shall be
revocable) to have this Lease superior to any Ground Lease or lien of its
Mortgage, as applicable, and, in the event of such election and upon
notification by such lessor, mortgagee or trustee to Tenant to that effect,
this Lease shall be deemed superior to the said Ground Lease or Mortgage, as
applicable, whether this Lease
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is dated prior to or subsequent to the date of said Ground Lease or Mortgage.
Tenant shall, in the event of the sale or assignment of Landlord's interest in
the Premises (except in a sale-leaseback financing transaction), or in the
event of the termination of any Ground Lease, attorn to and recognize such
purchaser, assignee, mortgagee or lessor, as applicable, as Landlord under this
Lease, provided that the lessor under such Ground Lease or the holder of any
such Mortgage has delivered to and entered into with Tenant a Non-Disturbance
Agreement. Tenant shall, in the event of a termination of a Ground Lease or any
proceedings brought for the foreclosure of, or in the event of the exercise of
the power of sale under, any mortgage or deed of trust covering the Premises,
attorn to and recognize the lessor under such Ground Lease or the purchaser at
such sale, assignee or mortgagee, as the case may be, as Landlord under this
Lease, provided that the lessor under such Ground Lease or the holder of any
such mortgage or deed of trust has delivered to and entered into with Tenant a
Non-Disturbance Agreement. Provided a Non-Disturbance Agreement has been
entered into by the parties, the above subordination and attornment clauses
shall be self-operative and no further instruments of subordination or
attornment need be required by any mortgagee, trustee, lessor, purchaser or
assignee. In confirmation thereof, Tenant agrees that, upon the request of
Landlord, or any such lessor, mortgagee, trustee, purchaser or assignee, Tenant
shall execute and deliver a subordination and attornment agreement in form
reasonably satisfactory to Tenant.
SECTION 12.3 TENANT'S ESTOPPEL CERTIFICATE. Tenant shall, within five (5) days
after receiving a written request from Landlord or any mortgagee of Landlord,
without additional consideration, deliver an estoppel certificate, consisting
of reasonable statements required by Landlord, any mortgagee or purchaser of
any interest in the Property, which statements may include but shall not be
limited to the following: this Lease is in full force and effect, with rental
paid through a specified date; this Lease has not been modified or amended;
Landlord is not in default and Landlord has fully performed all of Landlord's
obligations hereunder; and such other statements as may reasonably be required
by the requesting party. If Tenant is unable to make any of the statements
contained in the estoppel certificate because the same is untrue, Tenant shall
with specificity state the reason why such statement is untrue. Tenant shall,
if requested by Landlord or any such mortgagee, deliver to Landlord a fully
executed instrument in form reasonably satisfactory to Landlord evidencing the
agreement of Tenant to the mortgage or other hypothecation by Landlord of the
interest of Landlord hereunder.
ARTICLE 13--DEFAULT
SECTION 13.1 DEFAULTS BY TENANT. The occurrence of any of the events described
in subsections 13.101 through 13.108 shall constitute a default by Tenant under
this Lease.
13.101 FAILURE TO PAY RENT. With respect to the first two payments of Rent not
made by Tenant when due in any twelve (12) month period, the failure by
Tenant to make either such payment to Landlord within three (3) business
days after Tenant receives written notice specifying that the payment
was not made when due. With respect to any other payment of Rent, the
failure by Tenant to make such payment of Rent to Landlord when due, no
notice of any such failure being required.
13.102 FAILURE TO PERFORM. Except for a failure covered by subsection 13.101
above or 13.103 below, any failure by Tenant to observe and perform any
provision of this Lease to be
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observed or performed by Tenant where such failure continues for thirty
(30) days after written notice to Tenant, provided that if such failure
cannot be cured within said thirty (30) day period, Tenant shall not be
in default hereunder so long as Tenant commences curative action within
such thirty (30) day period, diligently and continuously pursues the
curative action and fully and completely cures the failure within ninety
(90) days after such written notice to Tenant.
13.103 CONTINUAL FAILURE TO PERFORM. The third failure by Tenant in any twelve
(12) month period to perform and observe a particular provision of this
Lease to be observed or performed by Tenant (other than the failure to
pay Rent, which in all instances will be covered by subsection 13.101
above), no notice being required for any such third failure.
13.104 BANKRUPTCY, INSOLVENCY, ETC. Tenant or any guarantor of Tenant's
obligations hereunder (hereinafter called "GUARANTOR", whether one (1)
or more), (i) cannot meet its obligations as they become due, (ii)
becomes or is declared insolvent according to any law, (iii) makes a
transfer in fraud of creditors according to any applicable law, (iv)
assigns or conveys all or a substantial portion of its property for the
benefit or creditors or (v) Tenant or Guarantor files a petition for
relief under the Federal Bankruptcy Code or any other present or future
federal or state insolvency, bankruptcy or similar law (collectively,
"applicable bankruptcy law"); a receiver or trustee is appointed for
Tenant or Guarantor or its property; the interest of Tenant or Guarantor
under this Lease is levied on under execution or under other legal
process; any involuntary petition is filed against Tenant or Guarantor
under applicable bankruptcy law; or any action under applicable
bankruptcy law is taken to reorganize or modify Tenant's or Guarantor's
capital structure if either Tenant or Guarantor be a corporation or
other entity (provided that no such levy, execution, legal process or
petition filed against Tenant or Guarantor shall constitute a breach of
this Lease if Tenant or Guarantor shall vigorously contest the same by
appropriate proceedings and shall remove or vacate the same within
ninety (90) days from the date of its creation, service or filing).
13.105 LOSS OF RIGHT TO DO BUSINESS. If Tenant is a corporation or limited
partnership, Tenant fails to maintain its right to do business in the
State of Texas or fails to pay any applicable annual franchise taxes as
and when same become finally due and payable and such failure continues
for ten (10) business days after Tenant receives written notice thereof
from the State of Texas.
13.106 DISSOLUTION OR LIQUIDATION. If Tenant is a corporation or partnership,
Tenant dissolves or liquidates or otherwise fails to maintain its
corporate or partnership structure, as applicable.
With respect to the defaults described in subsections 13.103 through 13.105,
Landlord shall not be obligated to give Tenant notices of default and Tenant
shall have no right to cure such defaults.
SECTION 13.2 REMEDIES OF LANDLORD.
13.201 TERMINATION OF THE lEASE. Upon the occurrence of a default by Tenant
hereunder, Landlord may, without judicial process, terminate this Lease
by giving written notice thereof to Tenant (whereupon all obligations
and liabilities of Landlord hereunder shall terminate) and, without
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further notice and without liability, repossess the Premises. Landlord
shall be entitled to recover all loss and damage Landlord may suffer by
reason of such termination, whether through inability to relet the
Premises on satisfactory terms or otherwise, including without
limitation, the following (without duplication of any element of
damages):
(a) accrued Rent to the date of termination and Late Charges, plus
interest thereon at the rate established under Section 15.10 below
from the date due through the date paid or date of any judgment or
award by any court of competent jurisdiction, the unamortized cost
of Tenant's Improvements, brokers' fees and commissions, attorneys'
fees, moving allowances and any other costs incurred by Landlord in
connection with making or executing this Lease, the cost of
recovering the Premises and the costs of reletting the Premises
(including, without limitation, advertising costs, brokerage fees,
leasing commissions, reasonable attorneys' fees and refurbishing
costs and other costs in readying the Premises for a new tenant);
(b) the present value of the Rent (discounted at a rate of interest equal
to eight percent [8%] per annum [the "DISCOUNT RATE"]) that would
have accrued under this Lease for the balance of the Lease term but
for such termination, reduced by the reasonable fair market rental
value of the Premises for such balance of the Lease term
(determined from the present value of the actual base rents,
discounted at the Discount Rate, received and to be received from
Landlord's reletting of the Premises or, if the Premises are not
relet, the base rents, discounted at the Discount Rate, that would
be received from a comparable lease and comparable tenant for a
comparable term and taking into account among other things, the
condition of the Premises, market conditions and the period of time
the Premises may reasonably remain vacant before Landlord is able
to re-lease the same to a suitable replacement tenant, it being
agreed that Landlord shall have no obligation to relet or attempt
to relet the Premises);
(c) plus any other costs or amounts necessary to compensate Landlord
for its damages.
Notwithstanding the preceding provisions, Tenant shall not be liable for
consequential damages incurred by Landlord, save and except for
consequential damages incurred by Landlord as a result of Tenant's
holdover in the Premises following the expiration or earlier termination
of this Lease.
13.202 REPOSSESSION AND RE-ENTRY. Upon the occurrence of a default by Tenant
hereunder, Landlord may, without judicial process, immediately terminate
Tenant's right of possession of the Premises (whereupon all obligations
and liability of Landlord hereunder shall terminate), but not terminate
this Lease, and, without notice, demand or liability, enter upon the
Premises or any part thereof, take absolute possession of the same,
expel or remove Tenant and any other person or entity who may be
occupying the Premises and change the locks. If Landlord terminates
Tenant's possession of the Premises under this subsection 13.202, (i)
Landlord shall have no obligation whatsoever to tender to Tenant a key
for new locks installed in the Premises, (ii) Tenant shall have no
further right to possession of the Premises and (iii) Landlord shall
have no obligation whatsoever to relet or attempt to relet the Premises.
Landlord may, however, at its sole option relet the Premises or any part
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thereof for such terms and such rents as Landlord may in its sole
discretion elect. If Landlord elects to relet the Premises, rent
received by Landlord from such reletting shall be applied first, to the
payment of any indebtedness other than Rent due hereunder from Tenant to
Landlord (in such order as Landlord shall designate), second, to the
payment of any cost of such reletting, including, without limitation,
refurbishing costs, reasonable attorneys' fees, advertising costs,
brokerage fees and leasing commissions and third, to the payment of Rent
due and unpaid hereunder (in such order as Landlord shall designate),
and Tenant shall Satisfy and pay to Landlord any deficiency upon demand
therefor from time to time. Landlord shall not be responsible or liable
for any failure to relet the Premises or any part thereof or for any
failure to collect any rent due upon any such reletting. No such
re-entry or taking of possession of the Premises by Landlord shall be
construed as an election on Landlord's part to terminate this Lease
unless a written notice of such termination is given to Tenant pursuant
to subsection 13.201 above. If Landlord relets the Premises, either
before or after the termination of this Lease, all such rentals received
from such lease shall be and remain the exclusive property of Landlord
and Tenant shall not be, at any time, entitled to recover any such
rental. Landlord may at any time after a reletting elect to terminate
this Lease.
13.203 CURE OF DEFAULT. Upon the occurrence of a default hereunder by Tenant,
Landlord may, without judicial process and without having any liability
therefor, enter upon the Premises and do whatever Tenant is obligated to
do under the terms of this Lease and Tenant agrees to reimburse Landlord
on demand for any expenses which Landlord may incur in effecting
compliance with Tenant's obligations under this Lease, and Tenant
further agrees that Landlord shall not be liable for any damages
resulting to Tenant from such action, whether caused by the negligence
of Landlord or otherwise.
13.204 CONTINUING OBLIGATIONS. No repossession of or re-entering upon the
Premises or any part thereof pursuant to subsection 13.202 or 13.203
above or otherwise and no reletting of the Premises or any part thereof
pursuant to subsection 13.202 above shall relieve Tenant or any
Guarantor of its liabilities and obligations hereunder, all of which
shall survive such repossession or re-entering. In the event of any such
repossession of or re-entering upon the Premises or any part thereof by
reason of the occurrence of a default, Tenant will continue to pay to
Landlord Rent required to be paid by Tenant.
SECTION 13.3 DEFAULTS BY LANDLORD. Landlord shall be in default under this
Lease if and only if Landlord fails to perform any of its obligations hereunder
and said failure continues for a period of thirty (30) days after Tenant
delivers written notice thereof to Landlord (to each of the addresses required
by this Section) and each mortgagee who has a lien against any portion of the
Property and whose name and address has been provided to Tenant, provided that
if such failure cannot reasonably be cured within said thirty (30) day period,
Landlord shall not be in default hereunder if the curative action is commenced
within said thirty (30) day period and is thereafter diligently pursued until
cured. In no event shall (i) Tenant claim a constructive or actual eviction or
that the Premises have become unsuitable hereunder or (ii) a constructive or
actual eviction or breach of the implied warranty of suitability be deemed to
have occurred under this Lease, prior to the expiration of the notice and cure
periods provided under this Section 13.3. Any notice of a failure to perform by
Landlord shall be sent to Landlord at the addresses and to the attention of the
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parties set forth in the Basic Lease Provisions. Any notice of a failure to
perform by Landlord not sent to Landlord at all addresses and/or to the
attention of all parties required under this Section and to each mortgagee who
is entitled to notice or not sent in compliance with Article 14 below shall be
of no force or effect.
SECTION 13.4 LANDLORD'S LIABILITY.
13.401 TENANT'S RIGHTS IN RESPECT OF LANDLORD DEFAULT. Tenant is granted no
contractual right of termination by this Lease, except to the extent and
only to the extent set forth in Articles 7 and 8 above. If Tenant shall
recover a money judgment against Landlord, such judgment shall be
satisfied only out of the right, title and interest of Landlord in the
Property as the same may then be encumbered and Landlord shall not be
liable for any deficiency. If Landlord is found to be in default
hereunder by reason of its failure to give a consent that it is required
to give hereunder, Tenant's sole remedy will be an action for specific
performance or injunction. The foregoing sentence shall in no event be
construed as mandatorily requiring Landlord to give consents under this
Lease. In no event shall Landlord be liable to Tenant for consequential
or special damages by reason of a failure to perform (or a default) by
Landlord hereunder or otherwise. In no event shall Tenant have the right
to levy execution against any property of Landlord other than its
interest in the Property as hereinbefore expressly provided.
13.402 CERTAIN LIMITATIONS ON LANDLORD'S LIABILITY. UNLESS COVERED BY
SUBSECTION 7.502 ABOVE OR CAUSED BY LANDLORD'S GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT AND WITHOUT LIMITING THE PROVISIONS OF SECTION 7.4,
LANDLORD SHALL NOT BE LIABLE TO TENANT FOR ANY CLAIMS, ACTIONS, DEMANDS,
COSTS, EXPENSES, DAMAGE OR LIABILITY OF ANY KIND (i) arising out of the
use, occupancy or enjoyment of the Premises by Tenant or any person
therein or holding under Tenant or by or through the acts or omissions
of any of their respective employees, officers, agents, invitees or
contractors, (ii) caused by or arising out of fire, explosion, falling
sheetrock, gas, electricity, water, rain, snow or dampness, or leaks in
any part of the Premises, (iii) caused by or arising out of damage to
the roof, pipes, appliances or plumbing works or any damage to or
malfunction of heating, ventilation or air conditioning equipment, (iv)
caused by tenants or any persons either in the Premises or elsewhere in
the Building (other than Common Areas) or by occupants of property
adjacent to the Building or Common Areas or by the public or by the
construction of any private, public or quasi-public work or (v) caused
by any act, neglect or negligence of Tenant. In no event shall Landlord
be liable to Tenant for any loss of or damage to property of Tenant or
of others located in the Premises, the Building or any other part of the
Property by reason of theft or burglary.
SECTION 13.5 WAIVER OF TEXAS DECEPTIVE TRADE PRACTICES ACT. TENANT HEREBY
WAIVES ALL ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES - CONSUMER
PROTECTION ACT, SECTION 17.41 ET. SEQ. OF THE TEXAS BUSINESS AND COMMERCE CODE
(THE "DTPA"), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER
CONSULTATION WITH AN ATTORNEY OF TENANT'S OWN SELECTION, TENANT VOLUNTARILY
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CONSENTS TO THIS WAIVER. The foregoing waiver by Tenant shall also be finding
on any permitted assign or successor of Tenant under this Lease. The provisions
of this Section shall survive any termination of this Lease. Tenant represents
to Landlord:
(a)Tenant is not in a significantly disparate bargaining position with
respect to this Lease and the transaction evidenced hereby.
(b)Tenant is represented by legal counsel in connection wit this
Lease.
SECTION 13.6 LANDLORD'S LIEN. Tenant grants to Landlord an express contract
lien on and security interest in and to all goods, equipment, furnishings,
fixtures, furniture, chattels and personal property of whatever nature owned by
Tenant attached or affixed to or used in and about the Premises on the date of
this Lease or at any time after the date of this Lease or otherwise located in
the Premises and all renewals or replacements or substitutions for any of the
foregoing, all building materials and equipment now or hereafter delivered to
the Premises and intended to be installed in the Premises and all security
deposits and advance rentals under lease agreements on the date of this Lease
or at any time after the date of this Lease covering or affecting the Premises
and held by or for the benefit of Tenant and all proceeds of the foregoing
(including by way of illustration, but not limitation, proceeds of any
insurance which may accrue to Tenant by reason of damage or destruction of any
such property). On the date this Lease is executed, Tenant shall execute and
deliver to Landlord two multiple originals of a financing statement in form
sufficient to perfect the security interest granted hereunder. A carbon,
photographic or other reproduction of this Lease is sufficient and may be filed
as a financing statement. Landlord shall have all the rights and remedies of a
secured party under the Texas Business and Commerce Code and this lien and
security interest may be foreclosed by process of law. The requirement of
reasonable notice prior to any sale under Article 9 of the Texas Business and
Commerce Code shall be met if such notice is given in the manner prescribed
herein at least ten (10) days before the day of sale. Any sale made pursuant to
the provisions of this Section shall be deemed to have been a public sale
conducted in a commercially reasonable manner if held in the Premises after the
time, place and method of sale and a general description of the types of
property to be sold have been advertised for ten (10) consecutive days prior to
the date of sale in a daily newspaper published in the county in Texas where
the Building is located.
SECTION 13.7 CUMULATIVE REMEDIES. No right or remedy herein conferred upon or
reserved to Landlord or Tenant is intended to be exclusive of any other right
or remedy set forth herein or otherwise available to Landlord or Tenant at law
or in equity and each and every right and remedy shall be cumulative and in
addition to any other right or remedy given hereunder or now or hereafter
existing at law or in equity or by statute. In addition to the other remedies
provided in this Lease and without limiting the preceding sentence, Landlord
and Tenant shall be entitled, to the extent permitted by applicable law, to
injunctive relief in case of the violation, or attempted or threatened
violation, of any of the covenants, agreements, conditions or provisions of
this Lease, or to a decree compelling performance of any of the covenants,
agreements, conditions or provisions of this Lease, or to any other remedy
allowed to Landlord or Tenant, as applicable, at law or in equity.
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SECTION 13.8 VACATING PREMISES. In the event that Tenant ceases all or
substantially all of its business operations in the Premises for a period of
more than ninety (90) calendar days, Landlord shall have the right to terminate
this Lease by delivering written notice thereof to Tenant.
ARTICLE 14--NOTICES
Any notice or communication required or permitted in this Lease shall be given
in writing, sent by (a) personal delivery, with proof of delivery, (b)
expedited delivery service, with proof of delivery, (c) United States mail,
postage prepaid, registered or certified mail, return receipt requested or (d)
prepaid telegram (provided that such telegram is confirmed by expedited
delivery service or by mail in the manner previously described), addressed as
provided in Item 14 of the Basic Lease Provisions and Section 13.3 above or to
such other address or to the attention of such other person as shall be
designated from time to time in writing by the applicable party and sent in
accordance herewith. Notice also may be given by telex or fax, provided each
such transmission is confirmed (and such confirmation is supported by
documented evidence) as received and further provided a telex or fax number, as
the case may be, is set forth in Item 14 of the Basic Lease Provisions. Any
such notice or communication shall be deemed to have been given either at the
time of personal delivery or, in the case of delivery service or mail, as of
the date of first attempted delivery at the address and in the manner provided
herein, or in the case of telegram or telex or fax, upon receipt.
ARTICLE 15--MISCELLANEOUS PROVISIONS
SECTION 15.1 BUILDING NAME AND ADDRESS. Tenant shall not, without the written
consent of Landlord, use the name of the Building for any purpose other than as
the address of the business to be conducted by Tenant in the Premises and in no
event shall Tenant acquire any rights in or to such names. Landlord shall have
the right at any time to change the name, number or designation by which the
Building is known.
SECTION 15.2 SIGNAGE. Tenant shall not inscribe, paint, affix or display any
signs, advertisements or notices on or in the Building, except for such tenant
identification information as Landlord customarily permits to be included or
shown on the directory in the main lobby and adjacent to or on the access door
or doors to the Premises. Directory information customarily shown on the
directory in the main lobby shall be a Landlord's cost.
SECTION 15.3 NO WAIVER. No waiver by Landlord or by Tenant of any provision of
this Lease shall be deemed to be a waiver by either party of any other
provision of this Lease. No waiver by Landlord of any breach by Tenant shall be
deemed a waiver of any subsequent breach by Tenant of the same or any other
provision. No waiver by Tenant of any breach by Landlord shall be deemed a
waiver of any subsequent breach by Landlord of the same or any other provision.
The failure of Landlord or Tenant to insist at any time upon the strict
performance of any covenant or agreement or to exercise any option, right,
power or remedy contained in this Lease shall not be construed as a waiver or a
relinquishment thereof for the future. Landlord's consent to or approval of any
act by Tenant requiring Landlord's consent or approval shall not be deemed to
render unnecessary the obtaining of Landlord's consent to or approval of any
subsequent act of Tenant. Tenant's consent to or approval of any act by
Landlord requiring Tenant's consent or approval shall not be deemed to render
unnecessary the obtaining of Tenant's consent to or approval of any subsequent
act of Landlord. No act or thing done by Landlord or Landlord's agents during
the term of this Lease shall
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be deemed an acceptance of a surrender of the Premises, unless done in writing
signed by Landlord. The delivery of the keys to any employee or agent of
Landlord shall not operate as a termination of this Lease or a surrender of the
Premises. The acceptance of any Rent by Landlord following a breach of this
Lease by Tenant shall not constitute a waiver by Landlord of such breach or any
other breach. The payment of Rent by Tenant following a breach of this Lease by
Landlord shall not constitute a waiver by Tenant of any such breach or any
other breach. No waiver by Landlord or Tenant of any provision of this Lease
shall be deemed to have been made unless such waiver is expressly stated in
writing signed by the waiving party. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly installment of Rent due under this
Lease shall be deemed to be other than on account of the earliest Rent due
hereunder, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as Rent be deemed an accord and satisfaction
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such rent or pursue any other remedy which may
be available to Landlord.
SECTION 15.4 APPLICABLE LAW. This Lease shall be governed by and construed in
accordance with the laws of the State of Texas.
SECTION 15.5 COMMON AREAS, SERVICE CORRIDORS AND SERVICE AREAS. "COMMON AREAS"
will mean all areas, spaces, facilities and equipment (whether or not located
within the Building) made available by Landlord for the common and joint use of
Landlord, Tenant and others designated by Landlord using or occupying space in
the Building, including but not limited to, tunnels, walkways, sidewalks and
driveways necessary for access to the Building, Building lobbies, landscaped
areas, public corridors, public rest rooms, Building stairs, elevators open to
the public, service elevators (provided that such service elevators shall be
available only for tenants of the Building and others designated by Landlord),
drinking fountains and any such other areas and facilities, if any, as are
designated by Landlord from time to time as Common Areas. Common Areas shall
not include the parking areas of the Parking Facilities, and the use of any
such parking areas shall be subject to the provisions of EXHIBIT F attached
hereto. "SERVICE CORRIDORS" shall mean all loading docks, loading areas and all
corridors that are not open to the public but which are available for use by
Tenant and others designated by Landlord. "SERVICE AREAS" will refer to areas,
spaces, facilities and equipment serving the Building (whether or not located
within the Building) but to which Tenant and other occupants of the Building
will not have access, including, but not limited to, mechanical, telephone,
electrical and similar rooms and air and water refrigeration equipment. Tenant
is hereby granted a nonexclusive right to use the Common Areas and Service
Corridors during the term of this Lease for their intended purposes, in common
with others designated by Landlord, subject to the terms and conditions of this
Lease, including, without limitation, the Rules and Regulations. The Building,
Common Areas, Service Corridors and Service Areas will be at all times under
the exclusive control, management and operation of the Landlord. Tenant agrees
and acknowledges that the Premises (whether consisting of less than one floor
or consisting of one or more full floors within the Building) do not include,
and Landlord hereby expressly reserves for its sole and exclusive use, any and
all mechanical, electrical, telephone and similar rooms, janitor closets,
elevator, pipe and other vertical shafts and ducts, flues, stairwells, any area
above the acoustical ceiling and any other areas not specifically shown on
EXHIBIT B as being part of the Premises. Tenant acknowledges that pipes, ducts,
conduits, wires and equipment serving
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other parts of the Building may be located above acoustical ceiling surfaces,
below floor surfaces or within walls in the Premises.
SECTION 15.6 SUCCESSORS AND ASSIGNS. Subject to Article 11 hereof, all of the
covenants, conditions and provisions of this Lease shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
SECTION 15.7 BROKERS. Tenant warrants that it has had no dealings with any real
estate broker or agent in connection with the negotiation of this Lease,
excepting only the brokers named in Item 10. of the Basic Lease Provisions and
that it knows of no other real estate brokers or agents who are or might be
entitled to a commission in connection with this Lease. Tenant agrees to
indemnify and hold harmless Landlord from and against any liability or claim,
whether meritorious or not, arising in respect to brokers and/or agents not so
named. Landlord has agreed to pay the fees of the brokers (but only the broker)
named in Item 10 of the Basic Lease Provisions to the extent that Landlord has
agreed to do so pursuant to a written agreement with such broker.
SECTION 15.8 SEVERABILITY. If any provision of this Lease or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the application of such provisions to other persons or circumstances
and the remainder of this Lease shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
SECTION 15.9 EXAMINATION OF LEASE. Submission by Landlord of this instrument to
Tenant for examination or signature does not constitute a reservation of or
option for lease. This Lease will be effective as a lease or otherwise only
upon execution by and delivery to both Landlord and Tenant.
SECTION 15.10 INTEREST ON TENANT'S OBLIGATIONS. Any amount due from Tenant to
Landlord which is not paid within thirty (30) days after the date due shall
bear interest at the lower of (i) eighteen percent (18%) per annum or (ii) the
highest rate from time to time allowed by applicable law, from the date such
payment is due until paid, but the payment of such interest shall not excuse or
cure the default.
SECTION 15.11 TIME. Time is of the essence in this Lease and in each and all of
the provisions hereof. Whenever a period of days is specified in this Lease,
such period shall refer to calendar days unless otherwise expressly stated in
this Lease.
SECTION 15.12 DEFINED TERMS AND MARGINAL HEADINGS. The words "Landlord" and
"Tenant" as used herein shall include the plural as well as singular. If more
than one person is named as Tenant, the obligations of such persons are joint
and several. The headings and titles to the articles, sections and subsections
of this Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part of this Lease.
SECTION 15.13 AUTHORITY OF TENANT. Tenant and each person signing this Lease on
behalf of Tenant represents to Landlord as follows: Tenant, if a corporation,
is duly incorporated and legally existing under the laws of the state of its
incorporation and is duly qualified to do
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<PAGE> 48
business in the State of Texas. Tenant, if a partnership or joint venture, is
duly organized under the Texas Uniform Partnership Act. Tenant, if a limited
partnership, is duly organized under the applicable limited partnership act of
the State of Texas or, if organized under the laws of a state other than Texas,
is qualified under said Texas limited partnership act. Tenant has all requisite
power and all governmental certificates of authority, licenses, permits,
qualifications and other documentation to lease the Premises and to carry on
its business as now conducted and as contemplated to be conducted. Each person
signing on behalf of Tenant is authorized to do so. The foregoing
representations in this Section 15.13 shall also apply to any corporation,
partnership, joint venture or limited partnership which is a general partner or
joint venturer of Tenant. Landlord is duly incorporated and legally existing
under the laws of the state of its incorporation and is duly qualified to do
business in the State of Texas. Landlord has all requisite power and all
governmental certificates of authority, licenses, permits, qualifications and
other documentation to operate the Building as now operated and as contemplated
to be operated. Each person signing on behalf of Landlord is authorized to do
so.
SECTION 15.14 FORCE MAJEURE. Whenever a period of time is herein prescribed for
action to be taken by Landlord or Tenant, the party taking the action shall not
be liable or responsible for, and there shall be excluded from the computation
for any such period of time, any delays due to strikes, riots, acts of God,
shortages of labor or materials, war, governmental laws, regulations or
restrictions or any other causes of any kind whatsoever which are beyond the
reasonable control of such party (each of the foregoing is herein referred to
as an "event of force majeure" or "force majeure"); provided, however, in no
event shall the foregoing apply to the financial obligations of either Landlord
or Tenant to the other under this Lease, including Tenant's obligation to pay
Basic Annual Rent, Additional Rent or any other amount payable to Landlord
hereunder.
SECTION 15.15 RECORDING. This Lease shall not be recorded. However, Landlord
shall have the right to record a short form or memorandum hereof, at Landlord's
expense, at any time during the term hereof and, if requested, Tenant agrees
(without charge to Landlord) to join in the execution thereof.
SECTION 15.16 NO REPRESENTATIONS. Landlord and Landlord's agents have made no
warranties, representations or promises (express or implied) with respect to
the Premises, the Building or any other part of the Property (including,
without limitation, the condition, use or suitability of the Premises, the
Building or the Property), except as herein expressly set forth and no rights,
easements or licenses are acquired by Tenant by implication or otherwise except
as expressly set forth in the provisions of this Lease.
SECTION 15.17 PARKING. EXHIBIT F attached hereto sets forth the agreements
between Landlord and Tenant relating to parking. Parking and delivery areas for
all vehicles shall be in accordance with parking regulations established from
time to time by Landlord, with which Tenant agrees to conform. Tenant shall
only permit parking by its employees, customers and agents of automobiles in
appropriate designated parking areas.
SECTION 15.18 ATTORNEYS' FEES. In the event of any legal action or proceeding
brought by either party against the other arising out of this Lease, the
prevailing party shall be entitled to
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recover reasonable attorneys' fees and costs incurred in such action
(including, without limitation, all costs of appeal) and such amount shall be
included in any judgment rendered in such proceeding.
SECTION 15.19 NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of
light, air or view by any structure which may be erected on the Property or
lands adjacent to the Property shall in no way affect this Lease or impose any
liability on Landlord (even if Landlord is the adjacent land owner).
SECTION 15.20 RELOCATION. Upon 120 days advance written notice to Tenant (the
"RELOCATION NOTICE"), Landlord shall have the right to relocate Tenant to other
space in the Building above the 23rd floor of the Building (the "SUBSTITUTE
PREMISES") provided the rentable area of such other space is not more than 110%
or less than 90% of the rentable area of the Premises, and further provided the
ratio of interior space to exterior window space is substantially similar to
such ratio for the current premises. Landlord shall pay all reasonable
out-of-pocket expenses of any such relocation, including the expenses of moving
and construction of improvements substantially similar to the leasehold
improvements in the premises as of the date of this lease and other leasehold
improvements installed in the premises after the date of this Lease with the
written consent of Landlord and prior to the date of the Relocation Notice,
subject to the condition that Landlord shall have the right to use all or any
of such improvements in connection with the construction of the improvements in
the Substitute Premises. In the event of such relocation, this Lease shall
continue in full force and effect without any change in the terms or other
conditions, except that the Substitute Premises shall be the Premises and an
EXHIBIT B showing the Substitute Premises shall be substituted for the EXHIBIT
B attached hereto. If requested by Landlord, Tenant shall execute an amendment
to this Lease evidencing the foregoing.
SECTION 15.21 SURVIVAL OF INDEMNITIES. Each indemnity agreement and hold
harmless agreement contained herein shall survive the expiration or termination
of this Lease.
SECTION 15.22 ENTIRE AGREEMENT. This Lease contains all of the agreements of
the parties hereto with respect to any matter covered or mentioned in this
Lease and no prior agreement, understanding or representation pertaining to any
such matter shall be effective for any purpose. No provision of this Lease may
be amended or added to except by an agreement in writing signed by the parties
hereto or their respective successors in interest.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this Lease,
as of the date first written in this Lease.
LANDLORD
DALLAS MAIN CENTER LIMITED PARTNERSHIP,
a Delaware limited partnership
BY: Premisys Real Estate Services, Inc.,
a Delaware corporation, its duly
authorized agent
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
TENANT
AMERICAN PHYSICIAN PARTNERS, INC., a
Delaware corporation
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
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<PAGE> 51
EXHIBIT A
LAND LEGAL DESCRIPTION
This Exhibit is attached to and a part of that certain Lease Agreement
dated as of _________________, 199____, executed by and between DALLAS MAIN
LIMITED PARTNERSHIP, a Delaware limited partnership, and AMERICAN PHYSICIAN
PARTNERS, INC., a Delaware corporation (the "Lease"). Any capitalized term not
defined herein shall have the meaning assigned to it in the provisions of the
Lease identified as the Basic Lease Provisions or Supplemental Lease
Provisions, as applicable. Landlord and Tenant mutually agree that the attached
legal description is the legal description of the Land:
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EXHIBIT B
FLOOR PLAN
This Exhibit is attached to and a part of that certain Lease Agreement
dated as of ___________________, 199___, executed by and between DALLAS MAIN
CENTER LIMITED PARTNERSHIP, a Delaware limited partnership, and AMERICAN
PHYSICIAN PARTNERS, INC., a Delaware corporation (the "Lease"). Any capitalized
term not defined herein shall have the meaning assigned to it in the provisions
of the Lease identified as the Basic Lease Provisions or Supplemental Lease
Provisions, as applicable. Landlord and Tenant mutually agree that the attached
Floor Plan is the Floor Plan for the Premises:
PREPARER OF LEASE FORM TO ATTACH FLOOR PLAN
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<PAGE> 53
EXHIBIT C
OPERATING COSTS AND EXCLUSIONS FROM OPERATING COSTS
This Exhibit is attached to and a part of that certain Lease Agreement
dated as of , 199 , executed by and between DALLAS MAIN CENTER LIMITED
PARTNERSHIP, a Delaware limited partnership, and AMERICAN PHYSICIAN PARTNERS,
INC., a Delaware corporation (the "Lease"). Any capitalized term not defined
herein shall have the meaning assigned to it in the provisions of the Lease
identified as the Basic Lease Provisions or Supplemental Lease Provisions, as
applicable.
1. OPERATING COSTS. Operating Costs shall include, but not be limited to,
the following (but shall specifically exclude Exclusions from Operating Costs
(hereinafter defined)):
(a) insurance premiums ("INSURANCE PREMIUMS") paid by Landlord to
maintain insurance pursuant to this Lease, the costs of which
may include (x) an allocation of a reasonable portion of the
premium of a blanket insurance policy maintained by Landlord
and, (y) in the case of self insurance, the cost which Landlord
would have incurred if it had maintained third party insurance
instead of self-insurance;
(b) water, sewer and other utility charges ("UTILITY EXPENSES")
that are not Energy Costs;
(c) service, testing, repairs (including replacement of component
parts) and other charges incurred in the operation, maintenance
and repair of the elevators and the plumbing, electrical, fire
sprinkler, life safety, security, heating, ventilation,
mechanical and air conditioning systems;
(d) Building standard services, including, HVAC, water, elevators,
life safety, window cleaning, general cleaning and other
janitorial services (including materials, supplies, Building
standard light bulbs and ballasts, equipment and tools therefor
and rental costs related to any of the foregoing), as well as
contracts with third parties to provide same;
(e) garbage, trash and waste disposal;
(f) tools and supplies costs;
(g) repair costs (including replacements of components which are
not required to be capitalized under GAAP);
(h) costs of landscaping (indoor and outdoor), including landscape
maintenance and sprinkler maintenance costs and rental and
supply costs in connection therewith;
(i) security and alarm services;
(j) license, permit and inspection fees;
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<PAGE> 54
(k) management fees, provided that if Landlord or an Affiliate of
Landlord manages the Property, the amount included for
management fees will not exceed the management fee typically
charged by independent management companies that have
capabilities and expertise in the management of properties in
the Dallas, Texas central business district similar to the
capabilities of Landlord or Landlord's Affiliate;
(l) Landlord's reasonable overhead and administrative expenses
directly attributable to management of the Property;
(m) wages and related benefits payable to employees, including
taxes and insurance relating thereto (at reasonable rates in
relationship to the market for comparable employees);
(n) accounting services;
(o) legal services, unless incurred in connection with transfer of
the Property, defense on claims asserted against Landlord,
enforcement as to tenant defaults or lease negotiations;
(p) expenses and fees (including attorneys' fees) incurred in
contesting the validity or applicability of any governmental
enactments which may affect Operating Costs;
(q) business or excise taxes payable on account of Landlord's
ownership or operation of the Property or any portion thereof
(excluding any inheritance, estate succession, transfer, gift,
franchise, corporation, income or profits tax imposed upon
Landlord);
(r) compliance with any fire safety or other governmental rules,
regulations, laws, statutes, ordinances or requirements imposed
by any governmental authority or insurance company with respect
to the Building;
(s) the charges assessed against Landlord and /or the Property for
any easement maintained for the benefit of the Property or any
portion thereof, as well as the charges assessed against the
Property pursuant to any contractual covenants or recorded
declaration of covenants or the covenants, conditions and
restrictions of any other similar instrument affecting the
Property;
(t) maintaining, painting and repairing existing art work;
(u) all costs, expenses and fees (including attorneys' and
consultants' fees) incurred by Landlord in reviewing,
contesting (or negotiating with taxing authorities as to) Real
Estate Taxes and other assessments, excises, charges and levies
which are otherwise included in Operating Costs; and
(v) the expense of maintaining, repairing and replacing component
parts of the argon lighting system for the Tower.
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<PAGE> 55
2. EXCLUSIONS FROM OPERATING COSTS. Notwithstanding any provisions herein
to the contrary, "EXCLUSIONS FROM OPERATING COSTS" shall mean (and
Operating Costs shall not include) the following costs:
(a) Real Estate Taxes;
(b) Additional Pass Through Costs;
(c) Tenant's Share of Variable Operating and Energy Costs Allocable
to Some Rentable Area;
(d) leasing commissions, attorneys' fees, costs and disbursements
and other expenses incurred in connection with marketing,
leasing, renovating or improving space for tenants or
prospective tenants of the Building;
(e) costs (including permit, license and inspection fees) incurred
in renovating or otherwise improving or decorating, painting or
redecorating space for tenants or vacant space;
(f) any of Landlord's costs for which Landlord knowingly provides
to another tenant of the Building and for which Landlord is
entitled to be reimbursed by such tenant as an additional
charge or rental over and above the base annual rent, energy
costs, operating costs, common area maintenance costs and
additional pass through costs payable under the lease with such
tenant or other occupant;
(g) any depreciation or amortization of the Building or any part
thereof, except as expressly permitted herein;
(h) interest on debt or amortization payments on mortgages, deeds
of trust or other debt, except as expressly permitted under the
definition of Operating Costs;
(i) costs which are required to be capitalized, as opposed to
expensed, under GAAP;
(j) costs incurred due to negotiations or disputes with tenants
(other than efforts and actions to enforce Building rules and
regulations or stop violations that would generally benefit all
or substantially all other tenants);
(k) compensation for employees to the extent such compensation is
allocable to the time spent by such employees on other
projects;
(l) income, franchise, death, gift and transfer taxes (as well as
penalties, interest and other charges payable as a result of
Landlord's delinquent payment thereof, unless such penalties,
interest and other charges are the result of Landlord's good
faith contest of the amount, validity or applicability of any
such taxes);
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<PAGE> 56
(m) costs for which Landlord receives reimbursement (other than in
the form of rent) from insurers, condemning authorities, or
other tenants;
(n) expenses incurred in operating the Concourse or any club
(social or athletic) located on the Property; and
(o) advertising and promotional costs.
4
<PAGE> 57
EXHIBIT D
WORK LETTER
FINISH ALLOWANCE
This Exhibit is attached to and a part of that certain Lease Agreement
dated as of ______________________, 199___, executed by and between DALLAS MAIN
CENTER LIMITED PARTNERSHIP, a Delaware limited partnership, and AMERICAN
PHYSICIAN PARTNERS, INC., a Delaware corporation (the "Lease"). Any capitalized
term not defined herein shall have the meaning assigned to it in the provisions
of the Lease identified as the Basic Lease Provisions or Supplemental Lease
Provisions, as applicable. Landlord and Tenant mutually agree as follows:
1. PLANS.
1.1 Space Plan. Landlord and Tenant have agreed to a space plan for the
Premises dated ___________, 1996, prepared by _______________. Tenant
represents to Landlord that it provided the space planner and/or
architect, as applicable, with all information needed to cause
compliance with the Disability Acts. TENANT SHALL BE RESPONSIBLE FOR
AND SHALL INDEMNIFY AND HOLD HARMLESS LANDLORD FROM AND AGAINST ANY AND
ALL CLAIMS, LIABILITIES AND EXPENSES (INCLUDING, WITHOUT LIMITATION
REASONABLE ATTORNEYS' FEES AND EXPENSES) INCURRED BY OR ASSERTED
AGAINST LANDLORD BY REASON OF OR IN CONNECTION WITH ANY VIOLATION OF
THE DISABILITY ACTS ARISING FROM OR OUT OF (x) information or design
and space plans furnished to Landlord by Tenant (or the lack of
complete and accurate information so furnished) concerning Tenant's
Improvements, (y) Tenant's employer-employee obligations, or (z) after
the Commencement Date, violations by Tenant and/or Tenant's
Improvements or the Premises not being in compliance with the
Disability Acts as the result of changes in regulations or law or
interpretations thereof not in effect on the Commencement Date. The
foregoing indemnity shall not include any claims, liabilities or
expenses (including reasonable attorneys' fees and expenses) arising
out of the negligence or gross negligence of Landlord or Landlord's
employees, agents or contractors. Without limiting the foregoing, if
Landlord constructs Tenant's Improvements based on any special
requirements or improvements required by Tenant, or upon information
furnished by Tenant that later proves to be inaccurate or incomplete
resulting in any violation of the Disability Acts, Tenant shall be
solely liable to correct such violations and to bring the improvements
into compliance with the Disability Acts as promptly as is practicable.
1.2 Changes to Approved Plans. If any re-drawing or re-drafting of either
the Space Plan is necessitated by Tenant's requested changes (all of
which shall be subject to approval by Landlord and, if applicable, the
Texas Department of Licensing & Regulation and any other governmental
agency or authority to which the plans and specifications are required
to be submitted), the expense of any such re-drawing or re-drafting
required in connection therewith and the expense of any work and
improvements necessitated by such re-drawing or re-drafting will be
charged to Tenant.
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2. CONSTRUCTION AND COSTS OF TENANT'S IMPROVEMENTS.
2.1 Construction Obligation and Finish Allowance.
(a) Landlord agrees to construct Tenant's Improvements, at Tenant's
cost and expense; provided, however, Landlord shall provide
Tenant with an allowance up to $1.00 per square foot of Rentable
Area in the Premises (the "FINISH ALLOWANCE"), which allowance
shall be disbursed by Landlord, from time to time, for payment
of (in the following priority) the following costs (collectively
referred to as the "PERMITTED COSTS"): (i) the contract sum
required to be paid to the general contractor engaged to
construct Tenant's Improvements (the "CONTRACT SUM"), (ii) the
fees of the preparer of the Construction Plans, and (iii) such
other costs related to relocating to or moving into the
Premises.
(b) Title to any equipment, appliances, furnishings or personalty
installed in the Premises and purchased with any portion of the
Finish Allowance shall pass to Landlord upon payment of the
invoice cost thereof and Tenant shall not remove any such
equipment, appliances, furnishings or personalty from the
Premises without Landlord's express, prior written consent or
unless requested by Landlord in connection with the expiration
or earlier termination of the Lease.
(c) "TENANT'S IMPROVEMENTS" are hereby defined to mean the
following:
(a) changing existing hardware in the Premises to Building
standard levard hardware;
(b) cleaning carpets; and
(c) install demising wall shown on Schedule I attached to this
Work Letter.
2.2 Bidding. Within five (5) days after both Landlord and Tenant agree to
the Construction Plans, Landlord shall request at least three (3)
mutually acceptable contractors authorized to perform work in the
Building to bid the construction of Tenant's Improvements under a lump
sum contract. Landlord agrees that Tenant shall have the right to
participate in the preparation of the bid instructions, attend the bid
opening, and clarify and qualify all bids. Tenant shall have three (3)
business days after the bid opening within which to accept one of the
submitted bids. Tenant shall have the right to required submitters of
bids to clarify their bids, if necessary, provided, however, no
contractor shall be permitted to deliver clarifications more than three
(3) business days after bid opening. If Tenant fails to accept one of
the submitted bids by the expiration of the third business day
following opening of bids, then Tenant shall be deemed to have approved
the lowest submitted bid. Landlord and Tenant must approve (or be
deemed to have approved) the Contract Sum for the construction of
Tenant's Improvements in writing prior to the commencement of
construction.
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<PAGE> 59
2.3 Excess Costs. If the sum of the Permitted Costs exceeds the Finish
Allowance, then Tenant shall pay all such excess costs ("EXCESS
COSTS"). Tenant shall remit to Landlord an amount (the "PREPAYMENT")
equal to the projected Excess Costs, if any, within five (5) working
days after commencement of construction by Landlord. On or prior to the
Commencement Date, Tenant shall deliver to Landlord the actual Excess
Costs, minus the Prepayment previously paid. Failure by Tenant to
timely tender to Landlord the full Prepayment shall permit Landlord to
stop all work until the Prepayment is received. All sums due Landlord
under this Section 2.3 shall be considered Rent under the terms of the
Lease and nonpayment shall constitute a default under the Lease and
entitle Landlord to any and all remedies specified in the Lease.
2.4 Liens Arising from Excess Costs. Tenant agrees to keep the Premises
free from any liens arising out of nonpayment of Excess Costs. In the
event that any such lien is filed and Tenant, within ten (10) days
following such filing fails to cause same to be released of record by
payment or posting of a proper bond, Landlord shall have, in addition
to all other remedies provided herein and by law, the right, but not
the obligation, to cause the same to be released by such means as it in
its sole discretion deems proper, including payment of or defense
against the claim giving rise to such lien. All sums paid by Landlord
in connection therewith shall constitute Rent under the Lease and a
demand obligation of Tenant to Landlord and such obligation shall bear
interest at the rate provided for in Section 15.10 of the Supplemental
Lease Provisions from the date of payment by Landlord until the date
paid by Tenant.
3. DELAYS. Delays in the completion of construction of Tenant's
Improvements or in obtaining a certificate of occupancy, if
required by the applicable governmental authority, caused by Tenant,
Tenant's Contractors (hereinafter defined) or any person, firm or
corporation employed by Tenant or Tenant's Contractors shall constitute
"TENANT DELAYS". In the event that Tenant's Improvements are not
Substantially Complete by the Commencement Date referenced in Item 7 of
the Basic Lease Provisions, then the Commencement Date referenced in
Item 7 shall be amended to be the Adjusted Substantial Completion Date
(hereinafter defined) and the Expiration Date referenced in Item 8 of
the Basic Lease Provisions shall be adjusted forward by the same number
of days as is the Commencement Date, provided, however, if the such
adjusted Expiration Date is a day other than the last day of a calendar
month, the Expiration Date shall be further adjusted to the last day of
the applicable calendar month so that the term of the Lease will be the
term set forth in Item 6 of the Basic Lease Provisions. The Adjusted
Substantial Completion Date shall be the date Tenant's Improvements are
Substantially Complete, adjusted backward, however, by one day for each
day of Tenant Delays, if any. The foregoing adjustments in the
Commencement Date and the Expiration Date shall be Tenant's sole and
exclusive remedy in the event Tenant's Improvements are not
Substantially Complete by the initial Commencement Date set forth in
Item 8 of the Basic Lease Provisions.
4. SUBSTANTIAL COMPLETION AND PUNCH LIST. The terms "SUBSTANTIAL
COMPLETION" and "SUBSTANTIALLY COMPLETE", as applicable, shall mean
when Tenant's Improvements are sufficiently completed in accordance
with the Construction Plans so that Tenant can reasonably use the
Premises for the Permitted Use (as described in Item 11 of the Basic
Lease Provisions). When Landlord considers Tenant's Improvements to be
Substantially Complete, Landlord will notify Tenant and within two (2)
business days thereafter, Landlord's
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<PAGE> 60
representative and Tenant's representative shall conduct a walk-through
of the Premises and identify any necessary touch-up work, repairs and
minor completion items as are necessary for final completion of
Tenant's Improvements. Neither Landlord's representative nor Tenant's
representative shall unreasonably withhold his agreement on punch list
items. Landlord will use reasonable efforts to cause the contractor to
complete all punch list items within thirty (30) days after agreement
thereon.
5. TENANT'S CONTRACTORS. If Tenant should desire to enter the Premises or
authorize its agent to do so prior to the Commencement Date of the
Lease, to perform approved work not requested of the
Landlord, Landlord shall permit such entry if:
(a) Tenant shall use only such contractors which Landlord shall
approve in its reasonable discretion and Landlord shall have
approved the plans to be utilized by Tenant, which approval
will not be unreasonably withheld; and
(b) Tenant, its contractors, workmen, mechanics, engineers, space
planners or such others as may enter the Premises
(collectively, "TENANT'S CONTRACTORS"), work in harmony with
and do not in any way disturb or interfere with Landlord's
space planners, architects, engineers, contractors, workmen,
mechanics or other agents or independent contractors in the
performance of their work (collectively, "LANDLORD'S
CONTRACTORS"), it being understood and agreed that if entry of
Tenant or Tenant's Contractors would cause, has caused or is
causing a material disturbance to Landlord or Landlord's
Contractors, then Landlord may, with notice, refuse admittance
to Tenant or Tenant's Contractors causing such disturbance; and
(c) Tenant (notwithstanding the first sentence of subsection 7.201
of the Supplemental Lease Provisions), Tenant's Contractors and
other agents shall provide Landlord sufficient evidence that
each is covered under such Worker's Compensation, public
liability and property damage insurance as Landlord may
reasonably request for its protection.
Landlord shall not be liable for any injury, loss or damage to any of
Tenant's installations or decorations made prior to the Commencement
Date and not installed by Landlord. Tenant shall indemnify and hold
harmless Landlord and Landlord's Contractors from and against any and
all costs, expenses, claims, liabilities and causes of action arising
out of or in connection with work performed in the Premises by or on
behalf of Tenant (but excluding work performed by Landlord or
Landlord's Contractors). Landlord is not responsible for the function
and maintenance of Tenant's Improvements which are different than
Landlord's standard improvements at the Property or improvements,
equipment, cabinets or fixtures not installed by Landlord. Such entry
by Tenant and Tenant's Contractors pursuant to this Section 5 shall be
deemed to be under all of the terms, covenants, provisions and
conditions of the Lease except the covenant to pay Rent.
6. CONSTRUCTION REPRESENTATIVES. Landlord's and Tenant's representatives
for coordination of construction and approval of change orders will be
as follows, provided that either party may change its representative
upon written notice to the other:
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<PAGE> 61
LANDLORD'S REPRESENTATIVE:
NAME Frank Worman
ADDRESS PREMISYS Real Estate Services, Inc.
901 Main Street, Suite 4110
Dallas, Texas 75202
PHONE 214/761-6110
FAX: 214/761-6108
TENANT'S REPRESENTATIVE:
NAME Paul Jolas
ADDRESS American Physician Partners, Inc.
17304 North Preston Rd., Suite 800
Dallas, Texas 75252
PHONE 214/733-6845
FAX 214/____________
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<PAGE> 62
EXHIBIT E
ACCEPTANCE OF PREMISES MEMORANDUM
This Acceptance of Premises Memorandum is being executed pursuant to that
certain Lease Agreement (the "LEASE") dated the _____ day of __________, 19__ ,
between DALLAS MAIN CENTER LIMITED PARTNERSHIP, a Delaware limited partnership
("LANDLORD"), and AMERICAN PHYSICIAN PARTNERS, INC., a Delaware corporation
("Tenant"), pursuant to which Landlord leased to Tenant and Tenant leased from
Landlord certain space in the office building located at 901 Main Street,
Dallas, Texas (the "BUILDING"). Landlord and Tenant hereby agree that:
1. Except for the Punch List Items (as shown on the attached Punch List),
Landlord has fully completed the construction work required under the
terms of the Lease and the Work Letter attached thereto.
2. The Premises are tenantable, Landlord has no further obligation for
construction (except with respect to Punch List Items) and Tenant
acknowledges that the Building, the Premises and Tenant's Improvements
are satisfactory in all respects, except for the Punch List Items and
are suitable for the Permitted Use.
3. The Commencement Date of the Lease is the _____ day of
__________________________, 19___. If the date set forth in Item 8 of
the Basic Lease Provisions is different than the date set forth in the
preceding sentence, then Item 8 of the Basic Lease Provisions is hereby
amended to be the Commencement Date set forth in the preceding
sentence.
4. The Expiration Date of the Lease is the _____ day of
_________________________, 19___. If the date set forth in Item 9 of
the Basic Lease Provisions is different than the date set forth in the
preceding sentence, then Item 9 of the Basic Lease Provisions is hereby
amended to be the Expiration Date set forth in the preceding sentence.
5. Tenant acknowledges receipt of the current Rules and Regulations for
the Building.
6. Tenant's telephone number at the Premises is ________________________.
Tenant's facsimile number at the Premises is
___________________________.
7. All capitalized terms not defined herein shall have the meaning
assigned to them in the Lease.
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Agreed and Executed this ___________ day of ________________________, 19___.
LANDLORD
DALLAS MAIN CENTER LIMITED
PARTNERSHIP, a Delaware limited
partnership,
By: Premsis Real Estate Services, Inc.
its duly authorized agent
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
TENANT
AMERICAN PHYSICIAN PARTNERS, INC.,
a Delaware corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
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EXHIBIT F
GARAGE PARKING AGREEMENT
This Exhibit is attached to and a part of that certain Lease Agreement
dated as of ___________________, 199___, executed by and between DALLAS MAIN
CENTER LIMITED PARTNERSHIP, a Delaware limited partnership, and AMERICAN
PHYSICIAN PARTNERS, INC., a Delaware corporation (the "LEASE"). Any capitalized
term not defined herein shall have the meaning assigned to it in the provisions
of the Lease identified as the Basic Lease Provisions or Supplemental Lease
Provisions, as applicable. Landlord and Tenant mutually agree as follows:
1. PARKING SPACES.
(a) So long as the Lease of which this Exhibit is a part shall
remain in effect, Tenant may rent in the Parking Garage up to a
number of parking spaces equal to 1 space per square feet of
rentable area from time to time included in the office use
portion of the Premises (such spaces, the "PARKING GARAGE
SPACES"). The number of Parking Garage Spaces to which Tenant
is entitled in respect of the initial Premises is hereby agreed
to be eight (8), up to _______ of which Tenant may elect to be
reserved.
(b) Tenant may elect to convert three (3) non-reserved Parking
Garage Spaces to one (1) parking space in the Executive Parking
Garage. If Tenant makes such election, Tenant shall have the
right to reconvert the one parking space in the Executive
Parking Garage to three (3) non-reserved Parking Spaces in the
Parking Garage.
2. PARKING RENTAL. For each Parking Garage Space used by Tenant, Tenant
shall pay rent equal to the market rent from time to time charged by
Landlord for parking spaces in the Parking Garage, which market rent is
currently $110.00 per month per unreserved space and $157.50 per month
per reserved space. Landlord shall give Tenant at least thirty (30)
written days' notice of any change in the monthly parking rate for
Parking Garage Spaces prior to instituting such new monthly rate. All
payments of rent for parking spaces shall be made (i) at the same time
as Basic Monthly Rent is due under the Lease and (ii) to Landlord or to
such persons (for example but without limitation, the manager of the
Parking Garage) as Landlord may direct from time to time.
3. PARKING CARDS. Landlord will provide Tenant with an access card for
each parking space to which Tenant is entitled. Parking cards and
stickers or any other device or form of identification supplied by
Landlord shall remain the property of Landlord and shall not be
transferable. There will be a reasonable replacement charge payable by
Tenant equal to the amount posted from time to time by Landlord for
loss of any magnetic parking card or parking sticker issued by
Landlord.
4. VALIDATION. Tenant may validate visitor parking, by such method or
methods as Landlord or the Parking Facility operator may approve, at
the validation rate from time to time generally applicable to visitor
parking. Tenant shall pay Landlord for the parking rent generated
through Tenant's validations within thirty (30) days after receiving a
written demand therefor. Landlord expressly reserves the right to
redesignate parking areas and to modify the parking structure for other
uses or to any extent, but in no event will Tenant's parking spaces be
reduced by reason of any such redesignation or modification.
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5. DAMAGE TO OR CONDEMNATION OF GARAGE. If Landlord fails or is unable to
provide any parking space to Tenant in either Parking Facility because
of damage or condemnation, such failure or inability shall never be
deemed to be a default by Landlord as to permit Tenant to terminate the
Lease, either in whole or in part, but Tenant's obligation to pay rent
for any such parking space which is not provided by Landlord shall be
abated for so long as Tenant does not have the use of such parking
space and such abatement shall constitute full settlement of all claims
that Tenant might otherwise have against Landlord by reason of such
failure or inability to provide Tenant with such parking space.
6. RULES AND REGULATIONS. A condition of any parking shall be compliance
by the parker with Parking Facility rules and regulations, including
any sticker or other identification system established by Landlord.
Parking Facility managers or attendants are not authorized to make or
allow any exceptions to these Rules and Regulations. The following
rules and regulations are in effect until notice is given to Tenant of
any change. Landlord reserves the right to modify and/or adopt such
other reasonable and generally applicable rules and regulations for a
Parking Facility as it deems necessary for the operation of such
Parking Facility.
(a) Cars must be parked entirely within the stall lines painted on
the floor.
(b) All directional signs and arrows must be observed.
(c) The speed limit shall be five (5) miles per hour.
(d) Parking is prohibited in areas not striped for parking, aisles,
areas where "no parking" signs are posted, in cross hatched
areas and in such other areas as may be designated by Landlord
or Landlord's agent(s) including, but not limited to, areas
designated as "Visitor Parking" or reserved spaces not rented
under this Exhibit.
(e) Every parker is required to park and lock his own car. All
responsibility for damage to cars or persons or loss of
personal possessions is assumed by the parker.
(f) Spaces which are designated for small, intermediate or
full-sized cars shall be so used. No intermediate or full-size
cars shall be parked in parking spaces limited to compact cars.
7. DEFAULT. If Tenant fails to pay the rent for and Parking Garage Space
as and when due hereunder and such failure continues for a period of
thirty (30) days after Tenant receives written notice of such failure,
then, in addition to any other remedies permitted under the Lease,
Landlord may terminate Tenant's right to use of such Parking Garage
Space or Spaces, as applicable. In addition, if Tenant has an
arrangement with any of its employees or other permitted users of its
Parking Spaces to pay the rent for the Parking Space used by such
employee or other user, (i) such arrangement will in no way affect
Tenant's obligation to pay rent for such space as and when due
hereunder, and (ii) if Landlord does not receive the rent for the space
used by such party more than two (2) times in any 12-month period, then
Landlord may prohibit that party from any further use of the Parking
Facilities. Landlord may refuse to permit any person who violates the
rules to park in the Parking Facilities and any violation of the rules
shall subject the car to removal at the car owner's expense. No such
refusal or removal shall create any liability on Landlord or be deemed
to interfere with Tenant's right to quiet possession of the Premises.
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<PAGE> 66
EXHIBIT G
RULES AND REGULATIONS
This Exhibit is attached to and a part of that certain Lease Agreement
dated as of _____________________, 199____, executed by and between DALLAS MAIN
CENTER LIMITED PARTNERSHIP, a Delaware Limited Partnership and AMERICAN
PHYSICIAN PARTNERS, INC., a Delaware corporation (the "Lease"). Any capitalized
term not defined herein shall have the meaning assigned to it in the provisions
of the Lease identified as the Basic Lease Provisions or Supplemental Lease
Provisions, as applicable.
1. Except as specifically provided for in this Lease, no sign, placard,
picture, advertisement, name or notice will be inscribed, displayed or
printed or affixed on or to any part of the outside or inside of the
Building or the Premises without the written consent of Landlord first
having been obtained.
2. Any directory of the Building provided by Landlord will be exclusively
for the display of the name and location of tenants in the Building,
and, subject to Tenant's rights under the Supplemental Lease
Provisions, Landlord reserves the right to exclude any other names
therefrom and may limit the number of listings per tenant.
3. Tenant will not place anything or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly
from outside the Premises. No awnings or other projections will be
attached to the outside walls and roof of the Building without prior
written consent of Landlord. No curtains, blinds, shades or screens
will be attached to or hung in or used in connection with any window or
door of the premises without the prior consent of Landlord.
4. "NORMAL BUSINESS HOURS" for purposes of Landlord's obligation to
provide air conditioning (both heating and cooling) will mean 7:00 a.m.
to 6:00 p.m. Monday through Friday and 7:00 a.m. to 2:00 p.m. on
Saturday except for the following holidays ("RECOGNIZED HOLIDAYS"): New
Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
5. The Premises will not be used for the manufacturing or storage of
merchandise except as such storage may be incidental to the use of the
Premises for the purposes permitted in this Lease. The Premises will
not be used for lodging, sleeping or for any illegal purposes.
6. The sidewalks, halls, passages, exits, entrances, elevators and
stairways will not be obstructed by any of the tenants or be used by
them for any purpose other than for ingress to and egress from their
respective leased premises. The halls, passages, exits, entrances,
elevators, stairways, terraces and roof are not for the use of the
general public, and Landlord will in all cases retain the right to
control and prevent access thereto by all persons whose presence, in
the judgment of Landlord, will be prejudicial to the safety, character,
reputation and interest of the Building and its tenants, provided that
nothing herein contained will be construed to prevent such access to
persons with whom Tenant normally deals in the ordinary course of
business, unless such persons are engaged in illegal activities. No
tenant and no employee or invitee of any tenant will go upon the roof
of Building.
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7. Except as expressly permitted in writing by Landlord, no additional
locks or bolts of any kind will be placed upon any of the doors or
windows by Tenant, nor will any changes be made to existing locks or
the mechanisms thereof. Landlord will furnish two (2) keys for each
lock it installs on the Premises without charge to Tenant. Landlord
will make a reasonable charge for any additional keys requested by
Tenant, and Tenant will not duplicate or obtain keys from any other
source. Tenant will upon the termination of the Term of this Lease
return to Landlord all keys so issued. Tenant will bear the cost for
the replacing or changing of any lock or locks due to any keys issued
to Tenant being lost.
8. The toilets and wash basins and other plumbing fixtures will not be
used for any purpose other than those for which they were constructed,
and no sweepings, rubbish, rags or foreign substances will be thrown
therein.
9 No furniture, freight or equipment of any kind will be brought into the
Building without the consent of Landlord, and all moving of the same
into or out of the Building will be done at such time and in such
manner as Landlord will designate. No furniture, packages, supplies,
equipment or merchandise will be received in the Building or carried up
or down in the elevators except between such hours and in such
elevators that will be designated by Landlord. There will not be used
in any space or in the public areas of the Building, either by Tenant
or others, any hand trucks except those equipped with rubber tires and
side guards.
10. No tenant will make or permit to be used any unseemly or disturbing
noises, or disturb or interfere with occupants of this or neighboring
buildings or leased premises, whether by the use of any musical
instrument, radio, phonograph, unusual noise or in any other way. No
tenant will throw anything out of doors or down the passage ways.
11. Tenant will not use or keep in the Premises or the Building any
kerosine, gasoline, or any flammable, combustible or explosive fluid,
chemical or substance or use any method of heating or air conditioning
other than those supplied or approved by Landlord.
12. Tenant will see that the windows and doors of the Premises are closed
and securely locked before leaving the Building. No tenant will permit
or suffer any windows to be opened in its premises while the air
conditioning is in operation except at the direction of Landlord.
Tenant must observe strict care and caution that all water facets and
other apparatus are entirely shut off before Tenant and Tenant's
employees leave the Building, and that all electricity, gas or air
conditioning will likewise be carefully shut off so as to prevent waste
or damage.
13. Landlord reserves the right to exclude or expel from the Building any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who will in any manner do any act in
violation of any of the rules or regulations of the Building.
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<PAGE> 68
14. The requirements of Tenant will be attended to only upon application at
the office of the Building. Employees of Landlord will not perform any
work or do anything outside of their regular duties unless under
special instructions from Landlord, and no employees will admit any
person (Tenant or otherwise) to any office without specific
instructions from Landlord.
15. No tenant will disturb, solicit or canvass any occupant of the
Building, nor will Tenant permit or cause others to do so, and Tenant
will cooperate to prevent same by others.
16. No vending machine or machines of any description will be installed,
maintained or operated upon the Premises without the written consent of
Landlord. Tenant will not permit in the Premises any cooking or the use
of apparatus for the preparation of any food or beverages (except for
use by Tenant's employees and where the Landlord has approved the
installation of cooking facilities as part of Tenant's leasehold
improvements), nor the use of any electrical apparatus likely to cause
an overload of the electrical circuits.
17. All persons entering and leaving the Building at any time other than
during normal business hours will register in the books kept by
Landlord at or near the night entrance or entrances, and Landlord will
have the right to prevent any persons entering or leaving the Building
unless provided with a key to the Premises to which such person seeks
entrance, and a pass in a form to be approved by Landlord and provided
at Tenant's expense. Any persons found in the Building at such times
without such keys or passes will be subject to the surveillance of the
employees and agents of Landlord. Landlord will be under no
responsibility for failure to enforce this rule.
18. Tenant will not use any janitor closets or telephone or electrical
closets for anything other than their originally intended purposes. In
the event Tenant will purchase privately owned communications equipment
for which telephone closets were not installed in connection with
initial occupancy of Tenant, such equipment will not be installed in
existing telephone closets.
19. Tenant's right to have heavy furnishings, equipment and files in the
Premises will be limited to items weighing less than the load-bearing
limits of floors within the Premises as established by Landlord. Heavy
items must be placed in locations approved in advance by Landlord. Upon
written demand from Landlord, Tenant will promptly remove from the
Premises any items which, in the judgment of Landlord, constitute a
structural overload on floors within the Premises. If Landlord approves
the presence of a heavy item for which reinforcement of the floor or
other precautionary measures are necessary, Tenant will bear the entire
cost of such reinforcement or other precautionary measures. If the
services of a structural engineer are, in the judgment of Landlord,
necessary to determine the location for and/or precautionary measures
to be taken in connection with any heavy load, Landlord will engage
such engineer, but the fees and expenses of such engineer will be paid
by Tenant upon demand.
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<PAGE> 69
20. Tenant will not, without the prior written consent of Landlord, use the
name or any photograph, drawing or other likeness of the Building for
any purpose other than as the address of the business to be conducted
by Tenant in the Premises, nor will Tenant do or permit anything to be
done in connection with Tenant's business or advertising which, in the
reasonable judgment of Landlord, might mislead the public as to any
apparent connection or relationship between Landlord, the Building and
Tenant.
In the event there is any conflict between these Rules and Regulations and
the Supplemental Lease Provisions, the Supplemental Lease Provisions will
control.
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<PAGE> 70
EXHIBIT H
ASBESTOS CONTAINING MATERIALS AND OTHER HAZARDOUS SUBSTANCES
This Exhibit is attached to and a part of that certain Lease Agreement
dated as of January 1, 1996, executed by and between DALLAS MAIN CENTER LIMITED
PARTNERSHIP, a Delaware limited partnership, and AMERICAN PHYSICIAN PARTNERS,
INC., a Delaware corporation ("Lease"). Any capitalized term not defined herein
shall have the meaning assigned to it in the provisions of the Lease identified
as the Basic Lease Provisions or Supplemental Lease Provisions, as applicable.
(a) A copy of the survey prepared by the independent contractor set forth
below (the "HAZARDOUS SUBSTANCE SURVEY") is available for Tenant's
inspection at the office of the Landlord. The purpose of the Hazardous
Substance Survey is to indicate the presence or absence of hazardous
or toxic materials (as defined in the Lease) at the Building based on
the present levels or content of said hazardous or toxic materials as
presently set by the U.S. Environmental Protection Agency ("EPA") or
the U.S. Occupational Safety and Health Administration ("OSHA").
However, Landlord has been advised by the independent contractor that
any such presence reflected in the Hazardous Substance Survey
identified below does not violate applicable Laws relating to such
materials or require removal or controls beyond those already
implemented by Landlord. Landlord makes no representations or
warranties whatsoever (express or implied) to Tenant regarding: (x)
the Hazardous Substance Survey (including, without limitation, the
contents, accuracy and/or scope thereof) and Landlord has informed
Tenant that said Hazardous Substance Survey is not a comprehensive
survey of the Building for all forms of hazardous or toxic materials,
including, but not limited to asbestos containing materials ("ACM"),
and cannot be relied upon as a representation that there are no other
hazardous or toxic materials, including but not limited to asbestos
and ACM, at the Premises or Building, whether addressed therein or
not; or (y) the presence or absence of other hazardous or toxic
materials in, at, or under the Premises or the Building. Tenant (a)
shall not rely on and has not relied on the Hazardous Substance
Survey, the same having been provided for informational purposes only
and (b) acknowledges that Tenant has taken such actions as Tenant
deems appropriate to fairly evaluate the Premises and has otherwise
satisfied itself that the Premises are acceptable and suitable from an
environmental perspective. Tenant shall furnish Landlord with a
complete and legible copy of any study, report, test, survey or
investigation performed by or on behalf of Tenant at any time
involving the Premises and shall fully restore all areas and
improvements where samples were taken or work performed and repair all
damage resulting from any of the same.
(b) Landlord shall, at its sole expense, have the right to conduct such
other surveys of the Building as Landlord shall elect for the purpose
of indicating the presence or absence of hazardous or toxic materials
at the Building based on the present levels or content of said
hazardous or toxic materials as presently set by the EPA or OSHA. In
the event that any such additional survey is performed and a copy
thereof is delivered to Tenant, such additional survey shall become a
part of the Hazardous Substance Survey.
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(c) In the event that Landlord ever implements an Operations and
Maintenance Program (the "O&M PROGRAM") with respect to any ACM
located in the Building, Tenant will be advised of such fact and shall
be give the opportunity to review the written document setting forth
the O&M Program. To reduce the risk that the ACM, if any, at the
Building is improperly disturbed or handled by untrained persons, all
maintenance, repairs and/or renovations by Tenant to any area of the
Premises or Building shown on the survey reflecting the existence of
ACM in the Building must be coordinated with and approved in advance
by Landlord. Tenant shall insure and hereby agrees that all
contractors and subcontractors engaged by Tenant agree in writing to
be bound by and will perform their work subject to the O&M Program.
Tenant agrees to cooperate with Landlord in all reasonable procedures
or actions necessary for the conduct of the O&M Program.
(d) TENANT SHALL INDEMNIFY AND HOLD LANDLORD HARMLESS FROM AND AGAINST ALL
CLAIMS, ACTIONS, LIABILITIES, DAMAGES, LOSSES, INJURIES OR DEATHS IN
CONNECTION WITH OR ARISING OUT OF OR FROM ANY INSPECTION, TESTING,
SAMPLING OR SIMILAR OR DISSIMILAR ACTIVITY CONDUCTED BY TENANT,
TENANT'S AGENTS OR CONTRACTORS AT THE PREMISES OR THE BUILDING FOR
HAZARDOUS OR TOXIC MATERIALS, WHETHER UNDER THIS RIDER OR OTHERWISE
UNDER OR IN CONNECTION WITH THIS LEASE.
LIST EACH HAZARDOUS SUBSTANCE SURVEY FOR THE PROPERTY PREPARED AT LANDLORD'S
REQUEST
<TABLE>
<CAPTION>
CONTRACTOR TITLE OF SURVEY DATE OF SURVEY
- ---------- --------------- --------------
<S> <C> <C>
BCM ENGINEERS ASBESTOS BULK SAMPLE
INC. ANALYSIS FOR
NATIONSBANK BUILDING
</TABLE>
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<PAGE> 72
EXHIBIT I
TENANT'S RIGHT OF OPPORTUNITY
(BASIC RENT EQUAL TO FAIR MARKET RENT)
This Rider is attached to and a part of that certain Lease Agreement dated
as of ______________________, 199___, executed by and between DALLAS MAIN
CENTER LIMITED PARTNERSHIP, a New Jersey corporation and AMERICAN PHYSICIAN
PARTNERS, INC., a Delaware corporation (the "LEASE"). Any capitalized term not
defined herein shall have the meaning assigned to it in the provisions of the
Lease identified as the Basic Lease Provisions or Supplemental Lease
Provisions, as applicable. Landlord and Tenant mutually agree as follows:
A. Prior to leasing to a third party any of the portion of the
crosshatched area on the 23rd floor of the Building more particularly
described in Schedule A attached to this Rider (the "OPPORTUNITY
EXPANSION SPACE"), Landlord shall deliver to Tenant a written
statement ("Statement") setting forth (a) the name of a prospective
tenant interested in all or a portion of the Opportunity Expansion
Space and (b) Landlord's determination of the Fair Market Rent for the
applicable Opportunity Expansion Space. Tenant shall have five (5)
days after receipt of the Statement within which to notify Landlord in
writing that it elects to lease the applicable Opportunity Expansion
Space (each such written notice is herein referred to as a "Notice").
If Tenant elects to lease the applicable Opportunity Expansion Space
within such five (5) day period, then Tenant's election shall be
irrevocable and Tenant shall be deemed to have accepted Landlord's
determination of the Fair Market Rent. Failure by Tenant to notify
Landlord within such five (5) day period shall be deemed an election
by Tenant not to lease the applicable Opportunity Expansion Space and
Landlord shall have the right to lease such space. If Tenant elects
not to lease the applicable Opportunity Expansion Space or fails to
elect to lease the applicable Opportunity Expansion Space within such
5-day period, then Tenant's rights under this Exhibit shall be of no
further force or effect. Tenant understands and agrees that its rights
under this Rider with respect to the portion of the Opportunity
Expansion Space shall be subordinate to any expansion any renewal
rights granted in a lease executed prior to the date of this Lease.
B. The applicable Opportunity Expansion Space shall be leased to Tenant
upon all terms and conditions of this Lease with the following
exceptions:
(a) All Opportunity Expansion Space shall be delivered to Tenant
in "as is" condition.
(b) Basic Annual Rent for the applicable Opportunity Expansion
Space will be equal to the Fair Market Rent, which is hereby
defined to mean the then prevailing rents similar to the
Basic Annual Rent payable by tenants for premises within the
Building of equivalent quality, size, and utility as the
applicable Opportunity Expansion Space and leased for a term
approximately equal to the then remaining term of the Lease.
The Fair Market Rent will take into consideration, and Tenant
shall be entitled to, only the tenant inducements (inclusive
of the finish allowance) agreed to in the transactions
considered by Landlord in determining the Fair Market Rent.
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(c) the Basic Monthly Rent for the agreed rentable area of the
Opportunity Expansion Space will be equal to one-twelfth
(1/12th) of the Basic Annual Rent for the applicable
Opportunity Expansion Space.
(d) The Operating Expenses Stop and Real Estate Taxes Stop for
the entire Premises shall each be recalculated based on the
rentable area of the Premises following the addition of the
applicable Opportunity Expansion Space to the Premises.
(e) The dates for submission of the initial space plan and
construction plans shall be agreed to by Landlord and Tenant
within five (5) days after Tenant elects to lease the
applicable Opportunity Expansion Space.
(f) The rent commencement date with respect to the applicable
Opportunity Expansion Space shall be the earlier to occur of
(x) substantial completion of the tenant improvements to be
installed in such space and (y) thirty days (30) days after
the date Landlord delivers to Tenant the initial space plan
for the applicable Opportunity Expansion Space (the date
determined pursuant to this clause (y), the "SCHEDULED RENT
COMMENCEMENT DATE"), provided, however, such Scheduled Rent
Commencement Date shall be subject to adjustment to the same
extent that the Commencement Date for the initial Premises is
subject to adjustment under Section 3 of the Work Letter.
(g) Tenant shall have no right to occupy any portion of the
Opportunity Expansion Space prior to the applicable Scheduled
Rent Commencement Date and in no event shall Tenant occupy
any Opportunity Expansion Space prior to (i) Substantial
Completion of the leasehold improvements being constructed in
the applicable Opportunity Expansion Space, (ii) issuance of
a certificate of completion or other document or permit
issued by the applicable governmental authority authorizing
Tenant's occupancy of the applicable Opportunity Expansion
Space and (iii) Landlord's receipt of an Acceptance of
Premises Memorandum covering the applicable Opportunity
Expansion Space executed by Tenant.
C. Within fifteen (15) days after Landlord's receipt of a Notice, Tenant
and Landlord will enter into a work letter substantially in the form
of Exhibit D attached to the Lease, provided that such form shall be
amended to (i) set forth provisions for preparation of constrution
drawings and approval dates thereof, (ii) amend the finish allowance
to be the amount of finish allowance, if any, considered in
calculating the Fair Market Rent and (iii) provide for such other
matters as are necessary to reflect the agreements of the parties with
respect to the finish out of the applicable Opportunity Expansion
Space. Pursuant to the work letter, Landlord shall construct or cause
to be constructed improvements in the applicable Opportunity Expansion
Space in substantial accordance with construction plans agreed to by
Landlord and Tenant.
D. Upon substantial completion of the applicable Opportunity Expansion
Space improvements, Landlord and Tenant shall execute an Acceptance of
Premises Memorandum in substantially the form of Exhibit E attached to
the Lease. If Tenant occupies any Opportunity Expansion Space without
executing the Acceptance of Premises Memorandum, Tenant shall be
deemed to have accepted such Opportunity Expansion Space for all
purposes.
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E. Within fifteen (15) days after Landlord's receipt of a Notice,
Landlord and Tenant will enter into an amendment to this Lease
reflecting (i) the addition of the applicable Opportunity Expansion
Space to the Premises, (ii) the increase in Basic Annual Rent and
Additional Rent payable under this Lease, (iii) the increase in
Tenant's Building Expense Percentage and (iv) such other amendments as
are necessary.
F. Notwithstanding any other provision or inference herein to the
contrary, Tenant's rights and Landlord's obligations under this Rider
shall expire and be of no further force or effect on the earliest of
(i) the expiration or earlier termination of the initial term of this
Lease, (ii) an assignment of this Lease by Tenant or (iii) the last
day of the fourth (4th) Lease Year.
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<PAGE> 1
EXHIBIT 10.22
FIRST AMENDMENT TO OFFICE BUILDING LEASE
THIS FIRST AMENDMENT TO OFFICE BUILDING LEASE AGREEMENT ("Amendment"),
by and between (i) DALLAS MAIN CENTER LIMITED PARTNERSHIP, a Delaware limited
partnership, ("Landlord"), and (ii) AMERICAN PHYSICIAN PARTNERS, INC., a
Delaware corporation ("Tenant"), is executed effective as of the 1st day of
July , 1997 (the "Effective Date").
W I T N E S S E T H:
WHEREAS, Landlord heretofore entered into that certain Office Building
Lease with Tenant dated October 1, 1996, under and pursuant to the terms of
which Landlord has leased to Tenant certain office space (the "Premises")
located in that certain building commonly known as "NationsBank Plaza" (the
"Building"), which is located at 901 Main Street, Dallas, Dallas County, Texas,
all as more particularly described in the Lease; and
WHEREAS, Tenant desires to exercise its Right of Opportunity pursuant
to Exhibit I of the Lease; and
WHEREAS, Landlord has agreed to the foregoing upon the terms and
conditions set forth below.
AGREEMENT:
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein, the parties hereto do hereby covenant and agree that the
Lease is amended, modified and supplemented as follows:
1. Defined Terms. Except as expressly defined in this Amendment,
all initial capitalized terms in this Amendment shall have the meaning assigned
to such terms in the Lease.
2. Certain Lease Modifications. From and after the Effective
Date, the following terms and provisions shall apply, and the Lease shall be
modified accordingly:
(a) Additional Floor Space. Landlord and Tenant
acknowledge and agree that from and after July 1, 1997 the Premises
shall be expanded to include approximately 2,874 square feet of
Rentable Area on the 23rd floor of the Tower, as shown on Exhibit A
attached hereto and made a part hereof (the "Additional Floor Space"),
with the result that Paragraph 2(b) of the Basic Lease Provisions
shall be deleted in its entirety and replaced with the following:
b. The "Agreed Rentable Area of the Premises" is
13,349 square feet.
<PAGE> 2
(b) Exhibit B to the Lease shall be deleted in its
entirety and replaced with Exhibit B to this Amendment.
(c) Basic Annual Rent. Landlord and Tenant acknowledge
and agree that as of July 1, 1997, the Basic Annual Rent due under the
Lease shall be increased to include the payment of rent for the
Additional Floor Space, which is as follows:
<TABLE>
<CAPTION>
Rate Per Square Foot of Basic Annual Basic Monthly
----------------------- ------------ -------------
Additional Floor Space Rent Increase Rent Increase
---------------------- ------------- -------------
<S> <C> <C>
$18.00 $51,732.00 $4,311.00
</TABLE>
Accordingly, Landlord and Tenant hereby acknowledge and agree that, as
of July 1, 1997, Basic Annual Rent and Basic Monthly Rent as contained
in 3(a) of the Basic Lease Provisions shall be increased to the
following:
<TABLE>
<CAPTION>
Basic Annual Basic Monthly
------------ -------------
Rent Rent
---- ----
<S> <C>
$208,857.00 $17,404.75
</TABLE>
(d) Operating Cost. Landlord and Tenant acknowledge and
agree that from and after July 1, 1997, Tenant's Pro Rata Share of
Operating Costs and Energy Costs shall be adjusted to include the
Additional Floor Space.
3. Exhibit I. Landlord and Tenant acknowledge and agree that
Exhibit I of the Lease is hereby deleted and Tenant's Right of Opportunity is
hereby null, void and extinguished (and of no force and effect) with the result
that Tenant shall have no further rights and Landlord shall have no further
obligations thereunder.
4. AS IS. Landlord and Tenant acknowledge and agree, and Tenant
hereby accepts the Additional Floor Space in its "AS IS, WHERE IS" condition,
with all faults and conditions.
5. Broker. Tenant represents and warrants that Tenant has had no
dealings with any broker or agent in connection with the negotiation or
execution of this Amendment. Tenant hereby agrees to defend, indemnify and
hold harmless Landlord, from and against any claim by third parties for
brokerage, commission, finders or other fees relative to this Amendment
resulting from or arising out of any acts or agreements of Tenant.
6. Effect of this Amendment. Except as specifically amended by
the provisions hereof, the terms and provisions in the Lease shall continue to
govern the rights and obligations of the parties thereunder, and all provisions
and covenants of the Lease shall remain in full force and effect as stated
therein. In addition, the Lease hereby is amended and modified in a manner
consistent with the terms and provisions of this Amendment. This Amendment and
the Lease shall
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<PAGE> 3
be construed as one instrument. In the event of any conflict between this
Amendment and the Lease, the terms and provisions of this Amendment shall
control and shall be paramount, and the Lease shall be construed accordingly.
The terms, provisions and covenants of this Amendment shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
successors in interest and legal representatives. The terms and conditions of
this Amendment may not be modified, amended, altered or otherwise affected
except by instrument in writing executed by Landlord and Tenant. THIS
AMENDMENT REPRESENTS THE FINAL AGREEMENT BETWEEN LANDLORD AND TENANT WITH
RESPECT TO THE AMENDMENT OF THE LEASE, AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN LANDLORD AND
TENANT. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN LANDLORD AND TENANT.
7. Counterparts. This Amendment may be executed in multiple
counterparts, each of which for all purposes is deemed an original, and all of
which constitutes collectively but one instrument; but in making proof of this
Amendment, it shall not be necessary to produce or account for more than one
(1) counterpart.
(The balance of this page is intentionally left blank.)
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<PAGE> 4
IN WITNESS WHEREOF, Landlord and Tenant executed this Amendment in
multiple counterparts as of the Effective Date.
Address: LANDLORD:
4110 NationsBank Plaza DALLAS MAIN CENTER LIMITED PARTNERSHIP,
901 Main Street a Delaware limited partnership
Dallas, TX 75202 (successor by merger to Dallas Main
Center J.V. #1)
By: PREMISYS REAL ESTATE SERVICES,
INC., a Pennsylvania
corporation, its agent
By:
--------------------------
Name: Mike Lafitte
------------------------
Title: Vice President
-----------------------
Address: TENANT:
2301 NationsBank Plaza AMERICAN PHYSICIAN PARTNERS, INC.
901 Main Street a Delaware corporation
Dallas, TX 75202
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
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<PAGE> 5
EXHIBIT "A"
ADDITIONAL FLOOR SPACE
-5-
<PAGE> 6
EXHIBIT"B"
This Exhibit is attached to and a part of that certain First Amendment
to Office Building Lease effective as of July 1, 1997, executed by and between
DALLAS MAIN CENTER LIMITED PARTNERSHIP, a Delaware limited partnership,
("Landlord") and AMERICAN PHYSICIAN PARTNERS, INC., a Delaware corporation
("Tenant") (the "First Lease Amendment"), which amends and modifies that
certain Lease Agreement dated as of October 1, 1996, executed by and between
Landlord and Tenant (the "Lease"). By the terms of the First Lease Amendment,
this Exhibit "B" replaces the original Exhibit "B" to the Lease (the "Original
Exhibit "B""), such Original Exhibit "B" being deleted in its entirety and
replaced hereby. Any capitalized term not defined herein shall have the
meaning assigned to it in the provisions of the Lease and the First Lease
Amendment identified as the Basic Lease Provisions or Supplemental Lease
Provisions, as applicable. Landlord and Tenant mutually agree that the
attached Floor Plan is the Floor Plan for the Premises:
PREPARER OF LEASE FORM TO ATTACH FLOOR PLAN
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<PAGE> 7
13,349 Rentable Square Feet, Suite 2301
(Entire Floor Plan)
-7-
<PAGE> 1
EXECUTION COPY
CREDIT AGREEMENT
Dated _______ __, 1997
among
AMERICAN PHYSICIAN PARTNERS, INC.,
as Borrower,
THE LENDERS SIGNATORY HERETO
FROM TIME TO TIME,
as Lenders,
and
GENERAL ELECTRIC CAPITAL CORPORATION,
as Agent and Lender
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
1. AMOUNT AND TERMS OF CREDIT .......................................... 1
1.1 Revolving Credit Facility .................................. 1
1.2 Letters of Credit .......................................... 4
1.3 Prepayments and Commitment Reductions ...................... 4
1.4 Use of Proceeds ............................................ 7
1.5 Interest and Applicable Margins ............................ 7
1.6 Fees ....................................................... 10
1.7 Receipt of Payments ........................................ 10
1.8 Application and Allocation of Payments ..................... 10
1.9 Loan Account and Accounting ................................ 11
1.10 Indemnity .................................................. 11
1.11 Access ..................................................... 12
1.12 Taxes ...................................................... 12
1.13 Capital Adequacy; Increased Costs; Illegality .............. 14
1.14 Single Loan ................................................ 16
2. CONDITIONS PRECEDENT ................................................ 16
2.1 Conditions to the Initial Loans ............................ 16
2.2 Further Conditions to Each Loan ............................ 17
3. REPRESENTATIONS AND WARRANTIES ...................................... 18
3.1 Existence; Compliance with Law ............................. 18
3.2 Executive Offices; FEIN .................................... 19
3.3 Corporate or Partnership Power,
Authorization, Enforceable
Obligations ............................................... 19
3.4 Financial Statements and Projections ....................... 20
3.5 Material Adverse Effect .................................... 20
3.6 Ownership of Property; Liens ............................... 21
3.7 Labor Matters .............................................. 21
3.8 Ventures, Subsidiaries and Affiliates;
Outstanding Stock and Indebtedness ........................ 22
3.9 Government Regulation ...................................... 22
3.10 Margin Regulations ......................................... 22
3.11 Taxes ...................................................... 22
3.12 ERISA ...................................................... 23
3.13 No Litigation .............................................. 24
3.14 Brokers .................................................... 24
3.15 Intellectual Property ...................................... 25
3.16 Full Disclosure ............................................ 25
3.17 Environmental Matters ...................................... 25
3.18 Insurance .................................................. 26
3.19 Intentionally Omitted ...................................... 26
3.20 Intentionally Omitted ...................................... 26
3.21 Intentionally Omitted ...................................... 26
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
3.22 Agreements and Other Documents ............................. 26
3.23 Solvency ................................................... 26
3.24 Acquisition Agreement ...................................... 26
3.25 Intentionally Omitted ...................................... 27
3.26 Third Party Reimbursement .................................. 27
4. FINANCIAL STATEMENTS AND INFORMATION ................................ 27
4.1 Reports and Notices ........................................ 27
4.2 Communication with Accountants ............................. 27
5. AFFIRMATIVE COVENANTS ............................................... 28
5.1 Maintenance of Existence and Conduct of
Business................................................... 28
5.2 Payment of Obligations ..................................... 28
5.3 Books and Records .......................................... 29
5.4 Insurance .................................................. 29
5.5 Compliance with Laws ....................................... 29
5.6 Supplemental Disclosure .................................... 29
5.7 Intellectual Property ...................................... 30
5.8 Environmental Matters ...................................... 30
5.9 Landlords' Agreements, Mortgagee
Agreements and Bailee Letters.............................. 30
5.10 Intentionally Omitted ...................................... 30
5.11 Further Assurances ......................................... 30
5.12 Accreditation and Licensing ................................ 30
6. NEGATIVE COVENANTS .................................................. 31
6.1 Mergers, Subsidiaries, Etc.; Unrestricted
Subsidiaries............................................... 31
6.2 Investments; Loans and Advances ............................ 35
6.3 Indebtedness ............................................... 37
6.4 Employee Loans and Affiliate Transactions .................. 40
6.5 Business ................................................... 41
6.6 Intentionally Omitted ...................................... 41
6.7 Liens ...................................................... 41
6.8 Sale of Stock and Assets ................................... 41
6.9 ERISA ...................................................... 42
6.10 Financial Covenants ........................................ 42
6.11 Hazardous Materials ........................................ 42
6.12 Intentionally Omitted ...................................... 42
6.13 Intentionally Omitted ...................................... 42
6.14 Restricted Payments ........................................ 42
6.15 Change of Corporate Name or Location ....................... 43
6.16 No Impairment of Intercompany Transfers .................... 43
6.17 Intentionally Omitted ...................................... 43
6.18 Changes Relating to Subordinated Debt ...................... 43
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
7. TERM ................................................................ 44
7.1 Termination ................................................ 44
7.2 Survival of Obligations Upon Termination
of Financing Arrangements ................................. 44
8. EVENTS OF DEFAULT: RIGHTS AND REMEDIES .............................. 44
8.1 Events of Default .......................................... 44
8.2 Remedies ................................................... 47
8.3 Waivers by Credit Parties .................................. 47
9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT ................. 48
9.1 Assignment and Participations .............................. 48
9.2 Appointment of Agent ....................................... 50
9.3 Agent's Reliance, Etc ...................................... 50
9.4 GE Capital and Affiliates .................................. 51
9.5 Lender Credit Decision ..................................... 51
9.6 Indemnification ............................................ 51
9.7 Successor Agent ............................................ 52
9.8 Setoff and Sharing of Payments ............................. 52
9.9 Advances; Payments; Non-Funding Lenders;
Information ............................................... 53
10. SUCCESSORS AND ASSIGNS ............................................... 55
10.1 Successors and Assigns ..................................... 55
11. MISCELLANEOUS ........................................................ 56
11.1 Complete Agreement; Modification of Agreement .............. 56
11.2 Amendments and Waivers ..................................... 56
11.3 Fees and Expenses .......................................... 57
11.4 No Waiver .................................................. 58
11.5 Remedies ................................................... 59
11.6 Severability ............................................... 59
11.7 Conflict of Terms .......................................... 59
11.8 Confidentiality ............................................ 59
11.9 GOVERNING LAW .............................................. 60
11.10 Notices .................................................... 61
11.11 Section Titles ............................................. 61
11.12 Counterparts ............................................... 61
11.13 WAIVER OF JURY TRIAL ....................................... 61
11.14 Press Releases ............................................. 62
11.15 Reinstatement .............................................. 62
11.16 Advice of Counsel .......................................... 62
11.17 No Strict Construction ..................................... 62
11.18 No Third-Party Beneficiary ................................. 62
</TABLE>
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<PAGE> 5
INDEX OF APPENDICES
Exhibit 1.1(a) - Form of Notice of Revolving Credit Advance
Exhibit 1.1(b) - Form of Revolving Note
Exhibit 1.1(c)(ii) - Form of Swing Line Note
Exhibit 1.5(e) - Form of Notice of Conversion/Continuation
Exhibit 9.1(a) - Form of Assignment Agreement
Schedule 1.1 - Responsible Individual
Schedule 1.4 - Sources and Uses; Funds Flow Memorandum
Schedule 3.2 - Executive Offices; FEIN
Schedule 3.4(A) - Financial Statements
Schedule 3.4(B) - Pro Forma
Schedule 3.4(C) - Projections
Schedule 3.6 - Real Estate and Leases
Schedule 3.7 - Labor Matters
Schedule 3.8 - Ventures, Subsidiaries and Affiliates; Outstanding
Stock
Schedule 3.11 - Tax Matters
Schedule 3.12 - ERISA Plans
Schedule 3.13 - Litigation
Schedule 3.15 - Intellectual Property
Schedule 3.17 - Hazardous Materials
Schedule 3.22 - Material Agreements
Schedule 5.1 - Trade Names
Schedule 5.4 - Insurance
Schedule 6.1(b) - Existing Permitted Joint Ventures
Schedule 6.3 - Indebtedness
Schedule 6.7 - Existing Liens
Schedule A-1 - List of Founding Radiology Practices and
Acquisition Agreements
Schedule A-19 - Prior Lender Obligations
Annex A (Recitals) - Definitions
Annex B (Section 1.2) - Letters of Credit
Annex C (Section 2.1(a)) - Schedule of Additional Closing Documents
Annex D (Section 4.1(a)) - Financial Statements and Projections -- Reporting
Annex E (Section 6.10) - Financial Covenants
Annex F (Section 9.9(a)) - Lenders' Wire Transfer Information
Annex G (Section 11.10) - Notice Addresses
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<PAGE> 6
CREDIT AGREEMENT, dated ________ __, 1997 among AMERICAN PHYSICIAN
PARTNERS, INC., a Delaware corporation ("Borrower"), and GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation (in its individual capacity, "GE
Capital"), for itself, as Lender, and as Agent for Lenders, and the other
Lenders signatory hereto from time to time.
RECITALS
WHEREAS, Borrower desires that Lenders extend revolving credit
facilities to Borrower of up to One Hundred Fifteen Million Dollars
($115,000,000.00) in the aggregate for the purpose of refinancing certain
indebtedness of Borrower and the seven (7) radiology practices to be acquired
by the Borrower on the date hereof and to provide working capital financing for
Borrower and funds for other general corporate purposes of Borrower; and for
these purposes, Lenders are willing to make certain loans and other extensions
of credit to Borrower of up to such amount upon the terms and conditions set
forth herein; and
WHEREAS, Borrower desires to secure all of its obligations under the
Loan Documents by pledging to Agent, for the benefit of Agent and Lenders, all
of the issued and outstanding capital stock of Borrower's Subsidiaries and all
the Borrower's or any Subsidiary's right, title and interest in the equity of
any partnership, joint venture or other business organization and all
intercompany notes, and granting to Agent for the benefit of Agent and Lenders
a security interest in all Service Agreements; and
WHEREAS, capitalized terms used in this Agreement shall have the
meanings ascribed to them in Annex A. All Annexes, Disclosure Schedules,
Exhibits and other attachments (collectively, "Appendices") hereto, or
expressly identified to this Agreement, are incorporated herein by reference,
and taken together, shall constitute but a single agreement. These Recitals
shall be construed as part of the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, and for other good and valuable consideration,
the parties hereto agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.1 REVOLVING CREDIT FACILITY. (a) Subject to the terms and conditions
hereof, each Lender agrees to make available from time to time until the
Commitment Termination Date its Pro Rata Share of advances (each, a "Revolving
Credit Advance"). The Pro Rata Share of the Revolving Loan of any Lender shall
not at any time exceed its separate Revolving Loan Commitment. The obligations
of each Lender hereunder shall be several and not joint. The aggregate amount
of Revolving Credit Advances outstanding shall not exceed at any time the
lesser of (A) the Maximum Amount and (B) the Revolving Credit Availability, in
each case less the sum of the Letter of Credit Obligations and the Swing Line
Loan outstanding at such time ("Borrowing
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<PAGE> 7
Availability"). Until the Availability Termination Date, Borrower may from time
to time borrow, repay and reborrow under this Section 1.1. Each Revolving
Credit Advance shall be made on notice by Borrower to the representative of
Agent identified on Schedule 1.1 at the address specified thereon. Those
notices must be given no later than (1) 2:00 p.m. (New York time) on the
Business Day prior to the date of the proposed Revolving Credit Advance, in the
case of an Index Rate Loan, or (2) 1:00 p.m. (New York time) on the date which
is three (3) Business Days prior to the proposed Revolving Credit Advance, in
the case of a LIBOR Loan. Each such notice (a "Notice of Revolving Credit
Advance") must be given in writing (by telecopy or overnight courier)
substantially in the form of Exhibit 1.1(a), and shall include the information
required in such Exhibit and such other information as may be required by
Agent. If Borrower desires to have the Revolving Credit Advances bear interest
by reference to a LIBOR Rate, it must comply with Section 1.5(e).
(b) Borrower shall execute and deliver to each Lender a note to
evidence the Revolving Loan Commitment of that Lender. Each note shall be in
the principal amount of the Revolving Loan Commitment of the applicable Lender,
dated the Closing Date and substantially in the form of Exhibit 1.1(b) (each a
"Revolving Note" and, collectively, the "Revolving Notes"). Each Revolving Note
shall represent the obligation of Borrower to pay the amount of each Lender's
Revolving Loan Commitment or, if less, the applicable Lender's Pro Rata Share
of the aggregate unpaid principal amount of all Revolving Credit Advances to
Borrower together with interest thereon as prescribed in Section 1.5. The
entire unpaid balance of the Revolving Loan and all other noncontingent
Obligations shall be immediately due and payable in full in immediately
available funds on the Commitment Termination Date.
(c) SWING LINE FACILITY. (i) Agent shall notify the Swing Line Lender
upon Agent's receipt of any Notice of Revolving Credit Advance. Subject to the
terms and conditions hereof, the Swing Line Lender shall make available from
time to time until the Availability Termination Date advances (each, a "Swing
Line Advance") in accordance with any such notice to the extent that such
notice requests the Borrower to make such Advance as a Swing Line Advance. The
aggregate amount of Swing Line Advances outstanding shall not exceed the lesser
of (A) the Swing Line Commitment and (B) the Revolving Credit Availability less
the outstanding balance of the Revolving Loan and the Letter of Credit
Obligations at such time ("Swing Line Availability"). Until the Availability
Termination Date, Borrower may from time to time borrow, repay and reborrow
under this Section 1.1(c). Each Swing Line Advance shall be made pursuant to a
Notice of Revolving Credit Advance delivered by Borrower to Agent in accordance
with Section 1.1(a) which requests a Swing Line Advance. Those notices must be
given no later than 12:00 noon (New York time) on the Business Day of the
proposed Swing Line Advance. Notwithstanding any other provision of this
Agreement or the other Loan Documents, the Swing Line Loan shall constitute an
Index Rate Loan. Borrower shall repay the aggregate outstanding principal
amount of the Swing Line Loan (i) in the absence of the occurrence and
continuance of an Event of Default, within one Business Day following the Swing
Line Lender's demand therefor, and (ii) during the occurrence and continuance
of an Event of Default, upon demand therefor by the Swing Line Lender.
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<PAGE> 8
(ii) Borrower shall execute and deliver to the Swing Line Lender a
promissory note to evidence the Swing Line Commitment. Such note shall be in
the principal amount of the Swing Line Commitment of the Swing Line Lender,
dated the Closing Date and substantially in the form of Exhibit 1.1(c)(ii) (the
"Swing Line Note"). The Swing Line Note shall represent the obligation of
Borrower to pay the amount of the Swing Line Commitment or, if less, the
aggregate unpaid principal amount of all Swing Line Advances made to Borrower
together with interest thereon as prescribed in Section 1.5. The entire unpaid
balance of the Swing Line Loan and all other non-contingent Obligations shall
be immediately due and payable in full in immediately available funds on the
Commitment Termination Date if not sooner paid in full.
(iii) REFUNDING OF SWING LINE LOANS. The Swing Line Lender, at any
time and from time to time in its sole and absolute discretion, may on behalf
of Borrower (and Borrower hereby irrevocably authorizes the Swing Line Lender
to so act on its behalf) request each Revolving Lender (including the Swing
Line Lender) to make a Revolving Credit Advance to Borrower (which shall be an
Index Rate Loan) in an amount equal to such Revolving Lender's Pro Rata Share
of the principal amount of the Swing Line Loan (the "Refunded Swing Line Loan")
outstanding on the date such notice is given. Unless any of the events
described in Sections 8.1(h) or 8.1(i) shall have occurred (in which event the
procedures of Section 1.1(c)(iv) shall apply) and regardless of whether the
conditions precedent set forth in this Agreement to the making of a Revolving
Credit Advance are then satisfied, each Revolving Lender shall disburse
directly to Agent, its Pro Rata Share of a Revolving Credit Advance on behalf
of the Swing Line Lender, prior to 3:00 p.m. (New York time), in immediately
available funds on the Business Day next succeeding the date such notice is
given. The proceeds of such Revolving Credit Advances shall be immediately paid
to the Swing Line Lender and applied to repay the Refunded Swing Line Loan.
(iv) PARTICIPATION IN SWING LINE LOANS. If, prior to refunding a Swing
Line Loan with a Revolving Credit Advance pursuant to Section 1.1(c)(iii), one
of the events described in Sections 8.1(h) or 8.1(i) shall have occurred, then,
subject to the provisions of Section 1.1(c)(v) below, each Revolving Lender
will, on the date such Revolving Credit Advance was to have been made for the
benefit of Borrower, purchase from the Swing Line Lender an undivided
participation interest in the Swing Line Loan in an amount equal to its Pro
Rata Share of such Swing Line Loan. Upon request, each Revolving Lender will
promptly transfer to the Swing Line Lender, in immediately available funds, the
amount of its participation and upon receipt thereof the Swing Line Lender will
deliver to such Revolving Lender a Swing Line Loan Participation Certificate,
substantially the form of Exhibit 1.1(c)(iv), dated the date of receipt of such
funds and in such amount.
(v) REVOLVING LENDERS' OBLIGATIONS UNCONDITIONAL. Each Revolving
Lender's obligation to make Revolving Credit Advances in accordance with
Section 1.1(c)(iii) and to purchase participating interests in accordance with
Section 1.1(c)(iv) shall be absolute and unconditional and shall not be
affected by any circumstance, including (A) any setoff, counterclaim,
recoupment, defense or other right which such Revolving Lender
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<PAGE> 9
may have against the Swing Line Lender, Borrower or any other Person for any
reason whatsoever; (B) the occurrence or continuance of any Default or Event of
Default; (C) any inability of Borrower to satisfy the conditions precedent to
borrowing set forth in this Agreement on the date upon which such participating
interest is to be purchased or (D) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing. If any Revolving
Lender does not make available to Agent or the Swing Line Lender, as
applicable, the amount required pursuant to Section 1.1(c)(iii) or 1.1(c)(iv),
as the case may be, the Swing Line Lender shall be entitled to recover such
amount on demand from such Revolving Lender, together with interest thereon for
each day from the date of non-payment until such amount is paid in full at the
Federal Funds Rate for the first two Business Days and at the Index Rate
thereafter.
1.2 LETTERS OF CREDIT. Subject to and in accordance with the terms and
conditions contained herein and in Annex B, Borrower shall have the right to
request, and Lenders agree to incur, or purchase participations in, Letter of
Credit Obligations in respect of Borrower.
1.3 PREPAYMENTS AND COMMITMENT REDUCTIONS.
(a) VOLUNTARY COMMITMENT REDUCTIONS. Borrower may at any time on at
least fifteen (15) Business Days' prior written notice to Agent voluntarily and
permanently reduce or terminate the Revolving Loan Commitment; provided that
(A) any such partial reduction shall be in a minimum amount of $5,000,000 and
integral multiples of $250,000 in excess of such amount and (B) the Revolving
Loan Commitment shall not be reduced to an amount less than the L/C Sublimit
plus the Swing Line Commitment. Upon the effective date of any such termination
all Advances and other Obligations shall be immediately due and payable in
full. Any such voluntary reduction or termination of the Revolving Loan
Commitment must be accompanied by the payment, if any, required by Section
1.3(b)(i) below, plus any LIBOR funding breakage costs resulting therefrom in
accordance with Section 1.10(b). Each notice of partial reduction shall
designate whether such reduction shall apply to reduce the L/C Sublimit or the
Swing Line Commitment. Upon any such reduction or termination of the Revolving
Loan Commitment, Borrower's right to request Revolving Credit Advances, or
request that Letter of Credit Obligations be incurred on its behalf, or request
Swing Line Advances, shall simultaneously be permanently reduced or terminated,
as the case may be. Any voluntary prepayment made after the Availability
Termination Date shall be deemed a voluntary commitment reduction pursuant to
this Section and such reduction shall be applied against installments due under
Section 1.3(b)(iv) pro rata.
(b) Mandatory Prepayments and Commitment Reductions. (i) If at any
time the outstanding balance of the Revolving Loan exceeds the lesser of (A)
the Maximum Amount and (B) the Revolving Credit Availability, less, in each
case, the outstanding Swing Line Loan at such time, Borrower shall
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<PAGE> 10
immediately repay the outstanding Revolving Credit Advances to the extent
required to eliminate such excess. If any such excess remains after repayment
in full of the aggregate outstanding Revolving Credit Advances, Borrower shall
provide cash collateral for the Letter of Credit Obligations in the manner set
forth in Annex B to the extent required to eliminate such excess.
(ii) (A) Immediately upon receipt by any Credit Party of proceeds of
any asset disposition (including condemnation proceeds, but excluding proceeds
of asset dispositions permitted by Section 6.8(a) or (b)), Borrower shall
prepay the Loans in an amount equal to the amount by which all such proceeds,
net of (1) commissions and other reasonable and customary transaction costs,
fees and expenses properly attributable to such transaction and payable by
Borrower in connection therewith (in each case, paid to non- Affiliates), (2)
transfer taxes, (3) amounts payable to holders of senior Liens (to the extent
such Liens constitute Permitted Encumbrances hereunder), if any, and (4) an
appropriate reserve for income taxes in accordance with GAAP in connection
therewith, exceeds one million five hundred thousand dollars ($1,500,000) in
any Fiscal Year; provided that such prepayments shall be made in increments of
$100,000 only (any amount not paid as a result of this requirement shall be
accumulated and paid when the aggregate amount of such accumulation shall meet
the required prepayment increment). For the purposes of this Section
1.3(b)(ii)(A) the Credit Parties shall not be deemed to have received proceeds
of any disposition permitted pursuant to Section 6.8(c) or (d) to the extent
that such proceeds are redeployed to replace the asset disposed of in the
manner and within the time period provided in such sections. To the extent that
such proceeds are not so redeployed within such time period, such proceeds
shall be deemed received by the Credit Parties upon the expiration of such
period. Any such prepayment shall be applied in accordance with clause (c)
below.
(B) Immediately upon receipt by any Credit Party of proceeds of any
sale of Stock or of all or substantially all of the assets of any Subsidiary or
Permitted Joint Venture in accordance with Section 6.8(e), the Borrower shall
prepay the Loans in an amount equal to all such proceeds, net of: (i)
commissions and other reasonable and customary transaction costs, fees and
expenses properly attributable to such transaction and payable by Borrower in
connection therewith (in each case, paid to non-Affiliates), (ii) transfer
taxes, (iii) amounts payable to holders of senior Liens (to the extent such
Liens constitute Permitted Encumbrances hereunder), if any, and (iv) an
appropriate reserve for income taxes in accordance with GAAP in connection
therewith.
(iii) If Borrower issues Stock or any Indebtedness, other than Stock
or Indebtedness issued as a part of the consideration for a Permitted
Acquisition and other than Indebtedness permitted pursuant to Section 6.3, then
no later than the Business Day following the date of receipt of the proceeds
thereof, Borrower shall prepay the Revolving Loan in an amount equal to all
such proceeds, net of underwriting discounts and commissions and other
reasonable costs paid to non-Affiliates in connection therewith. Any such
prepayment shall be applied in accordance with clause (c) below.
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<PAGE> 11
(iv) Commencing on September 30, 2000 (the "Amortization Commencement
Date") and on the last business day of each Fiscal Quarter thereafter until the
Commitment Termination Date, the Borrower shall repay the Revolving Loan
outstanding in quarterly installments equal to the lesser of: (x) the
percentage of the aggregate principal amount of the Revolving Loan outstanding
on the Amortization Commencement Date set forth opposite the period in which
such fiscal quarter ends below and (y) the amount of Revolving Loan outstanding
concurrent on the date of such installment:
<TABLE>
<CAPTION>
Period Percentage
------ ----------
<S> <C>
September 30, 2000 7.50%
through
September 29, 2002
September 30, 2002 10.0%
and thereafter
</TABLE>
(v) Notwithstanding anything else in this Agreement to the contrary,
all Obligations shall be due and payable, and all Letters of Credit (or standby
guarantees therefor) shall be cancelled or returned or cash collateralized in
accordance with Annex B, on the Commitment Termination Date.
(c) APPLICATION OF CERTAIN MANDATORY PREPAYMENTS. Any prepayments made
by Borrower pursuant to clause (b)(ii) or (b)(iii) above shall be applied as
follows: first, to Fees and reimbursable expenses of Agent then due and payable
pursuant to any of the Loan Documents; second, to interest then due and payable
on the Swing Line Loan; third, to the principal balance of the Swing Line Loan
until the same shall have been repaid in full; fourth, to interest then due and
payable on the Revolving Credit Advances; fifth, to the outstanding principal
balance of Revolving Credit Advances until the same shall have been paid in
full; and sixth, to any Letter of Credit Obligations or to provide cash
collateral therefor in the manner set forth in Annex B, until all such Letter
of Credit Obligations have been fully cash collateralized or secured in the
manner set forth in Annex B.
(d) COMMITMENT REDUCTIONS. The Revolving Loan Commitment shall be
permanently reduced (i) to the amount of the aggregate outstanding principal
amount of the Revolving Loan on the Availability Termination Date, and (ii) by
the amount of any payment or prepayment pursuant to Sections 1.3(b)(ii), (iii)
or (iv) made subsequent to the Availability Termination Date. Any prepayments
described in clause (ii) of this subsection (d) that permanently reduce the
Revolving Loan Commitment shall be applied against installments due pursuant to
Section 1.3(b)(iv) in inverse order of the occurrence thereof. The Swing Line
Commitment shall terminate on the Availability Termination Date.
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<PAGE> 12
(e) Nothing in this Section 1.3 shall be construed to constitute
Agent's or any Lender's consent to any transaction referred to in clauses
(b)(ii) or (b)(iii) above which is not permitted by other provisions of this
Agreement or the other Loan Documents.
1.4 USE OF PROCEEDS. Borrower shall utilize the proceeds of the
Revolving Loan and the Swing Line Loan solely for funding Permitted
Acquisitions, the Refinancing (and to pay any related transaction expenses),
and for the financing of Borrower's ordinary working capital, Capital
Expenditures and for other lawful purposes. Disclosure Schedule (1.4) contains
a description of Borrower's sources and uses of funds as of the Closing Date,
including Revolving Credit Advances and Letter of Credit Obligations to be made
or incurred on that date, and a funds flow memorandum detailing how funds from
each source are to be transferred to particular uses.
1.5 INTEREST AND APPLICABLE MARGINS. (a) Borrower shall pay interest
to Agent, (i) for the ratable benefit of Lenders in accordance with the
Revolving Credit Advances being made by each Lender, in arrears on each
applicable Interest Payment Date, at the Index Rate plus the Applicable
Revolver Index Margin per annum or, at the election of Borrower, the applicable
LIBOR Rate plus the Applicable Revolver LIBOR Margin per annum, on the
aggregate Revolving Credit Advances outstanding from time to time, (ii) for the
benefit of the Swing Line Lender with respect to the Swing Line Loan, at the
Index Rate plus the Applicable Revolver Index Margin per annum, (A) in the
absence of the occurrence and continuance of an Event of Default, within one
Business Day following the Swing Line Lender's demand therefor, and (B) during
the occurrence and continuance of an Event of Default, upon demand therefor by
the Swing Line Lender.
The Applicable Revolver Index Margin, Applicable Revolver LIBOR Margin
and the Applicable L/C Margin will be 0.375%, 1.375% and 1.375% per annum,
respectively, as of the Closing Date. Commencing with the date that the
Borrower delivers consolidated quarterly Financial Statements for the first
Fiscal Quarter that ends at least six (6) months after the Closing Date, the
Applicable Margins will be adjusted (up or down) prospectively on a quarterly
basis based upon Borrower and its Restricted Subsidiaries' Senior Debt Leverage
Ratio for the applicable test period ended on the last day of such Fiscal
Quarter. Adjustments in Applicable Margins will be determined by reference to
the following grids:
<TABLE>
<CAPTION>
If Senior Debt Level of
Leverage Ratio is Applicable Margins:
----------------- ------------------
<S> <C>
Less Than 1.0 Level I
Greater Than
or Equal To 1.0,
but Less Than 2.0 Level II
Greater Than
or Equal To 2.0, Level III
</TABLE>
-7-
<PAGE> 13
<TABLE>
<CAPTION>
Applicable Margins
------------------
Level I Level II Level III
------- -------- ---------
<S> <C> <C> <C>
Applicable Revolver 0.00% 0.375% 0.75%
Index Margin
Applicable Revolver 1.00% 1.375% 1.75%
LIBOR Margin
Applicable L/C 1.00% 1.375% 1.75%
Margin
</TABLE>
All adjustments in the Applicable Margins based on the foregoing ratio
will be implemented quarterly on a prospective basis, for each calendar month
commencing at least five (5) days after the date of delivery to Lenders of the
quarterly unaudited or annual audited (as applicable) Financial Statements of
Borrower evidencing the need for an adjustment. Concurrently with the delivery
of those Financial Statements, Borrower shall deliver to Agent and Lenders a
certificate, signed by its chief financial officer, setting forth in reasonable
detail the basis for the continuance of, or any change in, the Applicable
Margins. If an Event of Default shall have occurred and be continuing, at the
election of the Agent (or upon the written request of the Requisite Lenders),
the Applicable Margins shall immediately increase to the highest level set
forth on the foregoing grid effective as of the initial date of such Event of
Default until the date on which such Event of Default is waived or cured.
(b) If any payment on any Obligation becomes due and payable on a day
other than a Business Day, the maturity thereof will be extended to the next
succeeding Business Day (except as set forth in the definition of LIBOR Period)
and, with respect to payments of principal, interest thereon shall be payable
at the then applicable rate during such extension.
(c) All computations of Fees calculated on a per annum basis and
interest shall be made by Agent on the basis of a three hundred and sixty (360)
day year, in each case for the actual number of days occurring in the period
for which such interest and Fees are payable. The Index Rate shall be
determined each day based upon the Index Rate as in effect each day. Each
determination by Agent of an interest rate hereunder shall be conclusive,
absent manifest error.
(d) So long as an Event of Default described in Section 8.1(a)
resulting from the failure to pay principal, interest or letter of credit fees
shall have occurred and be continuing (a "Payment Default"), and at the
election of Agent (or upon the written request of Requisite Lenders) confirmed
by written notice from Agent to Borrower, the interest rates applicable to the
Obligations and the Letter of Credit Fees shall be increased by two percentage
points (2%) per annum above the rates of interest or the rate of such Fees
("Default Rate"), and all outstanding Obligations shall bear interest at the
Default Rate applicable to such Obligations. Interest and Letter of Credit Fees
at the Default Rate shall accrue from the initial date of such Event of Default
until the date on which such Event of Default is cured or waived and shall be
payable upon demand.
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<PAGE> 14
(e) So long as no Default or Event of Default shall have occurred and
be continuing, and subject to the additional conditions precedent set forth in
Section 2.2, Borrower shall have the option to: (i) request that any Revolving
Credit Advances be made as a LIBOR Loan, (ii) convert at any time all or any
part of outstanding Revolving Credit Advances from Index Rate Loans to LIBOR
Loans, (iii) convert any LIBOR Loan to an Index Rate Loan, subject to payment
of LIBOR breakage costs in accordance with Section 1.10(b) if such conversion
is made prior to the expiration of the LIBOR Period applicable thereto, or (iv)
continue all or any portion of any Revolving Credit Advances as a LIBOR Loan
upon the expiration of the applicable LIBOR Period and the succeeding LIBOR
Period of that continued LIBOR Loan shall commence on the last day of the LIBOR
Period of the Loan to be continued. The aggregate amount of Revolving Credit
Advances to be made or continued as, or converted into, a LIBOR Loan must be in
a minimum amount of $1,000,000 and integral multiples of $250,000 in excess of
such amount. Any such election must be made by 1:00 p.m. (New York time) on the
third (3rd) Business Day prior to (1) the date of any proposed Advance which is
to be made as part of a LIBOR Loan, (2) the end of each LIBOR Period with
respect to any LIBOR Loans to be continued as such, or (3) the date on which
Borrower wishes to convert any Index Rate Loan to a LIBOR Loan. If no election
is received with respect to a LIBOR Loan by 1:00 p.m. (New York time) on the
third (3rd) Business Day prior to the end of the LIBOR Period with respect
thereto (or if a Default or an Event of Default shall have occurred and be
continuing or the additional conditions precedent set forth in Section 2.2
shall not have been satisfied), that LIBOR Loan shall be converted to an Index
Rate Loan at the end of its LIBOR Period. Borrower must make such election by
notice to Agent in writing, by telecopy or overnight courier. In the case of
any conversion or continuation, such election must be made pursuant to a
written notice (a "Notice of Conversion/Continuation") in the form of Exhibit
1.5(e).
(f) Notwithstanding anything to the contrary set forth in this Section
1.5, if a court of competent jurisdiction determines in a final order that the
rate of interest payable hereunder exceeds the highest rate of interest
permissible under law (the "Maximum Lawful Rate"), then so long as the Maximum
Lawful Rate would be so exceeded, the rate of interest payable hereunder shall
be equal to the Maximum Lawful Rate; PROVIDED, HOWEVER, that if at any time
thereafter the rate of interest payable hereunder is less than the Maximum
Lawful Rate, Borrower shall continue to pay interest hereunder at the Maximum
Lawful Rate until such time as the total interest received by Agent, on behalf
of Lenders, is equal to the total interest which would have been received had
the interest rate payable hereunder been (but for the operation of this
paragraph) the interest rate payable since the Closing Date as otherwise
provided in this Agreement. Thereafter, interest hereunder shall be paid at the
rate(s) of interest and in the manner provided in
-9-
<PAGE> 15
Sections 1.5(a) through (e) above, unless and until the rate of interest again
exceeds the Maximum Lawful Rate, and at that time this paragraph shall again
apply. In no event shall the total interest received by any Lender pursuant to
the terms hereof exceed the amount which such Lender could lawfully have
received had the interest due hereunder been calculated for the full term
hereof at the Maximum Lawful Rate. If the Maximum Lawful Rate is calculated
pursuant to this paragraph, such interest shall be calculated at a daily rate
equal to the Maximum Lawful Rate divided by the number of days in the year in
which such calculation is made. If, notwithstanding the provisions of this
Section 1.5(f), a court of competent jurisdiction shall finally determine that
a Lender has received interest hereunder in excess of the Maximum Lawful Rate,
Agent shall, to the extent permitted by applicable law, promptly apply such
excess in the order specified in Section 1.8 and thereafter shall refund any
excess to Borrower or as a court of competent jurisdiction may otherwise order.
1.6 FEES. (a) Borrower shall pay to GE Capital, individually, the Fees
specified in that certain fee letter dated June 16, 1997, between Borrower and
GE Capital (the "GE Capital Fee Letter"), at the times specified for payment
therein.
(b) As additional compensation for the Lenders, Borrower agrees to pay
to Agent, for the ratable benefit of such Lenders, in arrears, on the first
Business Day of each Fiscal Quarter that occurs following the Closing Date and
prior to the Availability Termination Date and on the Availability Termination
Date, for each day from and including the Execution Date, to but excluding the
Availability Termination Date, a fee for the Lenders making available the
Revolving Credit Commitment in an amount equal to one quarter of one percent
(.25%) per annum (calculated on the basis of a 360 day year for actual days
elapsed) of the difference between (x) the Maximum Amount (as in effect from
time to time) and (y) the average for the period of the daily closing principal
balance of the Revolving Loan outstanding during the period for which such fee
is due.
1.7 RECEIPT OF PAYMENTS. Borrower shall make each payment under this
Agreement not later than 12:00 noon (New York time) on the day when due in
immediately available funds in Dollars to the Collection Account. For purposes
of computing interest and Fees and determining Borrowing Availability or Net
Borrowing Availability as of any date, all payments shall be deemed received on
the day of receipt of immediately available funds therefor in the Collection
Account prior to 12:00 noon New York time. Payments received after 12:00 noon
New York time on any Business Day shall be deemed to have been received on the
following Business Day.
1.8 APPLICATION AND ALLOCATION OF PAYMENTS. So long as no Event of
Default shall have occurred and be continuing, (i) payments matching specific
scheduled payments then due shall be applied to those scheduled payments; (ii)
voluntary prepayments shall be applied as determined by Borrower, subject to
the last sentence of Section 1.3(a); and (iii) mandatory prepayments shall be
applied as set forth in Section 1.3. As to each other payment, and as to all
payments made when an Event of Default shall have
-10-
<PAGE> 16
occurred and be continuing or following the Commitment Termination Date,
Borrower hereby irrevocably waives the right to direct the application of any
and all payments received from or on behalf of Borrower, and Borrower hereby
irrevocably agrees that Agent shall have the continuing exclusive right to
apply any and all such payments against the Obligations as Agent may deem
advisable notwithstanding any previous entry by Agent in the Loan Account or
any other books and records. In the absence of a specific determination by
Agent with respect thereto, and except as provided above, payments shall be
applied to amounts then due and payable in the following order: (1) to Fees and
Agent's expenses reimbursable hereunder; (2) to interest on the Swing Line
Loan; (3) to principal payments on the Swing Line Loan; (4) to interest on the
Revolving Credit Advances and Letter of Credit Fees; (5) to principal payments
on the Revolving Credit Advances and to provide cash collateral for Letter of
Credit Obligations in the manner described in Annex B, ratably to the
aggregate, combined principal balance of the Advances and outstanding Letter of
Credit Obligations; and (6) to all other Obligations including expenses of
Lenders to the extent reimbursable under Section 11.3.
1.9 LOAN ACCOUNT AND ACCOUNTING. Agent shall maintain a loan account
(the "Loan Account") on its books to record: (a) all Advances and Letter of
Credit Obligations, (b) all payments made by Borrower, and (c) all other debits
and credits as provided in this Agreement with respect to the Loans or any
other Obligations. All entries in the Loan Account shall be made in accordance
with Agent's customary accounting practices as in effect from time to time. The
balance in the Loan Account, as recorded on Agent's most recent printout or
other written statement, shall be presumptive evidence of the amounts due and
owing to Agent and Lenders by Borrower; provided that any failure to so record
or any error in so recording shall not limit or otherwise affect Borrower's
duty to pay the Obligations. Agent shall render to Borrower a monthly
accounting of transactions with respect to the Revolving Loan setting forth the
balance of the Loan Account. Unless Borrower notifies Agent in writing of any
objection to any such accounting (specifically describing the basis for such
objection), within thirty (30) days after the Borrower's receipt thereof, each
and every such accounting shall (absent manifest error) be deemed final,
binding and conclusive upon Borrower in all respects as to all matters
reflected therein. Only those items expressly objected to in such notice shall
be deemed to be disputed by Borrower.
1.10 INDEMNITY. (a) Whether or not any Advance is ever made or Letter
of Credit ever issued hereunder, Borrower shall indemnify and hold harmless
each of Agent, the L/C Issuers, Lenders and their respective Affiliates, and
each such Person's respective officers, directors, employees, attorneys, agents
and representatives (each, an "Indemnified Person"), from and against any and
all suits, actions, proceedings, claims, damages, losses, liabilities and
expenses (including attorneys' fees and disbursements and other costs of
investigation or defense, including those incurred upon any appeal) which may
be instituted or asserted against or incurred by any such Indemnified Person as
the result of credit having been extended, suspended or terminated under this
Agreement and the other Loan Documents or the administration of such credit, or
the execution, delivery or performance of the Loan Documents, or otherwise in
connection with or arising out of the transactions contemplated hereunder
-11-
<PAGE> 17
and thereunder (including, without limitation, the IPO, any Acquisition or
Permitted Acquisition) and any actions or failures to act in connection
therewith, including any and all Environmental Liabilities and legal costs and
expenses arising out of or incurred in connection with disputes between or
among any parties to any of the Loan Documents (collectively, "Indemnified
Liabilities"); provided, that Borrower shall not be liable for any
indemnification to an Indemnified Person to the extent that any such suit,
action, proceeding, claim, damage, loss, liability or expense results from that
Indemnified Person's gross negligence or willful misconduct, as finally
determined by a court of competent jurisdiction. NO INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY LOAN DOCUMENT, ANY SUCCESSOR,
ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON
ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT
HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER ANY LOAN DOCUMENT OR AS A
RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
(b) To induce Lenders to provide the LIBOR Rate option on the terms
provided herein, if (i) any LIBOR Loans are repaid in whole or in part prior to
the last day of any applicable LIBOR Period (whether that repayment is made
pursuant to any provision of this Agreement or any other Loan Document or is
the result of acceleration, by operation of law or otherwise); (ii) Borrower
shall default in payment when due of the principal amount of or interest on any
LIBOR Loan; (iii) Borrower shall default in making any borrowing of, conversion
into or continuation of LIBOR Loans after Borrower has given notice requesting
the same in accordance herewith; or (iv) Borrower shall fail to make any
prepayment of a LIBOR Loan after Borrower has given a notice thereof in
accordance herewith, then Borrower shall indemnify and hold harmless each
Lender from and against all losses, costs and expenses resulting from or
arising from any of the foregoing. Such indemnification shall include any loss
(including loss of margin) or expense arising from the reemployment of funds
obtained by it or from fees payable to terminate deposits from which such funds
were obtained. For the purpose of calculating amounts payable to a Lender under
this subsection, each Lender shall be deemed to have actually funded its
relevant LIBOR Loan through the purchase of a deposit bearing interest at the
LIBOR Rate in an amount equal to the amount of that LIBOR Loan and having a
maturity comparable to the relevant Interest Period; provided, however, that
each Lender may fund each of its LIBOR Loans in any manner it sees fit, and the
foregoing assumption shall be utilized only for the calculation of amounts
payable under this subsection. This covenant shall survive the termination of
this Agreement and the payment of the Notes and all other amounts payable
hereunder. As promptly as practicable under the circumstances, each Lender
shall provide Borrower with its written calculation of all amounts payable
pursuant to this Section 1.10(b), and such calculation shall be binding on the
parties hereto unless Borrower shall object in writing within ten (10) Business
Days of receipt thereof, specifying the basis for such objection in detail.
-12-
<PAGE> 18
1.11 ACCESS. Borrower and each of its Subsidiaries shall, during
normal business hours, from time to time upon five (5) Business Days' prior
notice as frequently as Agent reasonably determines to be appropriate: (a)
provide Agent and any of its officers, employees and agents access to its
properties, facilities, advisors and employees (including officers) and (b)
permit Agent, and any of its officers, employees and agents, to inspect, audit
and make extracts from its books and records. If an Event of Default shall have
occurred and be continuing, each of the Borrower and its Subsidiaries shall
provide such access to Agent at all times and without advance notice.
1.12 TAXES. (a) Any and all payments by Borrower hereunder or under
the Notes shall be made, in accordance with this Section 1.12, free and clear
of and without deduction for any and all present or future Taxes. If Borrower
shall be required by law to deduct any Taxes from or in respect of any sum
payable hereunder or under the Notes, (i) the sum payable shall be increased as
much as shall be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
1.12) Agent, the L/C Issuers or Lenders, as applicable, receive an amount equal
to the sum they would have received had no such deductions been made, (ii)
Borrower shall make such deductions, and (iii) Borrower shall pay the full
amount deducted to the relevant taxing or other authority in accordance with
applicable law. Within thirty (30) days after the date of any payment of Taxes,
Borrower shall furnish to Agent the original or a certified copy of a receipt
evidencing payment thereof.
(b) Borrower shall indemnify and, within ten (10) days of demand
therefor, pay Agent, each L/C Issuer and each Lender for the full amount of
Taxes (including any Taxes imposed by any jurisdiction on amounts payable under
this Section 1.12) paid by Agent, such L/C Issuer or such Lender, as
appropriate, and any liability (including penalties, interest and expenses)
arising therefrom or with respect thereto, whether or not such Taxes were
correctly or legally asserted.
(c) Each Lender organized under the laws of a jurisdiction outside the
United States (a "Foreign Lender") as to which payments to be made under this
Agreement or under the Notes are exempt from United States withholding tax
under an applicable statute or tax treaty shall provide to Borrower and Agent a
properly completed and executed IRS Form 4224 or Form 1001 or other applicable
form, certificate or document prescribed by the IRS or the United States
certifying as to such Foreign Lender's entitlement to such exemption (a
"Certificate of Exemption"). Any foreign Person that seeks to become a Lender
under this Agreement shall provide a Certificate of Exemption to Borrower and
Agent prior to becoming a Lender hereunder. No foreign Person may become a
Lender hereunder if such Person is unable to deliver a Certificate of
Exemption.
(d) Each Lender also agrees to deliver to Borrower and the Agent such
other supplemental forms as may at any time be required as a result of the
passage of time or changes in applicable law or regulation in order to confirm
or maintain in effect its entitlement to exemption from U.S. withholding tax on
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<PAGE> 19
any payments hereunder, provided, that the circumstances of the Lender at the
relevant time and applicable laws permit it to do so. If a Lender determines,
as a result of any change in either (1) applicable law, regulation or treaty,
or in any official application thereof or (2) its circumstances, that it is
unable to submit any form or certificate that it is obligated to submit
pursuant to this Section 1.12(d), or that it is required to withdraw or cancel
any such form or certificate previously submitted, it shall promptly notify the
Lender and the Agent of such fact. If a Lender is organized under the laws of a
jurisdiction outside the United States, and Borrower and the Agent have not
received forms, certificates or other instruments indicating to their
satisfaction that all payments to be made to such Lender hereunder are not
subject to U.S. withholding tax, Borrower shall withhold taxes from such
payments at the applicable statutory rate. Each Lender shall indemnify and hold
Borrower and the Agent harmless from any United States taxes, penalties,
interest and other expenses, costs and losses incurred or payable by them as a
result of either (A) such Lender's failure to submit any form or certificate
that it is required to provide pursuant to this Section 1.12(d) or (B) reliance
by Borrower or the Agent on any such form or certificate which such Lender has
provided to them pursuant to this Section 1.12(d), but in the case of (B), only
to the extent accrued or incurred with respect to payments made prior to such
certificate being withdrawn.
1.13 CAPITAL ADEQUACY; INCREASED COSTS; ILLEGALITY. (a) If the Agent,
any L/C Issuer or any Lender shall have determined that the adoption after the
date hereof of any law, treaty, governmental (or quasi-governmental) rule,
regulation, guideline or order regarding capital adequacy, reserve requirements
or similar requirements or compliance by the Agent, any L/C Issuer or any
Lender after the date hereof with any request or directive regarding capital
adequacy, reserve requirements or similar requirements (whether or not having
the force of law) from any central bank or other Governmental Authority
increases or would have the effect of increasing the amount of capital,
reserves or other funds required to be maintained by the Agent, such L/C Issuer
or such Lender and thereby reducing the rate of return on such Person's capital
as a consequence of its obligations hereunder, then Borrower shall from time to
time upon demand by such Person (with a copy of such demand to Agent) pay to
Agent, for the account of such Person, additional amounts sufficient to
compensate such Person for such reduction but only to the extent that such
Person reasonably determines such increase in capital to be allocable to the
existence of such Person's Commitment, Loans or interest in Letter of Credit
Obligations hereunder and similar amounts are being charged generally to other
companies with similar commitments from such Person. A certificate as to the
amount of that reduction and showing the basis of the computation thereof
submitted by such Person to Borrower and to Agent shall, absent manifest error,
be final, conclusive and binding for all purposes.
(b) If, due to either (i) the introduction of or any change in any law
or regulation (or any change in the interpretation thereof) after the date
hereof or (ii) the compliance with any guideline or request from any central
bank or other Governmental Authority (whether or not having the force of law)
after the date hereof, there shall be any increase in the cost to any Lender or
L/C Issuer of agreeing to make or making, funding or maintaining any Advance
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<PAGE> 20
or of agreeing to issue or purchase a participation interest in or in issuing
or purchasing a participation interest in any Letter of Credit or Letter of
Credit Obligation, then Borrower shall from time to time, upon demand by such
Lender or L/C Issuer (with a copy of such demand to Agent), pay to Agent for
the account of such Lender or L/C Issuer additional amounts sufficient to
compensate such Lender or L/C Issuer for such increased cost. A certificate as
to the amount of such increased cost, submitted to Borrower and to Agent by
such Lender or L/C Issuer, shall be conclusive and binding on Borrower for all
purposes, absent manifest error. Each Lender or L/C Issuer agrees that, as
promptly as practicable after it becomes aware of any circumstances referred to
above which would result in any such increased cost, the affected Lender or L/C
Issuer shall, to the extent not inconsistent with such Lender's or L/C Issuer's
internal policies of general application, use reasonable commercial efforts to
minimize costs and expenses incurred by it and payable to it by Borrower
pursuant to this Section 1.13(b).
(c) Notwithstanding anything to the contrary contained herein, if the
introduction of or any change after the date hereof in any law or regulation
(or any change after the date hereof in the interpretation thereof) shall make
it unlawful, or any central bank or other Governmental Authority shall assert
that it is unlawful, for any Lender to agree to make or to make or to continue
to fund or maintain any LIBOR Loan, then, unless that Lender is able to make or
to continue to fund or to maintain such LIBOR Loan at another branch or office
of that Lender without, in that Lender's sole good faith determination,
adversely affecting it or its Loans or the income obtained therefrom, on notice
thereof and demand therefor by such Lender to Borrower through Agent, (i) the
obligation of such Lender to agree to make or to make or to continue to fund or
maintain LIBOR Loans shall terminate and (ii) Borrower shall forthwith prepay
in full all outstanding LIBOR Loans owing to such Lender, together with
interest accrued thereon, unless Borrower, within five (5) Business Days after
the delivery of such notice and demand, converts all such Loans into Advances
bearing interest based on the Index Rate.
(d) REPLACEMENT OF LENDER IN RESPECT OF INCREASED COSTS. Within
fifteen (15) days after receipt by Borrower of written notice and demand from
any Lender (an "Affected Lender") for payment of additional amounts or
increased costs as provided in Section 1.12(a), 1.12(b), 1.13(a) or 1.13(b),
Borrower may, at its option, notify Agent and such Affected Lender of its
intention to replace the Affected Lender. So long as no Default or Event of
Default shall have occurred and be continuing, Borrower, with the consent of
Agent, may obtain, at Borrower's expense, a replacement Lender ("Replacement
Lender") for the Affected Lender, which Replacement Lender must be satisfactory
to Agent. If Borrower obtains a Replacement Lender within ninety (90) days
following notice of its intention to do so, the Affected Lender must sell and
assign its Advances, its interest in the Letter of Credit Obligations and
Commitments to such Replacement Lender for an amount equal to the principal
balance of the Revolving Loan held by the Affected Lender and all accrued
interest and Fees with respect thereto through the date of such sale, provided
that Borrower shall have reimbursed such Affected Lender for the additional
amounts or increased costs that it is entitled to receive under this Agreement
through the date of such sale and assignment.
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Notwithstanding the foregoing, Borrower shall not have the right to obtain a
Replacement Lender if the Affected Lender rescinds its demand for increased
costs or additional amounts within fifteen (15) days following its receipt of
Borrower's notice of intention to replace such Affected Lender. Furthermore, if
Borrower gives a notice of intention to replace and does not so replace such
Affected Lender within ninety (90) days thereafter, Borrower's rights under
this Section 1.13(d) shall terminate.
(e) Each Lender will notify Borrower of any event occurring after the
date of this Agreement which will entitle such Lender to compensation pursuant
to this Section 1.13 as promptly as practicable, and in any event within ninety
(90) days, after such Lender obtains knowledge of the occurrence of such event.
In no event will Borrower be obligated to compensate any Lender pursuant to
this Section 1.13 for any amounts described in clauses (a) or (b) above that
accrued more than ninety (90) days prior to the date that delivery of such
notice was required.
1.14 SINGLE LOAN. All Advances to Borrower, all Letter of Credit
Obligations and all of the other Obligations of Borrower arising under this
Agreement and the other Loan Documents shall constitute one general obligation
of Borrower secured, until the Termination Date, by all of its Collateral.
2. CONDITIONS PRECEDENT
2.1 CONDITIONS TO THE INITIAL LOANS.
No Lender shall be obligated to make any Loan and none of the Lenders,
the Agent or any L/C Issuer shall be required to incur any Letter of Credit
Obligations on the Closing Date, or to take, fulfill, or perform any other
action hereunder, until the following conditions have been satisfied or
provided for in a manner satisfactory to Agent, or waived in writing by Agent
and the Lenders:
(a) CREDIT AGREEMENT; LOAN DOCUMENTS. This Agreement or counterparts
hereof shall have been duly executed by, and delivered to, Borrower, Agent and
Lenders; and Agent shall have received such documents, instruments, agreements
and legal opinions as Agent shall request in connection with the transactions
contemplated by this Agreement and the other Loan Documents, including all
those listed in the Closing Checklist attached hereto as Annex C, each in form
and substance satisfactory to Agent.
(b) Repayment of Prior Lender Obligations; Satisfaction of Outstanding
L/Cs. (i) Agent shall have received a fully executed original of a pay-off
letter satisfactory to Agent confirming that, except as contemplated on
Schedule 6.3, all of the Prior Lender Obligations will be repaid in full from
the proceeds of the initial Revolving Credit Advance and all Liens upon any of
the property of Borrower or any of its Subsidiaries in favor of Prior Lender
shall be terminated by Prior Lender immediately upon such payment; and (ii) all
letters of credit issued or guaranteed by Prior Lender shall have been
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cash collateralized, supported by a guaranty of Agent or supported by a Letter
of Credit issued pursuant to Annex B, as mutually agreed upon by Agent,
Borrower and Prior Lender.
(c) APPROVALS. Agent shall have received (i) satisfactory evidence
that the Credit Parties have obtained all required consents and approvals of
all Persons including all requisite Governmental Authorities, to the execution,
delivery and performance of this Agreement and the other Loan Documents and the
consummation of the Related Transactions or (ii) an officer's certificate in
form and substance satisfactory to Agent affirming that no such consents or
approvals are required.
(d) PAYMENT OF FEES. Borrower shall have paid the Fees required to be
paid on the Closing Date in the respective amounts specified in Section 1.6
(including the Fees specified in the GE Capital Fee Letter), and shall have
reimbursed Agent for all reasonable fees, costs and expenses of closing
presented as of the Closing Date.
(e) CAPITAL STRUCTURE: OTHER INDEBTEDNESS. The capital structure of
Borrower and each of its Subsidiaries and the terms and conditions of all
Indebtedness of such Credit Party shall be consistent with the Borrower's prior
written disclosures to the Agent, or otherwise acceptable to Agent in its sole
discretion.
(f) CONSUMMATION OF RELATED TRANSACTIONS. Agent shall have received
fully executed copies of the Acquisition Agreements and each of the other
Related Transactions Documents, each of which shall be in form and substance
satisfactory to Agent and its counsel. The Acquisition and the other Related
Transactions shall have been consummated in accordance with the terms of each
Acquisition Agreement and the other Related Transactions Documents and the
Borrower shall have received on the Closing Date at least $60,000,000 of net
cash proceeds from the sale of its common stock in an initial registered
offering of its common stock (the "IPO") and shall have paid the Founder's
Closing Date Payment.
2.2 FURTHER CONDITIONS TO EACH LOAN. Except as otherwise expressly
provided herein, no Lender shall be obligated to fund any Advance, convert or
continue any Advance as a LIBOR Loan or incur any Letter of Credit Obligation,
and no L/C Issuer shall be required to issue any Letter of Credit if, as of the
date thereof:
(a) Any representation or warranty by any Credit Party contained
herein or in any of the other Loan Documents shall be untrue or incorrect as of
such date, except to the extent that such representation or warranty expressly
relates to an earlier date and except for changes therein expressly permitted
or expressly contemplated by this Agreement; or
(b) Any event or circumstance having a Material Adverse Effect shall
have occurred since the date hereof; or
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(c) (i) Any Event of Default shall have occurred and be continuing or
would result after giving effect to any Advance or the incurrence of any Letter
of Credit Obligation, or (ii) a Default shall have occurred and be continuing
or would result after giving effect to any Advance, and Requisite Lenders shall
have determined not to make any Advance or incur any Letter of Credit
Obligation so long as that Default is continuing; or
(d) After giving effect to any Advance or the incurrence of any Letter
of Credit Obligation, the outstanding principal amount of the Revolving Loan
would exceed the lesser of the Revolving Credit Availability and the Maximum
Amount, less, in each case, the then outstanding principal amount of the Swing
Line Loan; or
(e) After giving effect to any Swing Line Advance, the outstanding
principal amount of the Swing Line Loan would exceed the Swing Line
Availability.
The request and acceptance by Borrower of the proceeds of any Advance, the
incurrence, or request for the incurrence of any Letter of Credit Obligations
or the conversion or continuation of any Loan into, or as, a LIBOR Loan or any
request therefor, as the case may be, shall be deemed to constitute, as of the
date of such request or acceptance, (i) a representation and warranty by
Borrower that the conditions in this Section 2.2 have been satisfied and (ii) a
reaffirmation by Borrower of the granting and continuance of Agent's Liens, on
behalf of itself and Lenders, pursuant to the Collateral Documents.
3. REPRESENTATIONS AND WARRANTIES
To induce Lenders to make the Loans and to induce the Lenders and the
L/C Issuers to incur Letter of Credit Obligations, the Borrower makes the
following representations and warranties to Agent, the L/C Issuers and each
Lender, each and all of which shall survive the execution and delivery of this
Agreement.
3.1 EXISTENCE; COMPLIANCE WITH LAW. (a) Each Credit Party (i) is a
corporation or partnership duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation; (ii) is duly
qualified to conduct business and is in good standing in each other
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification except where the failure to be so
qualified or to be in good standing, individually or when aggregated with all
such failures, has not had and could not reasonably be expected to have or
result in a Material Adverse Effect; (iii) has the requisite corporate or
partnership power and authority and the legal right to own, pledge, mortgage or
otherwise encumber and operate its properties, to lease the property it
operates under lease and to conduct its business as now, heretofore and
proposed to be conducted; (iv) has all licenses, permits, consents or approvals
from or by, and has made all filings with, and has given all notices to, all
Governmental Authorities having
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jurisdiction, to the extent required for such ownership, operation and conduct,
except, in each case, to the extent that the failure to have such licenses,
permits, consents or approvals or to make such filings or give such notices,
individually or in the aggregate, has not had and could not reasonably be
expected to have or result in a Material Adverse Effect; (v) is in compliance
with its charter and by-laws; and (vi) subject to specific representations set
forth herein regarding ERISA, Environmental Laws, tax and other laws, is in
compliance with all applicable provisions of law, except where the failure to
comply, individually or in the aggregate, has not had and could not reasonably
be expected to have or result in a Material Adverse Effect.
(b) To the Borrower's knowledge, each Managed Practice has all
licenses, permits, consents or approvals from or by, and has made all filings
with, and has given all notices to, all Governmental Authorities having
jurisdiction, to the extent required for the ownership of its property and the
operation and conduct of its business (including, as applicable,
accreditations, licenses and certifications as a provider of health care
services including those necessary for it to be eligible to receive payment and
compensation and to participate under Medicare, Medicaid, CHAMPUS or CHAMPVA or
any Blue Cross/Blue Shield or equivalent program) and is in compliance with all
of the foregoing and all applicable laws relating to its business, except, in
each case, to the extent that the failure to have such licenses, permits,
consents or approvals or to make such filings or give such notices or to be in
such compliance, individually or in the aggregate, has not had and could not
reasonably be expected to have or result in a Material Adverse Effect.
3.2 EXECUTIVE OFFICES; FEIN. As of the Closing Date, the current
location of each Credit Party's chief executive office and principal place of
business is set forth in Disclosure Schedule (3.2) and none of such locations
have changed within the twelve (12) months preceding the Closing Date. In
addition, Disclosure Schedule (3.2) lists the federal employer identification
number of each Credit Party.
3.3 CORPORATE OR PARTNERSHIP POWER, AUTHORIZATION, ENFORCEABLE
OBLIGATIONS. (a) The execution, delivery and performance by each Credit Party
of the Related Transaction Documents to which it is a party and the creation of
all Liens provided for therein: (i) are within such Person's corporate or
partnership power; (ii) have been duly authorized by all necessary or proper
corporate and shareholder action or partnership action; (iii) do not contravene
any provision of such Person's charter or bylaws or other organizational
documents; (iv) do not violate any law or regulation, or any order or decree of
any court or Governmental Authority; (v) do not conflict with or result in the
breach or termination of, constitute a default under or accelerate or permit
the acceleration of any performance required by, any indenture, mortgage, deed
of trust, lease, agreement or other instrument to which such Person is a party
or by which such Person or any of its property is bound; (vi) do not result in
the creation or imposition of any Lien upon any of the property of such Person
other than those in favor of Agent, on behalf of itself and Lenders, pursuant
to the Loan Documents; and (vii) do not require the consent or approval of any
Governmental Authority or any other Person, except those referred to in Section
2.1(c),
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all of which will have been duly obtained, made or complied with prior to the
Closing Date. On or prior to the Execution Date the Credit Agreement and on or
prior to the Closing Date each of the other Loan Documents, shall have been
duly executed and delivered by each Credit Party thereto and each such Loan
Document shall then constitute a legal, valid and binding obligation of such
Person enforceable against it in accordance with its terms.
(b) Each Service Agreement, and each of the transactions contemplated
thereunder does not violate any applicable rule or regulation: (i) relating to
the eligibility of a Managed Practice to receive payment and to participate as
an accredited and certified provider of health care services under Medicare,
Medicaid, CHAMPUS, CHAMPVA or any Blue Cross/Blue Shield or equivalent program,
(ii) applicable to such Person as a result of its participation in such
programs, (iii) relating to the licenses and permits required therein in
connection therewith, or (iv) relating to the practice of medicine or the
sharing of fees generated in connection therewith; except in each case ((i),
(ii), (iii) and (iv)), for such violations, as individually or in the aggregate
with all such events, have not had and could not reasonably be expected to have
or result in a Material Adverse Effect.
3.4 FINANCIAL STATEMENTS AND PROJECTIONS. Except for the Projections,
all Financial Statements concerning Borrower and its Subsidiaries or any
Founding Radiology Practice which are referenced below have been prepared in
accordance with GAAP consistently applied throughout the periods covered
(except as disclosed therein and except, with respect to unaudited Financial
Statements, for the absence of footnotes and normal year-end audit adjustments)
and present fairly in all material respects the financial position of the
Persons covered thereby as at the dates thereof and the results of their
operations and cash flows for the periods then ended.
(a) The Financial Statements listed on Disclosure Schedule (3.4(A))
have been delivered on the date hereof.
(b) PRO FORMA. The Pro Forma delivered on the date hereof and
described on Disclosure Schedule (3.4(B)) was prepared by Borrower giving pro
forma effect to the Related Transactions, was based on the unaudited
consolidated and consolidating balance sheets described on such Disclosure
Schedule 3.4(B) was prepared in accordance with GAAP, with only such
adjustments thereto as would be required in accordance with GAAP.
(c) PROJECTIONS. The Projections delivered on the date hereof and
described on Disclosure Schedule (3.4(C)) have been prepared by Borrower in
light of the past operations of its businesses and the businesses of the
Founding Radiology Practices, but including future payments of known contingent
liabilities and reflect projections for the five (5) year period beginning on
January 1, 1997, on an annual basis. The Projections are based upon estimates
and assumptions stated therein, all of which Borrower believes to be reasonable
and fair in light of current conditions and current facts known to Borrower
and, as of the Closing Date, reflect Borrower's good faith and reasonable
estimates of the future financial performance of Borrower and of the other
information projected therein for the period set forth therein.
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3.5 MATERIAL ADVERSE EFFECT. Between December 31, 1996 and the Closing
Date, (a) neither the Borrower nor any of its Subsidiaries has incurred any
obligations, contingent or non-contingent liabilities, liabilities for Charges,
long-term leases or unusual forward or long-term commitments which are not
reflected in the Pro Forma and which, alone or in the aggregate, could
reasonably be expected to have a Material Adverse Effect, (b) no contract,
lease or other agreement or instrument has been entered into by the Borrower or
any of its Subsidiaries or has become binding upon any such Person's assets and
no law or regulation applicable to the Borrower or any of its Subsidiaries has
been adopted which has had or could reasonably be expected to have a Material
Adverse Effect, and (c) neither the Borrower nor any of its Subsidiaries is in
default and to the best of Borrower's knowledge no third party is in default
under any material contract, lease or other agreement or instrument, which
alone or in the aggregate could reasonably be expected to have a Material
Adverse Effect. None of the Borrower, any of its Subsidiaries, any Permitted
Joint Venture or (to the knowledge of Borrower) any Managed Practice has
received notification from any Governmental Authority that any such
Governmental Authority has taken or intends to take action to revoke, terminate
or adversely amend any license, certificate, certification or permit of such
Person to engage in the practice of medicine, to operate a healthcare facility
or to participate under Medicare, Medicaid, CHAMPUS or CHAMPVA, which
revocation, termination or amendment, singly or in the aggregate, with all
other such events, could reasonably be expected to have or result in a Material
Adverse Effect. Since December 31, 1996 no event has occurred, which alone or
together with other events, has had, or could reasonably be expected to have or
result in a Material Adverse Effect.
3.6 OWNERSHIP OF PROPERTY; LIENS. As of the Closing Date, the real
estate ("Real Estate") listed on Disclosure Schedule (3.6) constitutes all of
the real property owned, leased, subleased, or used by any Credit Party. Each
Credit Party owns good and indefeasible fee simple title to all of its owned
real estate, and valid and subsisting leasehold interests in all of its leased
Real Estate, all as described on Disclosure Schedule (3.6). Disclosure Schedule
(3.6) further describes any Real Estate with respect to which any Credit Party
is a lessor, sublessor or assignor as of the Closing Date. Each Credit Party
also has good and indefeasible title to, or valid leasehold interests in, all
of its personal properties and assets. As of the Closing Date, none of the
properties and assets of any Credit Party is subject to any Liens other than
Permitted Encumbrances, and there are no facts, circumstances or conditions
known to the Borrower that may result in any Liens (including Liens arising
under Environmental Laws) other than Permitted Encumbrances.
3.7 LABOR MATTERS. As of the Closing Date (a) no strikes or other
material labor disputes against any Credit Party or, to the Borrower's
knowledge, any Founding Radiology Practice are pending or, to the Borrower's
knowledge, threatened; (b) hours worked by and payment made to employees of
each Credit Party and, to the Borrower's knowledge, the Founding Radiology
Practices comply with the Fair Labor Standards Act and each other federal,
state, local or foreign law applicable to such matter, except for such non
compliances as, singly or in the aggregate, have not had and could not
reasonably be expected to have or result in a Material Adverse Effect; (c) all
payments due from any Credit Party or, to
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the Borrower's knowledge, any Founding Radiology Practice for employee health
and welfare insurance have been paid or accrued as a liability on the books of
such Person, except for such non- payments or non-accruals as, individually or
in the aggregate, have not had and could not reasonably be expected to have or
result in a Material Adverse Effect; (d) except as set forth in Disclosure
Schedule (3.7), no Credit Party or, to the Borrower's knowledge, any Founding
Radiology Practice is a party to or bound by any collective bargaining
agreement, management agreement, consulting agreement or any material
employment agreement (and true and complete copies of any agreements described
on Disclosure Schedule (3.7) have been delivered to Agent); (e) there is no
organizing activity involving any Credit Party or, to the Borrower's knowledge,
the Founding Radiology Practices pending or, to Borrower's knowledge,
threatened by any labor union or group of employees; (f) there are no
representation proceedings pending or, to the Borrower's knowledge, threatened
with the National Labor Relations Board, and no labor organization or group of
employees of any such Person has made a pending demand for recognition; and (g)
except as set forth in Disclosure Schedule (3.7), there are no complaints or
charges against any Credit Party or, to the Borrower's knowledge, any Founding
Radiology Practice pending or, to the knowledge of the Borrower, threatened to
be filed with any Governmental Authority or arbitrator based on, arising out
of, in connection with, or otherwise relating to the employment or termination
of employment by any such Person of any individual.
3.8 VENTURES, SUBSIDIARIES AND AFFILIATES; OUTSTANDING STOCK AND
INDEBTEDNESS. Except as set forth in Disclosure Schedule (3.8), as of the
Closing Date: (a) the Borrower has no Subsidiaries, (b) no Credit Party is
engaged in any joint venture or partnership with any other Person or is an
Affiliate of any other Person, (c) each of Borrower's Restricted Subsidiaries
and each Permitted Joint Venture Holding Company is a wholly-owned Subsidiary
of Borrower and (d) there are no outstanding rights to purchase, options,
warrants or similar rights or agreements pursuant to which any Credit Party may
be required to issue, sell, repurchase or redeem any of its Stock or any Stock
of its Subsidiaries. All outstanding Indebtedness of the Borrower and its
Subsidiaries as of the Closing Date is described in Section 6.3 (including
Disclosure Schedule (6.3)).
3.9 GOVERNMENT REGULATION. No Credit Party is an "investment company"
or an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940 as amended. No Credit Party is subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, or any other
federal or state statute that restricts or limits its ability to incur
Indebtedness or to perform its obligations hereunder. The making of the
Advances by Lenders to Borrower, the incurrence of the Letter of Credit
Obligations on behalf of Borrower, the application of the proceeds thereof and
repayment thereof and the consummation of the Related Transactions will not
violate any provision of any such statute or any rule, regulation or order
issued by the Securities and Exchange Commission.
3.10 MARGIN REGULATIONS. No Credit Party is engaged, nor will it
engage, principally or as one of its important activities, in the business of
extending credit for the purpose of "purchasing" or
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"carrying" any "margin security" as such terms are defined in Regulation U or G
of the Federal Reserve Board as now and from time to time hereafter in effect
(such securities being referred to herein as "Margin Stock"). No Credit Party
owns any Margin Stock (except for investments permitted pursuant to Section
6.2(a)(v)), and none of the proceeds of the Loans or other extensions of credit
under this Agreement will be used, directly or indirectly, for the purpose of
purchasing or carrying any Margin Stock, for the purpose of reducing or
retiring any Indebtedness which was originally incurred to purchase or carry
any Margin Stock or for any other purpose which might cause any of the Loans or
other extensions of credit under this Agreement to be considered a "purpose
credit" within the meaning of Regulation G, T, U or X of the Federal Reserve
Board. No Credit Party will take or permit to be taken any action which might
cause any Loan Document to violate any regulation of the Federal Reserve Board.
3.11 TAXES. All tax returns, reports and statements, including
information returns, required by any Governmental Authority to be filed by any
Credit Party have been filed with the appropriate Governmental Authority and
all Charges have been paid prior to the date on which any fine, penalty,
interest or late charge may be added thereto for nonpayment thereof (or any
such fine, penalty, interest, late charge or loss has been paid), excluding
Charges or other amounts being contested in accordance with Section 5.2(b),
except for such filings or payments, the non-payment of which, individually or
in the aggregate, have not had and could not reasonably be expected to have or
result in a Material Adverse Effect. Proper and accurate amounts have been
withheld by each Credit Party from its respective employees for all periods in
full and complete compliance with all applicable federal, state, local and
foreign law and such withholdings have been timely paid to the respective
Governmental Authorities except for such withholdings and payments, the failure
to make which, individually or in the aggregate, have not had and could not
reasonably be expected to have or result in a Material Adverse Effect.
Disclosure Schedule (3.11) sets forth as of the Closing Date those taxable
years for which any Credit Party's tax returns are currently being audited by
the IRS or any other applicable Governmental Authority and any assessments or
threatened assessments in connection with such audit, or otherwise currently
outstanding. Except as described on Disclosure Schedule (3.11), no Credit Party
has executed or filed with the IRS or any other Governmental Authority any
agreement or other document extending, or having the effect of extending, the
period for assessment or collection of any Charges. No Credit Party or, to the
Borrower's knowledge, their respective predecessors are liable for any Charges:
(a) under any agreement (including any tax sharing agreements) or (b) to
Borrower's knowledge, as a transferee.
3.12 ERISA. (a) As of the Closing Date, Disclosure Schedule (3.12)
lists and separately identifies all Title IV Plans, Multiemployer Plans, ESOPs
and Retiree Welfare Plans. Copies of all such listed Plans, together with a
copy of the latest form 5500 for each such Plan, have been delivered to Agent.
Each Qualified Plan has been determined by the IRS to qualify under Section 401
of the IRC, and the trusts created thereunder have been determined to be exempt
from tax under the provisions of Section 501 of the IRC, and nothing has
occurred which would cause the loss of such qualification or tax-exempt status.
Each Plan is in material compliance with the applicable provisions of ERISA and
the IRC,
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including the filing of reports required under the IRC or ERISA. Neither the
Borrower nor any ERISA Affiliate has failed to make any contribution or pay any
amount due as required by either Section 412 of the IRC or Section 302 of ERISA
or the terms of any such Plan. Neither the Borrower nor any ERISA Affiliate has
engaged in a prohibited transaction, as defined in Section 4975 of the IRC, in
connection with any Plan, which would subject any of the Borrower's or its
Subsidiaries to a material tax on prohibited transactions imposed by Section
4975 of the IRC.
(b) Except as set forth in Disclosure Schedule (3.12): (i) no Title IV
Plan has any Unfunded Pension Liability; (ii) no ERISA Event or event described
in Section 4062(e) of ERISA with respect to any Title IV Plan has occurred or
is reasonably expected to occur, which individually or in the aggregate, has
had or could reasonably be expected to have or result in a Material Adverse
Effect; (iii) there are no pending, or to the knowledge of Borrower, threatened
claims (other than claims for benefits in the normal course), sanctions,
actions or lawsuits, asserted or instituted against any Plan or any Person as
fiduciary or sponsor of any Plan, which have a reasonable risk of being
determined adversely and which, if so determined, individually or in the
aggregate, could have a Material Adverse Effect; (iv) neither the Borrower nor
any ERISA Affiliate has incurred or reasonably expects to incur any liability
as a result of a complete or partial withdrawal from a Multiemployer Plan; (v)
within the last five years no Title IV Plan with Unfunded Pension Liabilities
has been transferred outside of the "controlled group" (within the meaning of
Section 4001(a)(14) of ERISA) of the Borrower or any ERISA Affiliate; and (vi)
no liability under any Title IV Plan has been satisfied with the purchase of a
contract from an insurance company that is not rated AAA by the Standard &
Poor's Corporation or the equivalent by another nationally recognized rating
agency.
3.13 NO LITIGATION. No action, claim, lawsuit, demand, investigation
or proceeding is now pending or, to the knowledge of Borrower, threatened
against any of the Borrower, any of its Subsidiaries or, to the knowledge of
the Borrower, any Managed Practice, before any Governmental Authority or before
any arbitrator or panel of arbitrators (collectively, "Litigation"), (a) which
challenges any Credit Party's or any Managed Practice's right or power to enter
into or perform any of its obligations under the Related Transaction Documents
to which it is a party, or the validity or enforceability of any Related
Transaction Document or any action taken thereunder, or (b) which has a
reasonable risk of being determined adversely to any of the Borrower, any of
its Subsidiaries or, to the knowledge of the Borrower, any Managed Practice and
which, if so determined, could have a Material Adverse Effect. Except as set
forth on Disclosure Schedule (3.13), as of the Closing Date there is no
Litigation pending or threatened which seeks damages in excess of $500,000 in
excess of acknowledged insurance coverage from a recognized carrier or
injunctive relief or alleges criminal misconduct of any of the Borrower, any of
its Subsidiaries or, to the knowledge of the Borrower, any Founding Radiology
Practice. There is no pending investigation of any of the Borrower, any of its
Subsidiaries, any Permitted Joint Venture or, to the knowledge of the Borrower,
any Managed Practice by HCFA or any other Governmental Authority, which
investigation is not otherwise conducted in the ordinary course of business and
no criminal, civil or administrative action, audit, or investigation by a
fiscal intermediary or by or
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on behalf of any Governmental Authority exists or, to the best knowledge of the
Borrower, is threatened with respect to any of the Borrower, any of its
Subsidiaries or, to the knowledge of the Borrower, any Managed Practice, which
has had or could reasonably be expected to have or result in a Material Adverse
Effect (including by way of an adverse effect on such Person's right to receive
Medicare, Medicaid, CHAMPUS or CHAMPVA reimbursement to which such Person would
otherwise be entitled, or right to participate in the Medicare, Medicaid,
CHAMPUS or CHAMPVA programs or on the ability of such Person to engage in the
practice of medicine or to fulfill its obligations as contemplated under the
Loan Documents or any Service Agreement), and, to the best knowledge of the
Borrower, no such Person is subject to any pending but unassessed Medicare,
Medicaid, CHAMPUS or CHAMPVA claim payment adjustments, except to the extent
that such Person is contesting such assessment in good faith by appropriate
proceedings diligently pursued and has established and will maintain adequate
reserves for such adjustments in accordance with GAAP, except to the extent
that any such payment adjustment, individually or in the aggregate, has not had
and could not reasonably be expected to have or result in a Material Adverse
Effect.
3.14 BROKERS. No broker or finder acting on behalf of any Credit Party
brought about the obtaining, making or closing of the Loans or the Related
Transactions, and no Credit Party has any obligation to any Person in respect
of any finder's or brokerage fees in connection therewith.
3.15 INTELLECTUAL PROPERTY. As of the Closing Date, each Credit Party
owns or has rights to use all Intellectual Property necessary to continue to
conduct its business as now or heretofore conducted by it or proposed to be
conducted by it, and each Patent, Trademark, Copyright and License is listed,
together with application or registration numbers, as applicable, in Disclosure
Schedule (3.15) hereto. Each Credit Party conducts its business and affairs
without infringement of or interference with any Intellectual Property of any
other Person in any manner that, individually or in the aggregate, has had or
could reasonably be expected to have or result in a Material Adverse Effect.
3.16 FULL DISCLOSURE. No information contained in this Agreement, any
of the other Loan Documents, any Projections, the Disclosure Documents or
Financial Statements or other reports from time to time delivered hereunder or
any written statement furnished by Borrower or on its behalf or on behalf of
any of its Subsidiaries or Permitted Joint Venture or, to the knowledge of the
Borrower, any Managed Practice to Agent or any Lender pursuant to the terms of
this Agreement contains or will contain any untrue statement of a material fact
or omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made. The Liens granted to Agent, on behalf of itself and
Lenders, pursuant to the Collateral Documents will at all times be fully
perfected first priority Liens in and to the Collateral described therein,
subject, as to priority, only to Permitted Encumbrances (other than those
Permitted Encumbrances described in clause (j) of the definition thereof).
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3.17 ENVIRONMENTAL MATTERS. (a) Except as set forth in Disclosure
Schedule (3.17), as of the Closing Date: the Credit Parties and, to the
knowledge of the Borrower, the Founding Radiology Practices (i) are and have
been in compliance with all Environmental Laws; (ii) have obtained, and are in
compliance with, all Environmental Permits required by Environmental Laws for
the operations of their respective businesses as presently conducted or as
proposed to be conducted and all such Environmental Permits are valid,
uncontested and in good standing; (iii) are not involved in operations that are
likely to create, and know of no facts, circumstances or conditions that are
likely to result in, any Environmental Liabilities of such Person, and have not
permitted any current or former tenant or occupant of the Real Estate to engage
in any such operations; (iv) are aware of no Litigation arising under or
related to any Environmental Laws, Environmental Permits or Hazardous Material;
(v) have not been notified that they may be a "potentially responsible party"
or received a request for information under CERCLA or analogous state statutes;
(vi) are aware of no facts, circumstances or conditions that may result in any
one of them being identified as a "potentially responsible party" under CERCLA
or analogous state statutes; and (vii) have provided to Agent copies of all
existing environmental reports, reviews and audits and all written information
pertaining to actual or potential Environmental Liabilities, in each case
relating to any such Person; except for any of the foregoing as individually or
in the aggregate with all such events, have not had and could not reasonably be
expected to have or result in a Material Adverse Effect.
3.18 INSURANCE. Disclosure Schedule (3.18) lists all insurance
policies of any nature maintained, as of the Closing Date, for current
occurrences by each Credit Party, as well as a summary of the terms of each
such policy and a description of the malpractice insurance required to be
maintained by each Managed Practice.
3.19 INTENTIONALLY OMITTED.
3.20 INTENTIONALLY OMITTED.
3.21 INTENTIONALLY OMITTED.
3.22 AGREEMENTS AND OTHER DOCUMENTS. As of the Closing Date, each
Credit Party has provided to Agent or its counsel, on behalf of Lenders,
accurate and complete copies (or summaries) of all of the following agreements
or documents to which it or, to its knowledge, any Founding Radiology Practice,
is subject and each of which are listed on Disclosure Schedule (3.22): (a)
provider agreements not terminable by such Person or any Managed Practice
within sixty (60) days following written notice issued by such Person and
involving transactions in excess of $10,000,000 per annum; (b) any lease of
Equipment having a remaining term of one year or longer and requiring aggregate
rental and other payments in excess of $500,000 per annum; (c) licenses and
permits held by any of the Credit Parties, the absence of which could be
reasonably likely to have a Material Adverse Effect; (d) instruments or
documents evidencing Indebtedness of any Credit Party and any security interest
granted by any Credit Party with respect thereto; (e) all Service Agreements to
which it is or is to become a party; and (f) instruments and agreements
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evidencing the issuance of any equity securities, warrants, rights or options
to purchase equity securities of any Credit Party.
3.23 SOLVENCY. Both before and after giving effect to (a) the Loans
and Letter of Credit Obligations to be made or extended on the Closing Date or
such other date as Loans and Letter of Credit Obligations requested hereunder
are made or extended, (b) the disbursement of the proceeds of such Loans
pursuant to the instructions of Borrower, (c) the Acquisition, the Refinancing
and the consummation of the other Related Transactions and (d) the payment and
accrual of all transaction costs in connection with the foregoing, each Credit
Party is Solvent.
3.24 ACQUISITION AGREEMENT. As of the Closing Date, Borrower has
delivered to Agent a complete and correct copy of each Acquisition Agreement
(including all schedules, exhibits, amendments, supplements, modifications,
assignments and all other documents delivered pursuant thereto or in connection
therewith). No Credit Party and (to Borrower's knowledge) no other Person party
thereto is in default in the performance or compliance with any provisions
thereof. As of the Closing Date each Acquisition Agreement and each Service
Agreement complies with, and the Acquisition has been consummated in accordance
with, all applicable laws. Each Acquisition Agreement and each Service
Agreement is in full force and effect as of the Closing Date and has not been
terminated, rescinded or withdrawn. All requisite approvals by Governmental
Authorities having jurisdiction over any Credit Party or, to the knowledge of
Borrower, any Managed Practice or any other Persons referenced therein, with
respect to the transactions contemplated by the Acquisition Agreements and the
Service Agreements, have been obtained, and no such approvals impose any
conditions to the consummation of the transactions contemplated by the
Acquisition Agreements or to the conduct by any Credit Party or, to the
knowledge of Borrower, any Managed Practice of its business thereafter as
contemplated by the Service Agreements. To Borrower's knowledge, none of the
Founding Radiology Practices' representations or warranties in the Acquisition
Agreements contains any untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading. Each of the
representations and warranties given by each of the Borrower, its Subsidiaries
or (to Borrower's knowledge) any Founding Radiology Practice in the Acquisition
Agreements is true and correct in all material respects. Notwithstanding
anything contained in the Acquisition Agreements to the contrary, such
representations and warranties of the Credit Parties are incorporated into this
Agreement by this Section 3.24 and shall, solely for purposes of this Agreement
and the benefit of Agent and Lenders, survive the consummation of such
Acquisitions.
3.25 INTENTIONALLY OMITTED.
3.26 THIRD PARTY REIMBURSEMENT. If the Borrower, any Subsidiary, any
Permitted Joint Venture or any Managed Practice is or has been audited by
Medicare, Medicaid, CHAMPUS, CHAMPVA or similar governmental Third Party
Payors, to the Borrower's knowledge, (a) none of such audits provides for
adjustments in reimbursable costs or asserts claims for reimbursement or
repayment by such Person of costs and/or payments theretofore made by such
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governmental Third Party Payor that, if adversely determined, individually or
in the aggregate, could reasonably be expected to have or result in a Material
Adverse Effect and (b) no Managed Practice has had requests or assertions of
claims for reimbursement or repayment by it of costs and/or payments heretofore
made by any other Third Party Payor that, if adversely determined, individually
or in the aggregate, could reasonably be expected to have or result in a
Material Adverse Effect.
4. FINANCIAL STATEMENTS AND INFORMATION
4.1 REPORTS AND NOTICES. The Borrower hereby agrees that from and
after the Closing Date and until the Termination Date, it shall deliver to
Agent and/or Lenders, as required, the Financial Statements, notices,
Projections and other information at the times, to the Persons and in the
manner set forth in Annex D.
4.2 COMMUNICATION WITH ACCOUNTANTS. The Borrower authorizes Agent and,
so long as an Event of Default shall have occurred and be continuing, each
Lender, to communicate directly with its and its Subsidiaries' independent
certified public accountants, and authorizes and shall instruct those
accountants to disclose and make available to Agent and each Lender any and all
Financial Statements and other supporting financial documents, schedules and
information relating to any Credit Party or other Subsidiary (including copies
of any issued management letters) with respect to the business, financial
condition and other affairs of any Credit Party or other Subsidiary.
5. AFFIRMATIVE COVENANTS
The Borrower agrees that from and after the date hereof and until the
Termination Date:
5.1 MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS. Each Credit
Party shall: (a) do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate or partnership existence and its
rights and franchises, except for such rights and franchises, the failure to
preserve which individually or in the aggregate, has not had and could not
reasonably be expected to have or result in a Material Adverse Effect; (b)
continue to conduct its business substantially as now conducted or as otherwise
permitted hereunder; (c) at all times maintain, preserve and protect all of its
assets and properties used or useful in the conduct of its business, and keep
the same in good repair, working order and condition (taking into consideration
ordinary wear and tear) and from time to time make, or cause to be made, all
necessary or appropriate repairs, replacements and improvements thereto
consistent with industry practices, except for such failures to maintain,
preserve, protect, repair, replace or improve as individually or in the
aggregate, has not had and could not reasonably be expected to have or result
in a Material Adverse Effect; and (d) transact business only in such corporate
and trade names as are set forth in Disclosure Schedule 5.1 or of which the
Agent has otherwise received prior written notice.
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5.2 PAYMENT OF OBLIGATIONS. (a) Subject to Section 5.2(b), each Credit
Party shall pay and discharge or cause to be paid and discharged promptly all
Charges payable by it, including (A) Charges imposed upon it, its income and
profits, or any of its property (real, personal or mixed) and all Charges with
respect to tax, social security and unemployment withholding with respect to
its employees, and (B) lawful claims for labor, materials, supplies and
services or otherwise, before any thereof shall become past due; except for
such Charges and claims, the failure to pay which individually or in the
aggregate, has not had and could not reasonably be expected to have or result
in a Material Adverse Effect.
(b) Each Credit Party may in good faith contest, by appropriate
proceedings, the validity or amount of any Charges or claims described in
Section 5.2(a); provided, that (i) adequate reserves with respect to such
contest are maintained on the books of the Borrower, in accordance with GAAP,
(ii) such contest is maintained and prosecuted continuously and with diligence
and operates to suspend collection or enforcement of such Charges or claims or
any Lien in respect thereof, (iii) none of the Collateral becomes subject to
forfeiture or loss as a result of such contest, (iv) no Lien shall be imposed
to secure payment of such Charges or claims other than Permitted Encumbrances,
(v) such Credit Party shall promptly pay or discharge such contested Charges or
claims and all additional charges, interest, penalties and expenses, if any,
and shall deliver to Agent evidence acceptable to Agent of such compliance,
payment or discharge, if such contest is terminated or discontinued adversely
to such Credit Party or the conditions set forth in this Section 5.2(b) are no
longer met, and (vi) Agent has not advised Borrower in writing that Agent
reasonably believes that nonpayment or nondischarge thereof could have or
result in a Material Adverse Effect.
5.3 BOOKS AND RECORDS. Each Credit Party shall keep adequate books and
records with respect to its business activities in which proper entries,
reflecting all financial transactions, are made in accordance with GAAP and on
a basis consistent with the Financial Statements attached as Disclosure
Schedule (3.4(A)).
5.4 INSURANCE. (a) Each Credit Party shall, at its sole cost and
expense, maintain the policies of insurance described on Disclosure Schedule
(3.18) in form and with insurers reasonably acceptable to Agent.
(b) Agent reserves the right at any time upon any change in Credit
Party's risk profile (including any change in any laws affecting the potential
liability of such Person) to require additional forms and limits of insurance
to, in Agent's reasonable opinion, ensure that each such Person is protected by
insurance in amounts and with coverage customary for its industry. If requested
by Agent, each Credit Party shall, and shall cause each other appropriate
Person to, deliver to Agent from time to time a report of a reputable insurance
broker, satisfactory to Agent, with respect to the insurance policies required
hereunder.
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(c) The Borrower will deliver to the Agent, a certificate from the
Borrower's insurance broker dated the Closing Date and thereafter periodically
as the Agent shall reasonably require, certifying the Borrower's compliance
with this Section.
5.5 COMPLIANCE WITH LAWS. (a) The Borrower and each of its
Subsidiaries shall comply with all federal, state, local and foreign laws and
regulations applicable to it, including those relating to licensing, ERISA and
labor matters, Healthcare Laws and Environmental Laws and Environmental
Permits, except to the extent that the failure to comply, individually or in
the aggregate, has not had and could not reasonably be expected to have or
result in a Material Adverse Effect.
(b) Borrower shall cause each Managed Practice to comply with all
applicable federal, state and local laws, rules, regulations and restrictions
in the conduct of such Managed Practice's business, including without
limitation all laws applicable to the operation of such Managed Practice in the
generation, transportation, treatment, storage, disposal or other handling of
radioactive, medical, biological or hazardous materials or wastes; except where
the failure to comply, individually or in the aggregate, has not had and could
not reasonably be expected to have or result in a Material Adverse Effect.
5.6 SUPPLEMENTAL DISCLOSURE. From time to time as may be requested by
Agent (which request will not be made more frequently than once each year
absent the occurrence and continuance of a Default or an Event of Default),
each Credit Party shall supplement each Disclosure Schedule hereto, or any
representation herein or in any other Loan Document, with respect to any matter
hereafter arising which, if existing or occurring at the date of this
Agreement, would have been required to be set forth or described in such
Disclosure Schedule or as an exception to such representation or which is
necessary to correct any information in such Disclosure Schedule or
representation which has been rendered inaccurate thereby (and, in the case of
any supplements to any Disclosure Schedule, such Disclosure Schedule shall be
appropriately marked to show the changes made therein); provided that (a) no
such supplement to any such Disclosure Schedule or representation shall be or
be deemed a waiver of any Default or Event of Default resulting from the
matters disclosed therein, except as consented to by Agent and Requisite
Lenders in writing; and (b) no supplement shall be required as to
representations and warranties that relate solely to the Closing Date.
5.7 INTELLECTUAL PROPERTY. Each Credit Party shall conduct its
business and affairs without infringement of or interference with any
Intellectual Property of any other Person.
5.8 ENVIRONMENTAL MATTERS. Each Credit Party shall: (a) conduct its
operations and keep and maintain its Real Estate in compliance with all
Environmental Laws and Environmental Permits other than noncompliance which
could not reasonably be expected to have a Material Adverse Effect; and (b)
notify Agent promptly after Borrower becomes aware of any violation of
Environmental Laws or Environmental Permits or any Release by the Borrower or
any of
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its Restricted Subsidiaries or on or affecting the property of such Person
which could reasonably be expected to have or result in a Material Adverse
Effect.
5.9 LEASE OBLIGATIONS. Each Credit Party shall timely and fully pay
and perform such Person's obligations under all leases and other agreements
with respect to each leased location of such Person.
5.10 COMPLIANCE WITH SERVICE AGREEMENTS. Each Credit Party shall use
its reasonable best efforts to cause, each Managed Practice to comply with the
terms of the applicable Service Agreement in all material respects.
5.11 FURTHER ASSURANCES. Each Credit Party shall, at the Borrower's
expense and upon request of Agent, duly execute and deliver, or cause to be
duly executed and delivered, to Agent such further instruments and do and cause
to be done such further acts as may be necessary or proper in the reasonable
opinion of Agent to carry out more effectually the provisions and purposes of
this Agreement or any other Loan Document.
5.12 ACCREDITATION AND LICENSING. (a) The Borrower and each of its
Subsidiaries and each Permitted Joint Venture shall keep itself fully licensed
with all licenses required to operate such Person's business under applicable
law, maintain such Person's qualification to practice medicine in the manner
contemplated under the applicable Service Agreement and for participation in,
and payment under, Medicare, Medicaid, CHAMPUS, CHAMPVA and any other federal,
state or local governmental program or private program providing for payment or
reimbursement for services rendered by such Person, except to the extent that
the loss or relinquishment of such qualification would not or could not
reasonably be expected to have or result in a Material Adverse Effect. The
Borrower will promptly furnish or cause to be furnished to the Agent copies of
all reports and correspondence it or any Subsidiary sends or receives relating
to any loss or revocation (or threatened loss or revocation) of any
qualification described in this Section.
(b) Borrower shall cause each Managed Practice to: (i) provide
professional services to its patients in compliance with ethical standards,
laws, rules and regulations applicable to the operations of such Managed
Practice; (ii) assure that each physician employee of such Managed Practice has
all required licenses, credentials, approvals and other certifications to
perform his or her duties and services for such Managed Practice; and (iii)
maintain all licenses required to operate such Managed Practices' business
under applicable law; except to the extent, with respect to each of clauses
(i), (ii), and (iii) above, where the failure to comply, individually or in the
aggregate, has not had and could not reasonably be expected to have or result
in a Material Adverse Effect.
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6. NEGATIVE COVENANTS
The Borrower agrees that, without the prior written consent of the
Requisite Lenders, from and after the date hereof until the Termination Date:
6.1 MERGERS, SUBSIDIARIES, ETC.; UNRESTRICTED SUBSIDIARIES. (a) No
Credit Party shall directly or indirectly, by operation of law or otherwise,
(x) own, form or acquire any Subsidiary (except for a Subsidiary: (i) that is
wholly owned by a Credit Party or that constitutes a Permitted Joint Venture,
(ii) that becomes party to the Subsidiary Guaranty and the Subsidiary Pledge
and Security Agreement or that constitutes a Permitted Joint Venture, (iii)
whose Stock, and any Stock that it owns of any other Person have been delivered
to the Agent in pledge as security for the Obligations, except in the case of
an Existing Permitted Joint Venture or Acquired Permitted Joint Venture to the
extent that the organizational documents of such Existing Permitted Joint
Venture or Acquired Permitted Joint Venture in effect at the time of the
acquisition thereof prohibit the pledge of its Stock, and (iv) the investment
in which complies with Section 6.2), or (y) merge with, consolidate with,
acquire all or substantially all of the assets or capital stock of, or
otherwise combine with or acquire, any Person. Notwithstanding the foregoing
clause (y) of this Section 6.1(a), (1) any Restricted Subsidiary may merge or
consolidate with any other Restricted Subsidiary, (2) any Credit Party or any
Permitted Joint Venture Holding Company may acquire Stock in any Permitted
Joint Venture, subject to the requirements of Section 6.1(b), and (3) any
Credit Party may acquire all or substantially all of the assets or 100% of the
Stock of any radiology practice or practice group or imaging center or other
business providing similar services, including services ancillary to such
practice or practice group (provided that the requirement to acquire all or
substantially all of the assets of any practice or practice group shall not be
deemed to require the acquisition of assets customarily retained by a Managed
Practice following such an acquisition) or of a Person (a "PPM") that owns,
operates or manages such groups or businesses (the "Acquisition Target") that
meets each of the following conditions (each, a "Permitted Acquisition"):
(i) Agent shall receive at least fifteen (15) days' prior written
notice of such proposed Permitted Acquisition, which notice shall include
a reasonably detailed description of the Acquisition Target and the terms
of such proposed Permitted Acquisition;
(ii) such Permitted Acquisition shall involve an Acquisition Target
operating solely within one or more of the 50 states of the United States
of America or the District of Columbia, shall be consensual, shall have
been approved by the Acquisition Target board of directors or other
governing authority or its authorized legal representative and shall not,
in the case where the Acquisition Target is a PPM, involve an aggregate
consideration (including, without limitation, cash paid, stock issued or
debt issued or assumed) in an amount that exceeds $25,000,000;
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(iii) the Agent shall have received on or within 10 days following
the closing date of any such Permitted Acquisition: (A)(1) with respect to
a Practice Acquisition, copies of each of the Service Agreements,
acquisition or merger agreements, professional employment and
non-competition agreements and all other agreements executed in connection
with such acquisition, the terms and conditions of which agreements shall
be substantially similar to the terms and conditions of the Service
Agreements, Acquisition Agreements and other Related Transaction Documents
executed in connection with the Related Transactions (which terms and
conditions shall include, without limitation, the duration of the Service
and Employment Agreements, the termination and practice repurchase
provisions, practice governance provisions and provisions regarding the
assignability as security to the Agent and which terms and conditions the
Borrower shall use its reasonable best efforts to cause to include
limitations on Managed Practice liabilities), and (2) with respect to
other acquisitions, copies of the acquisition or merger agreements and all
other agreements executed in connection with such acquisition, and (B)
such opinions, certificates, lien search results and other documents as
may be reasonably requested by Agent;
(iv) at least five (5) Business Days prior to the closing date of any
such proposed Permitted Acquisition for which the aggregate consideration
to be paid (whether by cash, stock, assumption of debt or otherwise) by
the Borrower and its Restricted Subsidiaries equals or exceeds $3,500,000,
Borrower shall have delivered to Agent, in form and substance satisfactory
to Agent, a certificate of the chief financial officer of Borrower in the
form of Schedule 6.1(b) to the effect that: (A) at the time of such
Permitted Acquisition and after giving effect thereto, no Default or Event
of Default will have occurred and be continuing; and (B) on a pro forma
basis Borrower would have been in compliance with the financial covenants
set forth in Annex E as of the most recent test period for which such
covenants were tested, which covenants shall be calculated (in addition to
the assumptions specified in Annex E) as if: (x) such acquisition and all
other acquisitions closed or to be closed following such test period and
prior to the proposed closing date of the proposed Permitted Acquisition
had occurred at the beginning of such test period and Borrower had
received income attributable to such Acquisition Target and such other
acquired entities based on the actual performance of such Acquisition
Target and such other acquired entities over such period (adjusted to
reflect the pro forma effect of Borrower's physician compensation model as
appropriate) and had incurred the Indebtedness and expenses incurred to
purchase such Acquisition Target and such other acquired entity at the
beginning of such period and repaid, retired, disposed of or refinanced
any Indebtedness repaid, retired, disposed of or refinanced or to be
repaid, retired, disposed of or refinanced in such acquisition at the
beginning of such period, and (y) any disposition of Stock or of all or
substantially all of the assets of any Subsidiary or Permitted Joint
Venture by Borrower or any of its Subsidiaries and any termination of a
Service Agreement (which Service Agreement is not contemporaneously
replaced by a Service Agreement with the same Managed Practice that
provides substantially the same EBITDA to Borrower and its
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Subsidiaries as the terminated Service Agreement) that have occurred or
are to occur following such test period and prior to the proposed closing
date of the proposed Permitted Acquisition had occurred at the beginning
of such test period and the Borrower had not received any EBITDA
attributable to such entity disposed of or to such terminated Service
Agreement over such period and had incurred any Indebtedness or expense
incurred in connection with such disposition or termination at the
beginning of such period and had repaid, retired, disposed of or
refinanced any Indebtedness that was or is to be repaid, retired or
disposed of or refinanced in connection with such disposition or
termination (to the extent that the Borrower and its Subsidiaries have
been, or are to be, released from all liability with respect thereto) at
the beginning of such period; and
(v) on or prior to the date of such Permitted Acquisition, Agent
shall have received, in form and substance satisfactory to Agent, such
documents and instruments as it shall require to evidence the joinder of
any new Subsidiary, other than a Permitted Joint Venture, to the
Subsidiary Guaranty and Subsidiary Pledge and Security Agreement and the
perfection of all liens created thereunder (subject, in the case of an
Acquired Permitted Joint Venture, to the provisions of Subsection
6.1(b)(iv)).
(b) (i) The Borrower shall not and shall not permit any of its
Subsidiaries to, create, own or acquire any Stock in any Person other than: (A)
Stock in itself to the extent permitted elsewhere in this Agreement, (B) Stock
in a Subsidiary created, owned or acquired in accordance with Section 6.1(a),
(C) Stock that constitutes a permitted investment by virtue of clauses (A)
through (H) of subsection (v) of Section 6.2(a), or (D) Stock in a Permitted
Joint Venture in compliance with this Section 6.1(b).
(ii) Any Existing Permitted Joint Venture is listed on Disclosure
Schedule 6.1(b), along with a description of its ownership and organizational
structure and Indebtedness, and each is designated as either a Levered
Permitted Joint Venture or an Unlevered Permitted Joint Venture..
(iii) (A) Neither the Borrower nor any of its Subsidiaries shall
create or acquire any Stock in any Permitted Joint Venture after the Closing
Date unless it shall notify the Agent thereof within five (5) days following
such creation or acquisition. Such notice shall include a description of the
ownership, organizational structure and Indebtedness of such Permitted Joint
Venture and shall designate such Permitted Joint Venture as either a Levered
Permitted Joint Venture or an Unlevered Permitted Joint Venture. If such
Permitted Joint Venture is an Acquired Permitted Joint Venture, such notice
shall also describe the circumstances of such acquisition except to the extent
that such description is already being provided pursuant to Section 6.1(a). No
Credit Party may hold Stock in any Permitted Joint Venture that is not a
corporation except through a Permitted Joint Venture Holding Company.
(B) If the aggregate consideration paid or invested upon the creation
or acquisition of Stock in any Permitted Joint Venture (other than an Acquired
Permitted Joint
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Venture) shall exceed $3,500,000, the Borrower shall also comply with the
provisions of paragraphs (i) and (iv) of clause (3) of the second sentence of
Section 6.1(a) with respect to such creation or acquisition.
(iv) At the Closing Date, in the case of Existing Permitted Joint
Ventures, and otherwise at the time of the acquisition or creation of any Stock
therein, the Borrower shall deliver and/or shall cause the applicable
Subsidiary to deliver to the Agent in pledge as security for the Obligations,
all Stock that the Borrower or any of its Subsidiaries holds in such Permitted
Joint Venture, PROVIDED that the pledge of the Stock in the Permitted Joint
Venture shall not be required if such Permitted Joint Venture is an Existing
Permitted Joint Venture or an Acquired Permitted Joint Venture to the extent
that, at the time of the acquisition thereof, the organizational documents
thereof prohibit such pledge.
(v) If at the time any Permitted Joint Venture is acquired or created
it shall have outstanding Indebtedness or liabilities in excess of $5,000,000,
then the Borrower shall submit to the Agent evidence satisfactory to the Agent
in its good faith discretion that none of the Indebtedness or liabilities of
such Permitted Joint Venture are, or could reasonably be expected to become,
Indebtedness or liabilities of the Borrower or any other Subsidiary other than
the Permitted Joint Venture Holding Company that owns the Stock in such
Permitted Joint Venture, except that this paragraph (v) shall not apply to the
extent that any such Indebtedness constitutes Permitted Recourse Debt.
(vi) No Restricted Subsidiary may become an Unrestricted Subsidiary,
no Unrestricted Subsidiary may become a Restricted Subsidiary, no Levered
Permitted Joint Venture may become an Unlevered Permitted Joint Venture and no
Unlevered Permitted Joint Venture may become a Levered Permitted Joint Venture;
provided that, so long as no Default or Event of Default shall have occurred
and be continuing or would result therefrom, Borrower may upon prior written
notice to the Agent redesignate an Levered Permitted Joint Venture that
otherwise meets the requirements of an Unlevered Permitted Joint Venture to be
an Unlevered Permitted Joint Venture. Upon any such redesignation, the Borrower
may reclassify amounts invested in such Permitted Joint Venture during the
Fiscal Year in which such redesignation occurs and prior to such redesignation
from investments in Levered Permitted Joint Ventures to investments in
Unlevered Permitted Joint Ventures for the purpose of Section 6.2(a)(iii)(A).
6.2 INVESTMENTS; LOANS AND ADVANCES. (a) Except as otherwise expressly
permitted by this Section 6.2, no Credit Party shall make or permit to exist
any investment in, or make, accrue or permit to exist loans or advances of
money to, any Person, through the direct or indirect lending of money, holding
of securities or otherwise, except that:
(i) any Credit Party may make loans or advances to employees for
reimbursable expenses in the ordinary course of business and as permitted
in Section 6.4(b);
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(ii) the Borrower may make and maintain equity investments in its
Restricted Subsidiaries and may make and maintain loans or advances to its
Restricted Subsidiaries and the Restricted Subsidiaries may make and
maintain loans and advances to the Borrower, provided that such loans or
advances are evidenced by notes and all such equity investments and loans
or advances are pledged to the Agent as security for the Obligations;
(iii) any Credit Party may make and maintain equity investments in,
and make loans and advances to, Permitted Joint Ventures and Permitted
Joint Venture Holding Companies and subject to the following limitations:
(A) the aggregate amount that may be invested in Permitted Joint
Ventures by the Borrower and its Subsidiaries, taken as a whole,
shall not exceed $20,000,000 in any Fiscal Year, and, of that amount,
the aggregate amount that may be invested in Levered Permitted Joint
Ventures shall not exceed $10,000,000 in any Fiscal Year, provided,
that for the purposes of this Section 6.2(a)(iii)(A), there shall be
excluded from the amount invested in Permitted Joint Ventures the
amount invested in any (x) Existing Permitted Joint Venture on the
Closing Date and (y) Acquired Permitted Joint Venture in connection
with the initial acquisition thereof except to the extent that the
EBITDA of such Acquired Permitted Joint Venture exceeds 25% of the
total EBITDA of the Acquisition Target the purchase of which resulted
in the acquisition of such Acquired Permitted Joint Venture (the
"Excess EBITDA;" in such case the amount deemed invested in such
Acquired Permitted Joint Venture for the purpose of this Section
6.2(a)(iii)(A) shall equal the aggregate consideration paid for such
Acquisition Target, multiplied by a fraction, the numerator of which
is the amount of such Excess EBITDA, and the denominator of which is
the total EBITDA of such Acquisition Target),
(B) if such investment constitutes an equity investment, such
investment shall be pledged to the Agent as security for the
Obligations to the extent provided in Section 6.1(b)(iv),
(C) all investments constituting loans or advances shall be
evidenced by a note and pledged to the Agent as additional security
for the Obligations,
(D) if the aggregate amount invested in any one Permitted Joint
Venture in any period of three months shall equal or exceed
$3,500,000, the Borrower shall deliver at the time that such
investment first equals or exceeds such amount, a compliance
certificate in the form required by clause (iv) of the second
sentence of Section 6.1(a), and
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(E) for the purpose of this Section 6.2.(a)(iii), investments,
loans and advances to Permitted Joint Venture Holding Companies shall
be permitted to the extent the proceeds thereto are immediately
reinvested by the Permitted Joint Venture Holding Company into the
Permitted Joint Venture in which such Permitted Joint Venture Holding
Company owns Stock;
(iv) Borrower and its Restricted Subsidiaries may make Managed
Practice Advances to Managed Practices, provided that the aggregate unpaid
amount of such advances does not exceed $5,000,000 at any time
outstanding; and
(v) so long as no Event of Default shall have occurred and be
continuing, Borrower may make investments in the aggregate, in:
(A) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof
maturing within one year from the date of acquisition thereof,
(B) commercial paper maturing no more than one year from the
date of creation thereof and currently having the highest rating
obtainable from either Standard & Poor's Corporation or Moody's
Investors Service, Inc.,
(C) certificates of deposit, maturing no more than one year
from the date of creation thereof, issued by commercial banks
incorporated under the laws of the United States of America, each
having combined capital, surplus and undivided profits of not less
than $300,000,000 and having a senior secured rating of "A" or better
by a nationally recognized rating agency (an "A Rated Bank"),
(D) time deposits, maturing no more than 180 days from the date
of creation thereof with A Rated Banks,
(E) marketable direct obligations issued by a state of the
United States or a political subdivision thereof that is rated A (or
the then equivalent grade) or better by Moody's Investor Service,
Inc. or Standard & Poor's Corporation and maturing within one (1)
year from the date of acquisition thereof,
(F) funds or similar vehicles which invest exclusively in
obligations of the type described in clauses (A) through (E) above,
(G) secured repurchase agreements relating to investments of
the types described in clauses (A) or (E) above, provided that for
any such repurchase agreement the counterparty thereto is a
government securities dealer designated by the Federal Reserve Bank
of New York as a "reporting dealer" and whose financial statements
indicate capital of at least $50,000,000, and
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(H) other investments not exceeding $2,000,000 in the aggregate
at any time outstanding.
(b) No Permitted Joint Venture Holding Company and no Permitted Joint
Venture shall make or permit to exist any investment in, or make, accrue or
permit to exist loans or advances of money to, any Person, through the direct
or indirect lending of money, holding of securities or otherwise, except that
(i) a Permitted Joint Venture Holding Company may make investments, loans or
advances and may hold the securities of the Permitted Joint Venture in which it
holds Stock, provided that such investment meets the other requirements of this
Section 6.2, (ii) a Permitted Joint Venture may make investments permitted
pursuant to clauses (A) through (G) of subsection (v) of Section 6.2(a) for
cash management purposes and may make other investments, loans or advances for
strategic purposes in an entity that does not constitute a Subsidiary or a
Permitted Joint Venture, provided that such investment, loan or advance (when
aggregated with all other investments, loans or advances by the Borrower, its
Subsidiaries and all other Permitted Joint Ventures made pursuant to Section
6.2(a)(v)(H)) shall not exceed the limit set forth in Section 6.2(a)(v)(H), and
(iii) a Permitted Joint Venture may make other investments with the prior
written consent of the Agent and the Requisite Lenders upon such terms and
conditions as the Agent and the Requisite Lenders shall require in their good
faith discretion (the Agent and the Lenders agree to respond promptly to any
request by the Borrower for such consent).
(c) No additional loans, advances or investments shall be made by the
Borrower or its Subsidiaries to or in any Permitted Joint Venture from and
after the time that such Permitted Joint Venture qualifies as such solely by
virtue of clause (vi) of the definition thereof; provided that this prohibition
shall be lifted if and so long as such Permitted Joint Venture again satisfies
all of the requirements of clauses (i) through (v) of such definition.
6.3 INDEBTEDNESS. (a) No Credit Party shall, create, incur, assume or
permit to exist any Indebtedness, except (without duplication):
(i) the Revolving Loan and the other Obligations,
(ii) existing Indebtedness described in Disclosure Schedule 6.3 and
refinancings thereof or amendments or modifications thereof which do not
have the effect of increasing the principal amount thereof or changing the
amortization thereof (other than to extend the same) and which are
otherwise on terms and conditions no less favorable to any of the
Borrower, any Restricted Subsidiary, Agent or any Lender, as determined by
Agent, than the terms of the Indebtedness being refinanced, amended or
modified,
(iii) Indebtedness of the Borrower consisting of subordinated notes,
convertible preferred stock or mandatorily redeemable stock in an
aggregate principal amount not to exceed $100,000,000 issued in offerings
registered under the Securities Act of 1933 or exempt from registration
pursuant to Rule 144 thereof or otherwise, and which meets the following
criteria:
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A. the notes do not amortize and/or the stock is not redeemable
or repurchasable prior to the date that is 366 days following the
Termination Date,
B. the notes and all redemption or repurchase rights respecting
the stock, and all claims and obligations in respect of any of the
foregoing are subordinated to the prior payment in full in cash or
cash equivalents of the Obligations (and any refunding, extension
refinancing or modification thereof) upon terms and conditions
satisfactory to the Agent and the Requisite Lenders in their good
faith discretion (which shall include, without limitation, such
payment blockage, payover, standstill, bankruptcy voting rights,
notice and other provisions as the Agent or the Requisite Lenders
shall request),
C. the notes, and all redemption, repurchase or other payment
rights in respect of the stock or the notes shall be unsecured,
D. the covenants and default provisions in respect thereof shall
be satisfactory to the Agent and the Requisite Lenders in their good
faith discretion, and
E. no Default or Event of Default shall have occurred and be
continuing or will exist as a result of the issuance or use of the
proceeds thereof,
(iv) Indebtedness of the Borrower of the type described in clause (f)
of the definition of Indebtedness, but only to the extent incurred to
hedge the interest rate on Indebtedness permitted hereunder,
(v) Indebtedness of the Borrower to the seller of an Acquisition
Target incurred in connection with a Permitted Acquisition, but only to
the extent that such Indebtedness, in the good faith judgment of the
Agent, meets all the requirements described in clauses A through E of
subsection 6.3(a)(iii),
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(vi) Indebtedness consisting of intercompany loans and advances made
by Borrower to any of its Restricted Subsidiaries or by any wholly owned
Restricted Subsidiary to Borrower,
(vii) Indebtedness that constitutes a primary obligation of any
Permitted Joint Venture that also constitutes a contingent obligation of
the Borrower, in an amount not to exceed at any time outstanding
$10,000,000 (such debt, "Permitted Recourse Debt"),
(viii) Guaranteed Indebtedness consisting of endorsements of
negotiable instruments for deposit or collection in the ordinary course of
business, and
(ix) Other Indebtedness in an amount not to exceed at any time
outstanding $15,000,000.
The Agent and the Lenders agree to respond as promptly as practicable to any
request to approve the terms of any Indebtedness issued in compliance with
clauses (iii) and (v) of this Section 6.3(a).
(b) No Credit Party shall directly or indirectly, voluntarily
purchase, redeem, defease or prepay any principal of, premium, if any, interest
or other amount payable in respect of any Indebtedness, other than (i) the
Obligations and (ii) Indebtedness permitted pursuant to clauses (ii), (iv),
(vi), (viii) or (ix) of subparagraph (a) of this Section 6.3.
(c) No Unlevered Permitted Joint Venture shall, create, incur, assume
or permit to exist any Indebtedness, except, at any time, Indebtedness, the
aggregate principal amount of which does not exceed 0.5 multiplied by the
EBITDA of such Unlevered Permitted Joint Venture for the 12 month period most
recently ended at the time of determination and for which financial statements
are then available.
(d) No Levered Permitted Joint Venture shall create, incur, assume or
permit to exist any single issue of Indebtedness in excess $5,000,000 unless
prior to the incurrence thereof, it shall have delivered to the Agent, in form
and substance satisfactory to the Agent in its sole good faith discretion,
evidence that such Indebtedness will not become Indebtedness of the Borrower or
any Restricted Subsidiary, except to the extent that such Indebtedness
constitutes Permitted Recourse Debt.
6.4 EMPLOYEE LOANS AND AFFILIATE TRANSACTIONS. (a) Except as provided
in this Section 6.4, Section 6.2 with respect to advances to employees, or
Section 6.14 with respect to the repurchase of stock from Affiliates, no Credit
Party shall enter into or be a party to any transaction with any Affiliate
except in the ordinary course of business and pursuant to the reasonable
requirements of such Credit Party's business and upon fair and
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reasonable terms that are no less favorable to such Credit Party than would be
obtained in a comparable arm's length transaction with a Person not an
Affiliate.
(b) No Credit Party shall enter into any lending or borrowing
transaction with any employees of the Borrower or a Subsidiary, except loans to
their respective employees in the ordinary course of business in an amount
outstanding at any time, that when added to amounts spent pursuant to Section
6.14(d) over the term of this Agreement does not exceed $2,000,000.
6.5 BUSINESS. No Credit Party shall engage in any business other than
the businesses currently engaged in by it or businesses reasonably related
thereto.
6.6 INTENTIONALLY OMITTED.
6.7 LIENS. (a) No Credit Party shall create, incur, assume or permit
to exist any Lien on or with respect to its properties or assets (whether now
owned or hereafter acquired) except for (i) Permitted Encumbrances; (ii) Liens
in existence on the date hereof and summarized on Disclosure Schedule 6.7; and
(iii) other Liens securing obligations not exceeding $15,000,000 in the
aggregate at any time outstanding. In addition, no Credit Party shall become a
party to any agreement, note, indenture or instrument, or take any other
action, which would prohibit the creation of a Lien on any of its properties or
other assets in favor of Agent, on behalf of itself and Lenders, as collateral
for the Obligations, except operating leases, Capital Leases or Licenses which
prohibit Liens upon the assets that are subject thereto.
(b) No Unlevered Permitted Joint Venture shall create, incur, assume
or permit to exist any Lien on or with respect to its properties or assets
(whether now owned or hereafter acquired) except for Permitted Encumbrances.
6.8 SALE OF STOCK AND ASSETS. No Credit Party shall sell, transfer,
convey, assign or otherwise dispose of any of its properties or other assets,
including the Stock of any of such Person's Subsidiaries, other than (a) the
sale of Inventory in the ordinary course of business, (b) transfers of assets
constituting investments permitted pursuant to Section 6.2(a)(v), (c) the sale,
transfer, lease or conveyance of equipment or other fixed assets for fair value
(other than a sale of substantially all of the assets of a Subsidiary described
in clause (e) below which shall be governed by such clause (e)), provided that
the proceeds of such sale, transfer, lease or conveyance are used to replace
the assets disposed of with substantially similar assets within 180 days of
such sale, transfer, lease or conveyance; (d) dispositions resulting from
casualty losses, provided that the proceeds thereof are used to purchase assets
substantially similar to the assets disposed of within 180 days of such
disposition; (e) the sale of the Stock or assets of a Subsidiary or Permitted
Joint Venture for fair value provided that: (i) in the case of a sale of the
Stock or assets of any Restricted Subsidiary or Permitted Joint Venture Holding
Company such sale constitutes a sale of 100% of the Stock or substantially all
of the assets of such Person, (ii) in any Fiscal Year (the "Test Year") the
EBITDA during the prior Fiscal Year that was attributable to all of the
Restricted Subsidiaries whose stock or assets were sold during the Test Year,
did not exceed 5% of the EBITDA of the Borrower and its Restricted Subsidiaries
during such prior Fiscal Year,
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(iii) prior to any such sale, the Borrower must deliver to the Agent a
certificate demonstrating its compliance with the financial covenants for the
four fiscal quarters most recently ended on a pro forma basis which excludes
any EBITDA attributable to the Subsidiary or Permitted Joint Venture whose
Stock or assets are being sold and any Indebtedness of the Borrower and/or such
Subsidiary or Permitted Joint Venture that is being retired or reduced in such
transaction (to the extent reduced or retired); and (f) (i) the sale, transfer,
conveyance or other disposition by the Borrower or such Restricted Subsidiary
of equipment, fixtures or real estate that are obsolete or no longer used or
useful in such Person's business, and (ii) sales, transfers, conveyances or
other dispositions that, but for the failure to redeploy the proceeds in the
time required would be permitted under clauses (c) and (d) above, which in the
aggregate ((i) and (ii)) do not have a value that exceeds $3,000,000 in any
Fiscal Year.
6.9 ERISA. Neither the Borrower nor any of its Subsidiaries shall, or
shall cause or permit any ERISA Affiliate to, cause or permit to occur an event
which could result in the imposition of a Lien under the IRC or ERISA.
6.10 FINANCIAL COVENANTS. Borrower shall not breach or fail to comply
with any of the Financial Covenants (the "Financial Covenants") set forth in
Annex E.
6.11 HAZARDOUS MATERIALS. Neither the Borrower nor any of its
Subsidiaries shall cause or permit a Release of any Hazardous Material on, at,
in, under, above, to, from or about any of its real property where such Release
would violate in any respect, or form the basis for any Environmental
Liabilities under, any Environmental Laws or Environmental Permits other than
such violations which could not reasonably be expected to have or result in a
Material Adverse Effect.
6.12 INTENTIONALLY OMITTED.
6.13 INTENTIONALLY OMITTED.
6.14 RESTRICTED PAYMENTS. Neither the Borrower nor any of its
Restricted Subsidiaries nor any Permitted Joint Venture Holding Company shall,
make any Restricted Payment, except (a) intercompany loans and advances between
Borrower and Subsidiaries to the extent permitted by Section 6.3 above, (b)
dividends and distributions by Subsidiaries of Borrower paid to Borrower, (c)
employee loans permitted under Section 6.4(b) above, (d) repurchases of Stock
of the Borrower from employees and board members and their estates or members
of their immediate families upon the resignation, termination or death of such
employee or board member, provided that the aggregate amount of all such
purchases pursuant to this clause (d) over the term of this Agreement does not
exceed $2,000,000 less the outstanding amount of loans to employees pursuant to
Section 6.4(b) at the time of repurchase and at the
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time of such repurchase, no Default or Event of Default shall have occurred and
be continuing, (e) prior to the Availability Termination Date, repurchases of
Stock of the Borrower pursuant to the Repurchase Program, provided that: (i) no
such purchase may be made prior to the first anniversary of the Closing Date or
after the Availability Termination Date, (ii) the aggregate amount of all such
purchases pursuant to this clause (e) over the term of this Agreement shall not
exceed 10% of the consolidated net income of the Borrower and its Restricted
Subsidiaries that, on a cumulative basis, has accrued since the Closing Date
(provided that, for the purposes of this provision, there shall be added back
to consolidated net income any amounts deducted therefrom with respect to
extraordinary non-cash losses associated with the write-off of goodwill), (iii)
both before and after giving effect to any such repurchase, no Default or Event
of Default shall have occurred and be continuing, and (iv) the Borrower shall
deliver to the Agent at least 3 Business Days prior to the commencement of any
such purchasing cycle a certificate demonstrating that, after giving effect to
such repurchase on a pro forma basis, the Borrower would be in compliance with
all financial covenants contained herein, (f) the Founders' Closing Date
Payment, and (g) scheduled payments of interest with respect to the
Subordinated Debt, provided that no Default or Event of Default shall have
occurred and be continuing or would result after giving effect to any payment
pursuant to this clause (g).
6.15 CHANGE OF CORPORATE NAME OR LOCATION. Neither the Borrower nor
any Restricted Subsidiary shall (a) change its corporate name, (b) change its
corporate structure, or (c) change its chief executive office, principal place
of business, corporate offices or the location of its records, in any case
without at least thirty (30) days prior written notice to Agent and provided
that any such new location shall be in the continental United States.
6.16 NO IMPAIRMENT OF INTERCOMPANY TRANSFERS. Neither the Borrower nor
any of its Restricted Subsidiaries shall directly or indirectly enter into or
become bound by any agreement, instrument, indenture or other obligation (other
than this Agreement and the other Loan Documents) which could directly or
indirectly restrict, prohibit or require the consent of any Person with respect
to the payment of dividends or distributions or the making or repayment of
intercompany loans by a Restricted Subsidiary of Borrower to Borrower.
6.17 INTENTIONALLY OMITTED.
6.18 CHANGES RELATING TO SUBORDINATED DEBT. Neither the Borrower nor
any of its Restricted Subsidiaries shall change or amend the terms of any
Subordinated Debt (or any indenture or agreement in connection therewith) if
the effect of such amendment is to: (a) increase the interest rate on such
Subordinated Debt; (b) change the dates upon which payments of principal or
interest are due on such Subordinated Debt other than to extend such dates; (c)
change any default or event of default or covenant other than to delete or make
less restrictive any default or covenant provision therein, or add any covenant
with respect to such Subordinated Debt; (d) change the redemption or prepayment
provisions of such Subordinated Debt other than to extend the dates therefor or
to reduce the premiums payable in connection therewith; (e) grant any security,
collateral or guaranty to secure payment of such
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Subordinated Debt; or (f) change or amend any other term if such change or
amendment would materially increase the obligations of the obligor or confer
additional material rights to the holder of such Subordinated Debt in a manner
adverse to the Borrower, any Restricted Subsidiary, the Agent or any Lender.
7. TERM
7.1 TERMINATION. The financing arrangements contemplated hereby shall
be in effect until the Commitment Termination Date, and the Loans and all other
Obligations shall be automatically due and payable in full on such date.
7.2 SURVIVAL OF OBLIGATIONS UPON TERMINATION OF FINANCING
ARRANGEMENTS. Except as otherwise expressly provided for in the Loan Documents,
no termination or cancellation (regardless of cause or procedure) of any
financing arrangement under this Agreement shall in any way affect or impair
the obligations, duties and liabilities of the Borrower and its Subsidiaries or
the rights of Agent and Lenders relating to any unpaid portion of the Loans or
any other Obligations, due or not due, liquidated, contingent or unliquidated
or any transaction or event occurring prior to such termination, or any
transaction or event, the performance of which is required after the Commitment
Termination Date. Except as otherwise expressly provided herein or in any other
Loan Document, all undertakings, agreements, covenants, warranties and
representations of or binding upon the Borrower and its Subsidiaries, and all
rights of Agent and each Lender, all as contained in the Loan Documents, shall
not terminate or expire, but rather shall survive any such termination or
cancellation and shall continue in full force and effect until the Termination
Date; provided however, that in all events the provisions of Section 11, the
payment obligations under Sections 1.12 and 1.13, and the indemnities contained
in the Loan Documents shall survive the Termination Date.
8. EVENTS OF DEFAULT: RIGHTS AND REMEDIES
8.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events (regardless of the reason therefor) shall constitute an "Event
of Default" hereunder:
(a) Borrower (i) fails to make any payment of principal of the Loans
or the Letter of Credit Obligations when and as due and payable, or (ii) fails
to make any payment of interest or letter of credit fees when and as due and
payable and such failure shall continue for three days or (iii) fails to make
any payment on any of the other Obligations within ten (10) days following
Agent's demand for such payment.
(b) Borrower or any of its Subsidiaries shall fail or neglect to
perform, keep or observe any of the provisions of Sections 1.4, or 6, or any of
the provisions set forth in Annex E.
(c) Borrower or any of its Subsidiaries shall (i) fail or neglect to
perform, keep or observe any of the provisions of clauses (e), (f), (g), (i) or
(j) of Annex D or, (ii) shall fail or neglect to perform, keep or observe any
other provision of Section 4 or any other provision set forth in Annex D, which
failure described in this clause (ii) of this subparagraph (c) shall remain
unremedied for five (5) days or more after notice from the Agent.
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(d) Borrower or any of its Subsidiaries shall fail or neglect to
perform, keep or observe any other provision of this Agreement or of any of the
other Loan Documents (other than any provision embodied in or covered by any
other clause of this Section 8.1) and the same shall remain unremedied for
thirty (30) days or more following the date that the Borrower shall have
obtained knowledge or received notice thereof.
(e) A default or breach shall occur under any other agreement,
document or instrument to which any Credit Party is a party which is not cured
within any applicable grace period, and such default or breach (i) involves the
failure to make any payment when due in respect of any Indebtedness (other than
the Obligations) of such Person in excess of $2,000,000 in the aggregate, or
(ii) causes, or permits any holder of such Indebtedness or a trustee to cause,
Indebtedness or a portion thereof in excess of $2,000,000 in the aggregate to
become due prior to its stated maturity or prior to its regularly scheduled
dates of payment, regardless of whether such right is exercised, by such holder
or trustee.
(f) Any representation or warranty herein or in any Loan Document or
in any written statement, report, financial statement or certificate made or
delivered to Agent or any Lender by Borrower or any of its Subsidiaries is
untrue or incorrect in any material respect as of the date when made or deemed
made.
(g) Assets of any Credit Party with a fair market value of $2,000,000
or more shall be attached, seized, levied upon or subjected to a writ or
distress warrant, or come within the possession of any receiver, trustee,
custodian or assignee for the benefit of creditors of any Credit Party and such
condition continues for thirty (30) days or more.
(h) A case or proceeding shall have been commenced against any Credit
Party or any Material Unrestricted Subsidiary (provided, that, in the case of a
Material Unrestricted Subsidiary, the Requisite Lenders shall have voted to
declare such event to be an Event of Default) seeking a decree or order in
respect of such Person (i) under Title 11 of the United States Code, as now
constituted or hereafter amended or any other applicable federal, state or
foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) for such
Person or of any substantial part of any such Person's assets, or (iii)
ordering the winding-up or liquidation of the affairs of any such Person, and
such case or proceeding shall remain undismissed or unstayed for sixty (60)
days or more or such court shall enter a decree or order granting the relief
sought in such case or proceeding.
(i) Any Credit Party or any Material Unrestricted Subsidiary
(provided, that, in the case of a Material Unrestricted Subsidiary, the
Requisite Lenders shall have voted to declare such event to be an Event of
Default) (i) shall file a petition seeking relief under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other applicable
federal, state or foreign bankruptcy or other
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similar law, (ii) shall fail to contest in a timely and appropriate manner or
shall consent to the institution of proceedings thereunder or to the filing of
any such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee or sequestrator (or similar official)
of such Person or of any substantial part of any such Person's assets, (iii)
shall make an assignment for the benefit of creditors, (iv) shall take any
corporate action in furtherance of any of the foregoing, or (v) shall admit in
writing its inability to, or shall be generally unable to, pay its debts as
such debts become due.
(j) A final judgment or judgments for the payment of money in excess
of $2,000,000 in the aggregate at any time outstanding shall be rendered
against any Credit Party and the same shall not, within thirty (30) days after
the entry thereof, have been discharged or execution thereof stayed or bonded
pending appeal, or shall not have been discharged prior to the expiration of
any such stay.
(k) Any material provision of any Loan Document shall for any reason
cease to be valid, binding and enforceable in accordance with its terms (or any
Credit Party shall challenge the enforceability of any Loan Document or shall
assert in writing, or engage in any action or inaction based on any such
assertion, that any provision of any of the Loan Documents has ceased to be or
otherwise is not valid, binding and enforceable in accordance with its terms),
or any security interest created under any Loan Document shall cease to be a
valid and perfected first priority security interest or Lien (except as
otherwise permitted herein or therein) in any of the Collateral purported to be
covered thereby other than as a result of the failure of the Agent to timely
file any continuation statement or maintain possession of any collateral under
its control.
(l) Any Change of Control shall occur.
(m) The termination of, or the receipt by any Credit Party of notice
of the termination of, or the occurrence of any event or condition which would,
with the passage of time or the giving of notice or both, constitute an event
of default under or permit the termination of, any one or more Service
Agreements with respect to any Material Managed Practice.
(n) Any Credit Party or any Managed Practice shall be prohibited or
otherwise restrained from conducting the business theretofor conducted by it in
any manner that has or could reasonably be expected to have or result in a
Material Adverse Effect by virtue of any determination, ruling, decision,
decree or order of any court or Governmental Authority of competent
jurisdiction.
(o) The introduction of, or any change in, any law or regulation
governing or affecting a physician practice management company or any practice
or practice group managed thereby, including without limitation any Healthcare
Laws, which could reasonably be expected to have a Material Adverse Effect.
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(p) A default or breach shall occur under any other agreement,
document or instrument to which any Material Managed Practice is a party which
is not cured within any applicable grace period, and such default or breach,
individually or when aggregated with all such defaults or breaches, could
reasonably be expected to have or result in a Material Adverse Effect.
8.2 REMEDIES. (a) If any Event of Default shall have occurred and be
continuing, or if a Default shall have occurred and be continuing and Agent or
Requisite Lenders shall have determined not to make any Advances or incur any
Letter of Credit Obligations so long as that specific Default is continuing,
Agent may (and at the written request of the Requisite Lenders shall), without
notice, suspend this facility with respect to further Advances and/or the
incurrence of further Letter of Credit Obligations whereupon any further
Advances and Letter of Credit Obligations shall be made or extended in Agent's
sole discretion (or in the sole discretion of the Requisite Lenders, if such
suspension occurred at their direction) so long as such Default or Event of
Default is continuing. If any Payment Default shall have occurred and be
continuing, Agent may (and at the written request of Requisite Lenders shall),
without notice except as otherwise expressly provided herein, increase the rate
of interest applicable to the Loans and the Letter of Credit Fees to the
Default Rate.
(b) If any Event of Default shall have occurred and be continuing,
Agent may (and at the written request of the Requisite Lenders shall), without
notice, (i) terminate this facility with respect to further Advances or the
incurrence of further Letter of Credit Obligations; (ii) declare all or any
portion of the Obligations, including all or any portion of any Loan to be
forthwith due and payable, and require that the Letter of Credit Obligations be
cash collateralized as provided in Annex B, all without presentment, demand,
protest or further notice of any kind, all of which are expressly waived by
Borrower and each other Credit Party; and (iii) exercise any rights and
remedies provided to Agent under the Loan Documents and/or at law or equity,
including all remedies provided under the Code; provided, however, that upon
the occurrence of an Event of Default specified in Sections 8.1(h) or (i), all
of the Obligations, including the Revolving Loan, shall become immediately due
and payable without declaration, notice or demand by any Person.
8.3 WAIVERS BY CREDIT PARTIES. Except as otherwise provided for in
this Agreement or by applicable law, each of Borrower and its Subsidiaries
waives: (a) presentment, demand and protest and notice of presentment,
dishonor, notice of intent to accelerate, notice of acceleration, protest,
default, nonpayment, maturity, release, compromise, settlement, extension or
renewal of any or all commercial paper, accounts, contract rights, documents,
instruments, chattel paper and guaranties at any time held by Agent on which
any Credit Party may in any way be liable, and hereby ratifies and confirms
whatever Agent may do in this regard, (b) all rights to notice and a hearing
prior to Agent's taking possession or control of, or to Agent's replevy,
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attachment or levy upon, the Collateral or any bond or security which might be
required by any court prior to allowing Agent to exercise any of its remedies,
and (c) the benefit of all valuation, appraisal, marshaling and exemption laws.
9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT
9.1 ASSIGNMENT AND PARTICIPATIONS. Subject to the provisions of
paragraphs (a) and (b) below, the Borrower hereby consents to any Lender's
assignment of, and/or sale of participations in, at any time or times, the Loan
Documents, Loans, Letter of Credit Obligations and any Commitment or of any
portion thereof or interest therein, including any Lender's rights, title,
interests, remedies, powers or duties thereunder, whether evidenced by a
writing or not.
(a) Any assignment by a Lender shall (i) require the consent of Agent
and, absent the occurrence and continuance of an Event of Default, Borrower
(which consent, in each case, shall not be unreasonably withheld or delayed)
and the execution of an assignment agreement (an "Assignment Agreement"
substantially in the form attached hereto as Exhibit 9.1(a) and otherwise in
form and substance satisfactory to, and acknowledged by, Agent); (ii) be
conditioned on such assignee Lender representing to the assigning Lender and
Agent that it is purchasing the applicable Loans to be assigned to it for its
own account, for investment purposes and not with a view to the distribution
thereof; (iii) if a partial assignment, be in an amount at least equal to
$5,000,000 and, after giving effect to any such partial assignment, the
assigning Lender shall have retained Commitments in an amount at least equal to
$5,000,000; (iv) include a payment to Agent of an assignment fee of $3,500; and
(v) absent the occurrence and continuance of an Event of Default, be only to an
Eligible Assignee. In the case of an assignment by a Lender under this Section
9.1, the assignee shall have, to the extent of such assignment, the same
rights, benefits and obligations as it would if it were a Lender hereunder. The
assigning Lender shall be relieved of its obligations hereunder with respect to
its Commitments or assigned portion thereof from and after the date of such
assignment. Borrower hereby acknowledges and agrees that any assignment will
give rise to a direct obligation of Borrower to the assignee and that the
assignee shall be considered to be a "Lender". In all instances, each Lender's
liability to make Loans hereunder shall be several and not joint and shall be
limited to such Lender's Pro Rata Share of the applicable Commitment. In the
event Agent or any Lender assigns or otherwise transfers all or any part of a
Note, Agent or any such Lender shall so notify Borrower and Borrower shall,
upon the request of Agent or such Lender, execute new Notes in exchange for the
Notes being assigned. Notwithstanding the foregoing provisions of this Section
9.1(a), any Lender may at any time pledge or assign all or any portion of such
Lender's rights under this Agreement and the other Loan Documents to a Federal
Reserve Bank; provided, however, that no such pledge or assignment shall
release such Lender from such Lender's obligations hereunder or under any other
Loan Document.
(b) Any participation by a Lender of all or any part of its
Commitments shall be in an amount at least equal to $5,000,000, and with the
understanding that all amounts payable by Borrower hereunder shall be
determined as if that Lender had not sold such participation, and that the
holder of any such participation shall not be entitled
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to require such Lender to take or omit to take any action hereunder except
actions directly affecting (i) any reduction in the principal amount of, or
interest rate or Fees payable with respect to, any Loan in which such holder
participates, (ii) any extension of the scheduled amortization of the principal
amount of any Loan in which such holder participates or the final maturity date
thereof, and (iii) any release of all or substantially all of the Collateral
(other than in accordance with the terms of this Agreement, the Collateral
Documents or the other Loan Documents). Solely for purposes of Sections 1.10,
1.12, 1.13 and 9.8, Borrower acknowledges and agrees that a participation shall
give rise to a direct obligation of Borrower to the participant and the
participant shall be considered to be a "Lender". Except as set forth in the
preceding sentence neither Borrower nor any other Credit Party shall have any
obligation or duty to any participant. Neither Agent nor any Lender (other than
the Lender selling a participation) shall have any duty to any participant and
may continue to deal solely with the Lender selling a participation as if no
such sale had occurred.
(c) Except as expressly provided in this Section 9.1, no Lender shall,
as between Borrower and that Lender, or Agent and that Lender, be relieved of
any of its obligations hereunder as a result of any sale, assignment, transfer
or negotiation of, or granting of participation in, all or any part of the
Loans, the Notes or other Obligations owed to such Lender.
(d) Borrower and each of its Subsidiaries shall assist any Lender
permitted to sell assignments or participations under this Section 9.1 as
reasonably required to enable the assigning or selling Lender to effect any
such assignment or participation, including the execution and delivery of any
and all agreements, notes and other documents and instruments as shall be
requested and the delivery of informational materials for, and the
participation of management in meetings with, potential assignees or
participants. Borrower and each of its Subsidiaries shall certify the
correctness, completeness and accuracy of all descriptions of such Credit Party
and their affairs contained in any selling materials provided by it and all
other information provided by it and included in such materials, except that
any Projections delivered by Borrower shall only be certified by Borrower as
having been prepared by Borrower in compliance with the representations
contained in Section 3.4(c).
(e) A Lender may furnish any information concerning Borrower in the
possession of such Lender from time to time to assignees and participants
(including prospective assignees and participants). Each Lender shall obtain
from assignees or participants confidentiality covenants substantially
equivalent to those contained in Section 11.8.
(f) So long as no Event of Default shall have occurred and be
continuing, no Lender shall assign or sell participations in any portion of its
Loans or Commitments to a potential Lender or participant, if, as of the date
of the proposed assignment or sale, the assignee Lender or participant would be
subject to capital adequacy or similar requirements under Section 1.13(a),
increased costs under Section 13(b), an inability to fund LIBOR Loans under
Section 1.13(c), or withholding taxes in accordance with Section 1.13(d).
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9.2 APPOINTMENT OF AGENT. GE Capital is hereby appointed to act on
behalf of all Lenders as Agent under this Agreement and the other Loan
Documents. The provisions of this Section 9.2 are solely for the benefit of
Agent and Lenders and no Credit Party nor any other Person shall have any
rights as a third party beneficiary of any of the provisions hereof. In
performing its functions and duties under this Agreement and the other Loan
Documents, Agent shall act solely as an agent of Lenders and does not assume
and shall not be deemed to have assumed any obligation toward or relationship
of agency or trust with or for any Credit Party or any other Person. Agent
shall have no duties or responsibilities except for those expressly set forth
in this Agreement and the other Loan Documents. The duties of Agent shall be
mechanical and administrative in nature and Agent shall not have, or be deemed
to have, by reason of this Agreement, any other Loan Document or otherwise a
fiduciary relationship in respect of any Lender. Neither Agent nor any of its
Affiliates nor any of their respective officers, directors, employees, agents
or representatives shall be liable to any Lender for any action taken or
omitted to be taken by it hereunder or under any other Loan Document, or in
connection herewith or therewith, except for damages caused by its or their own
gross negligence or willful misconduct.
If Agent shall request instructions from Requisite Lenders or all
affected Lenders with respect to any act or action (including failure to act)
in connection with this Agreement or any other Loan Document, then Agent shall
be entitled to refrain from such act or taking such action unless and until
Agent shall have received instructions from Requisite Lenders or all affected
Lenders, as the case may be, and Agent shall not incur liability to any Person
by reason of so refraining. Agent shall be fully justified in failing or
refusing to take any action hereunder or under any other Loan Document (a) if
such action would, in the opinion of Agent, be contrary to law or the terms of
this Agreement or any other Loan Document, (b) if such action would, in the
opinion of Agent, expose Agent to Environmental Liabilities or (c) if Agent
shall not first be indemnified to its satisfaction against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. Without limiting the foregoing, no Lender
shall have any right of action whatsoever against Agent as a result of Agent
acting or refraining from acting hereunder or under any other Loan Document in
accordance with the instructions of Requisite Lenders or all affected Lenders,
as applicable.
9.3 AGENT'S RELIANCE, ETC. Neither Agent nor any of its Affiliates nor
any of their respective directors, officers, agents or employees shall be
liable for any action taken or omitted to be taken by it or them under or in
connection with this Agreement or the other Loan Documents, except for damages
caused by its or their own gross negligence or willful misconduct. Without
limitation of the generality of the foregoing, Agent: (a) may treat the payee
of any Note as the holder thereof until Agent receives written notice of the
assignment or transfer thereof signed by such payee and in form satisfactory to
Agent; (b) may consult with legal counsel, independent public accountants and
other experts selected by it and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the advice of such
counsel, accountants or experts; (c) makes no warranty or representation to any
Lender and shall not be responsible to any Lender for any statements,
warranties or representations made in or in connection with this Agreement or
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the other Loan Documents; (d) shall not have any duty to ascertain or to
inquire as to the performance or observance of any of the terms, covenants or
conditions of this Agreement or the other Loan Documents on the part of any
Credit Party or to inspect the Collateral (including the books and records) of
any Credit Party; (e) shall not be responsible to any Lender for the due
execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or the other Loan Documents or any other instrument or
document furnished pursuant hereto or thereto; and (f) shall incur no liability
under or in respect of this Agreement or the other Loan Documents by acting
upon any notice, consent, certificate or other instrument or writing (which may
be by telecopy, telegram, cable or telex) believed by it to be genuine and
signed or sent by the proper party or parties.
9.4 GE CAPITAL AND AFFILIATES. With respect to its Commitments
hereunder, GE Capital shall have the same rights and powers under this
Agreement and the other Loan Documents as any other Lender and may exercise the
same as though it were not Agent; and the term "Lender" or "Lenders" shall,
unless otherwise expressly indicated, include GE Capital in its individual
capacity. GE Capital and its Affiliates may lend money to, invest in, and
generally engage in any kind of business with, any Credit Party, any of their
Affiliates and any Person who may do business with or own securities of any
Credit Party or any such Affiliate, all as if GE Capital were not Agent and
without any duty to account therefor to Lenders. GE Capital and its Affiliates
may accept fees and other consideration from any Credit Party for services in
connection with this Agreement or otherwise without having to account for the
same to Lenders. Each Lender acknowledges the potential conflict of interest
between GE Capital as a Lender holding disproportionate interests in the Loans
and GE Capital as Agent.
9.5 LENDER CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon Agent or any other Lender and based on
the Financial Statements referred to in Section 3.4(a) and such other documents
and information as it has deemed appropriate, made its own credit and financial
analysis of the Credit Parties and its own decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and
without reliance upon Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement. Each
Lender acknowledges the potential conflict of interest of each other Lender as
a result of Lenders holding disproportionate interests in the Loans, and
expressly consents to, and waives any claim based upon, such conflict of
interest.
9.6 INDEMNIFICATION. Lenders agree to indemnify Agent (to the extent
not reimbursed by Borrower and without limiting the obligations of Borrower
hereunder), ratably according to their respective Pro Rata Shares, from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against
Agent in any way relating to or arising out of this Agreement or any other Loan
Document or any action taken or omitted by Agent in connection therewith;
PROVIDED, HOWEVER, that no Lender shall be liable for any portion of such
liabilities,
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obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from Agent's gross negligence or willful
misconduct. Without limiting the foregoing, each Lender agrees to reimburse
Agent promptly upon demand for its ratable share of any out-of-pocket expenses
(including reasonable counsel fees) incurred by Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement
and each other Loan Document, to the extent that Agent is not reimbursed for
such expenses by Borrower and its Subsidiaries.
9.7 Successor Agent. Agent may resign at any time by giving not less
than thirty (30) days' prior written notice thereof to Lenders and Borrower.
Upon any such resignation, the Requisite Lenders shall have the right to
appoint a successor Agent, which successor, absent the occurrence and
continuance of any Event of Default, shall be consented to by the Borrower
(such consent not to be unreasonably withheld or delayed). If no successor
Agent shall have been so appointed by the Requisite Lenders and shall have
accepted such appointment within 30 days after the resigning Agent's giving
notice of resignation, then the resigning Agent may, on behalf of Lenders,
appoint a successor Agent, which shall be a Lender, if a Lender is willing to
accept such appointment, or otherwise shall be a commercial bank or financial
institution or a subsidiary of a commercial bank or financial institution if
such commercial bank or financial institution is organized under the laws of
the United States of America or of any State thereof and has a combined capital
and surplus of at least $300,000,000. If no successor Agent has been appointed
pursuant to the foregoing, by the 30th day after the date such notice of
resignation was given by the resigning Agent, such resignation shall become
effective and the Requisite Lenders shall thereafter perform all the duties of
Agent hereunder until such time, if any, as the Requisite Lenders appoint a
successor Agent as provided above. Any successor Agent appointed by Requisite
Lenders hereunder shall be subject to the approval of Borrower, such approval
not to be unreasonably withheld or delayed; provided that such approval shall
not be required if a Default or an Event of Default shall have occurred and be
continuing. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall succeed to and become vested with
all the rights, powers, privileges and duties of the resigning Agent. Upon the
earlier of the acceptance of any appointment as Agent hereunder by a successor
Agent or the effective date of the resigning Agent's resignation, the resigning
Agent shall be discharged from its duties and obligations under this Agreement
and the other Loan Documents, except that any indemnity rights or other rights
in favor of such resigning Agent shall continue. After any resigning Agent's
resignation hereunder, the provisions of this Section 9 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement and the other Loan Documents. Agent may be removed at the
written direction of the holders (other than Agent) of two-thirds or more of
the Commitments (excluding Agent's Commitment); provided that in so doing, such
Lenders shall be deemed to have waived and released any and all claims they may
have against Agent.
9.8 SETOFF AND SHARING OF PAYMENTS. In addition to any rights now or
hereafter granted under applicable law and not by way of limitation
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of any such rights, upon the occurrence and during the continuance of any Event
of Default, each Lender and each holder of any Note is hereby authorized at any
time or from time to time, without notice to Borrower or any of its
Subsidiaries or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and to apply any and all balances held by
it at any of its offices for the account of Borrower or any of its Subsidiaries
(regardless of whether such balances are then due to Borrower) and any other
properties or assets any time held or owing by that Lender or that holder to or
for the credit or for the account of Borrower or any of its Subsidiaries
against and on account of any of the Obligations which are not paid when due.
Any Lender or holder of any Note exercising a right to set off or otherwise
receiving any payment on account of the Obligations in excess of its Pro Rata
Share thereof shall purchase for cash (and the other Lenders or holders shall
sell) such participations in each such other Lender's or holder's Pro Rata
Share of the Obligations as would be necessary to cause such Lender to share
the amount so set off or otherwise received with each other Lender or holder in
accordance with their respective Pro Rata Shares. Borrower and each of its
Subsidiaries agree, to the fullest extent permitted by law, that (a) any Lender
or holder may exercise its right to set off with respect to amounts in excess
of its Pro Rata Share of the Obligations and may sell participations in such
amount so set off to other Lenders and holders and (b) any Lender or holders so
purchasing a participation in the Loans made or other Obligations held by other
Lenders or holders may exercise all rights of set-off, bankers' lien,
counterclaim or similar rights with respect to such participation as fully as
if such Lender or holder were a direct holder of the Loans and the other
Obligations in the amount of such participation. Notwithstanding the foregoing,
if all or any portion of the set-off amount or payment otherwise received is
thereafter recovered from the Lender that has exercised the right of set-off,
the purchase of participations by that Lender shall be rescinded and the
purchase price restored without interest.
9.9 ADVANCES; PAYMENTS; NON-FUNDING LENDERS; INFORMATION; ACTIONS IN
CONCERT.
(a) ADVANCES; PAYMENTS. (i) Revolving Lenders shall refund or
participate in the Swing Line Loan in accordance with clauses (iii) and (iv) of
Section 1.1(c). If the Swing Line Lender declines to make a Swing Line Loan or
if Swing Line Availability is zero, the Agent shall promptly upon receipt of
any Notice of Revolving Credit Advance or L/C Request, forward a copy of such
request to each of the Lenders. Each Lender shall make the amount of such
Lender's Pro Rata Share of each Advance available to Agent in same day funds by
wire transfer to Agent's account as set forth in Annex F not later than 12:00
noon (New York time) on the requested funding date. After receipt of such wire
transfers (or, in the Agent's sole discretion, before receipt of such wire
transfers), subject to the terms hereof, Agent shall make the requested Advance
to Borrower. All payments by each Lender shall be made without setoff,
counterclaim or deduction of any kind.
(ii) Upon the receipt of any payment from the Borrower with respect to
any Obligation (other than the Swing Line Loan), Agent will advise each Lender
by telephone, or telecopy of the amount of such Lender's Pro Rata Share of
principal, interest and Fees paid for the benefit of Lenders with respect to
each
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applicable Loan. Provided that such Lender has made all payments required to be
made by it under this Agreement and the other Loan Documents as of such
Settlement Date, Agent will pay to each Lender such Lender's Pro Rata Share of
principal, interest and Fees paid by Borrower since the previous Settlement
Date for the benefit of that Lender on the Loans held by it. Such payments
shall be made by wire transfer to such Lender's account (as specified by such
Lender in Annex F or the applicable Assignment Agreement) not later than 3:00
p.m. (New York time) on the Business Day of such receipt.
(b) AVAILABILITY OF LENDER'S PRO RATA SHARE. Agent may assume that
each Lender will make its Pro Rata Share of each Revolving Credit Advance
available to Agent on each funding date. If such Pro Rata Share is not, in
fact, paid to Agent by such Lender when due, Agent will be entitled to recover
such amount on demand from such Lender without set-off, counterclaim or
deduction of any kind. If any Lender fails to pay the amount of its Pro Rata
Share forthwith upon Agent's demand, Agent shall promptly notify Borrower and
Borrower shall immediately repay such amount to Agent. Nothing in this Section
9.9(b) or elsewhere in this Agreement or the other Loan Documents shall be
deemed to require Agent to advance funds on behalf of any Lender or to relieve
any Lender from its obligation to fulfill its Commitments hereunder or to
prejudice any rights that Borrower may have against any Lender as a result of
any default by such Lender hereunder. To the extent that Agent advances funds
to Borrower on behalf of any Lender and is not reimbursed therefor on the same
Business Day as such Advance is made, Agent shall be entitled to retain for its
account all interest accrued on such Advance until reimbursed by the applicable
Lender.
(c) RETURN OF PAYMENTS. (i) If Agent pays an amount to a Lender under
this Agreement in the belief or expectation that a related payment has been or
will be received by Agent from Borrower and such related payment is not
received by Agent, then Agent will be entitled to recover such amount from such
Lender on demand without set-off, counterclaim or deduction of any kind.
(ii) If Agent determines at any time that any amount received by Agent
under this Agreement must be returned to Borrower or paid to any other
Person pursuant to any insolvency law or otherwise, then, notwithstanding
any other term or condition of this Agreement or any other Loan Document,
Agent will not be required to distribute any portion thereof to any Lender.
In addition, each Lender will repay to Agent on demand any portion of such
amount that Agent has distributed to such Lender, together with interest at
such rate, if any, as Agent is required to pay to Borrower or such other
Person, without set-off, counterclaim or deduction of any kind.
(d) NON-FUNDING LENDERS. The failure of any Lender (such Lender, a
"Non-Funding Lender") to make any Revolving Credit Advance or to purchase any
participation in any Swing Line Loan to be made or purchased by it on the date
specified therefor shall not relieve any other Lender (each such other Lender,
an "Other Lender") of its obligations to make such Advance, but neither any
Other Lender nor Agent shall be responsible for the failure of any Non-Funding
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Lender to make an Advance to be made by such Non-Funding Lender, and no
Non-Funding Lender shall have any obligation to Agent or any Other Lender for
the failure by such Non-Funding Lender. Notwithstanding anything set forth
herein to the contrary, a Non- Funding Lender shall not have any voting or
consent rights under or with respect to any Loan Document or constitute a
"Lender" or a "Lender" (or be included in the calculation of "Requisite
Lenders" hereunder) for any voting or consent rights under or with respect to
any Loan Document.
(e) DISSEMINATION OF INFORMATION. Agent will use reasonable efforts to
provide Lenders with any notice of Default or Event of Default received by
Agent from, or delivered by Agent to, any Credit Party, with notice of any
Event of Default of which Agent has actually become aware and with notice of
any action taken by Agent following any Event of Default; provided, however,
that Agent shall not be liable to any Lender for any failure to do so, except
to the extent that such failure is attributable to Agent's gross negligence or
willful misconduct. Lenders acknowledge that Borrower is required to provide
Financial Statements to Lenders in accordance with Annex D hereto and agree
that Agent shall have no duty to provide the same to Lenders.
(f) ACTIONS IN CONCERT. Anything in this Agreement to the contrary
notwithstanding, each Lender hereby agrees with each other Lender that no
Lender shall take any action to protect or enforce its rights arising out of
this Agreement or the Notes (including exercising any rights of set-off)
without first obtaining the prior written consent of Agent or Requisite
Lenders, it being the intent of Lenders that any such action to protect or
enforce rights under this Agreement and the Notes shall be taken in concert and
at the direction or with the consent of Agent.
10. SUCCESSORS AND ASSIGNS
10.1 SUCCESSORS AND ASSIGNS. This Agreement and the other Loan
Documents shall be binding on and shall inure to the benefit of Borrower, its
Subsidiaries, Agent, Lenders and their respective successors and assigns
(including, in the case of any Credit Party, a debtor-in-possession on behalf
of such Credit Party), except as otherwise provided herein or therein. Neither
the Borrower nor any of its Subsidiaries may assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties hereunder or under
any of the other Loan Documents without the prior express written consent of
Agent and the Lenders. Any such purported assignment, transfer, hypothecation
or other conveyance by any Credit Party without the prior express written
consent of Agent and the Lenders shall be void. The terms and provisions of
this Agreement are for the purpose of defining the relative rights and
obligations of Borrower, Agent and Lenders with respect to the transactions
contemplated hereby and no Person shall be a third party beneficiary of any of
the terms and provisions of this Agreement or any of the other Loan Documents.
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11. MISCELLANEOUS
11.1 COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. The Loan Documents
constitute the complete agreement between the parties with respect to the
subject matter thereof and may not be modified, altered or amended except as
set forth in Section 11.2 below. Any letter of interest, commitment letter, fee
letter (other than the GE Capital Fee Letter) or confidentiality agreement
between any Credit Party and Agent or any Lender or any of their respective
affiliates, predating this Agreement and relating to a financing of
substantially similar form, purpose or effect shall be superseded by this
Agreement.
11.2 AMENDMENTS AND WAIVERS. (a) Except for actions expressly
permitted to be taken by Agent, no amendment, modification, termination or
waiver of any provision of this Agreement or any of the Notes or any other Loan
Documents, or any consent to any departure by any Credit Party therefrom, shall
in any event be effective unless the same shall be in writing and signed by
Borrower and by Requisite Lenders, Supermajority Lenders or all Lenders, as
applicable. Except as set forth in clauses (b) and (c) below, all such
amendments, modifications, terminations or waivers requiring the consent of any
Lenders shall require the written consent of Requisite Lenders.
(b) No amendment, modification, termination or waiver of or consent
with respect to any provision of this Agreement which waives compliance with
the provisions of Section 6.10, or modifies any of the definitions of the terms
used in such Sections shall be effective unless the same shall be in writing
and signed by the Supermajority Lenders and Borrower.
(c) No amendment, modification, termination or waiver shall, unless in
writing and signed by each Lender, do any of the following: (i) increase the
principal amount of any Lender's Commitment or subject the Lenders to any
additional monetary obligation; (ii) reduce the principal of, rate of interest
on or Fees payable with respect to any Loan or Letter of Credit Obligations;
(iii) extend any scheduled payment date or final maturity date of the principal
amount of any Loan; (iv) waive, forgive, defer, extend or postpone any payment
of interest or Fees; (v) release any Guaranty or all or substantially all of
the Collateral; (vi) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Loans which shall be required for
Lenders or any of them to take any action hereunder; and (vii) amend or waive
this Section 11.2 or the definitions of the term "Requisite Lenders" or
"Supermajority Lenders" insofar as such definitions affect the substance of
this Section 11.2. Furthermore, no amendment, modification, termination or
waiver affecting the rights or duties of Agent or any L/C Issuer under this
Agreement or any other Loan Document shall be effective unless in writing and
signed by Agent or such L/C Issuer, as applicable, in addition to Lenders
required hereinabove to take such action. Each amendment, modification,
termination or waiver shall be effective only in the specific instance and for
the specific purpose for which it was given. No amendment, modification,
termination or waiver shall be required for Agent
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to take additional Collateral pursuant to any Loan Document. No amendment,
modification, termination or waiver of any provision of any Note shall be
effective without the written concurrence of the holder of that Note. No notice
to or demand on any Credit Party in any case shall entitle such Credit Party or
any other Credit Party to any other or further notice or demand in similar or
other circumstances. Any amendment, modification, termination, waiver or
consent effected in accordance with this Section 11.2 shall be binding upon
each holder of the Notes at the time outstanding and each future holder of the
Notes.
(d) If, in connection with any proposed amendment, modification,
waiver or termination (a "Proposed Change") requiring the consent of all
Lenders or the Supermajority Lenders, the consent of Requisite Lenders is
obtained, but the consent of other Lenders whose consent is required is not
obtained (any such Lender whose consent is not obtained being referred to as a
"Non-Consenting Lender") then, so long as Agent is not a Non-Consenting Lender,
at Borrower's request Agent, or a Person acceptable to Agent, shall have the
right with Agent's consent and in Agent's sole discretion (but shall have no
obligation) to purchase from such Non-Consenting Lenders, and such
Non-Consenting Lenders agree that they shall, upon Agent's request, sell and
assign to Agent or such Person, all of the Commitments of such Non-Consenting
Lender for an amount equal to the principal balance of all Loans held by the
Non-Consenting Lender and all accrued interest and Fees with respect thereto
through the date of sale, such purchase and sale to be consummated pursuant to
an executed Assignment Agreement.
(e) Upon indefeasible payment in full in cash and performance of all
of the Obligations (other than indemnification Obligations under Section 1.10),
termination of the Commitments and a release of all claims against Agent and
Lenders, and so long as no suits, actions proceedings, or claims are pending or
threatened against any Indemnified Person asserting any damages, losses or
liabilities that are Indemnified Liabilities, Agent shall deliver to Borrower
termination statements, mortgage releases and other documents necessary or
appropriate to evidence the termination of the Liens securing payment of the
Obligations.
11.3 FEES AND EXPENSES. Borrower shall reimburse Agent for all
out-of-pocket expenses incurred in connection with the preparation of the Loan
Documents (including the reasonable fees and expenses of all of its special
loan counsel, advisors, consultants and auditors retained in connection with
the Loan Documents and the Related Transactions and advice in connection
therewith). Borrower shall reimburse Agent (and, with respect to clauses (c)
and (d) below, all Lenders) for all fees, costs and expenses, including the
fees, costs and expenses of counsel or other advisors (including environmental
and management consultants and appraisers) for advice, assistance, or other
representation in connection with:
(a) the forwarding to Borrower or any other Person on behalf of
Borrower by Agent of the proceeds of the Loans;
(b) any amendment, modification or waiver of, or consent with respect
to, any of the Loan Documents or Related Transactions Documents or advice in
connection with the administration of the Loans made pursuant hereto or its
rights hereunder or thereunder;
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(c) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by Agent, any Lender, Borrower or any other Person) in any
way relating to the Collateral, any of the Loan Documents or any other
agreement to be executed or delivered in connection therewith or herewith,
whether as party, witness, or otherwise, including any litigation, contest,
dispute, suit, case, proceeding or action, and any appeal or review thereof, in
connection with a case commenced by or against Borrower or any other Person
that may be obligated to Agent by virtue of the Loan Documents; including any
such litigation, contest, dispute, suit, proceeding or action arising in
connection with any work-out or restructuring of the Loans during the pendency
of one or more Events of Default; provided that in the case of reimbursement of
counsel for Lenders other than Agent, such reimbursement shall be limited to
one counsel for all such Lenders;
(d) any attempt to enforce any remedies of Agent or any Lender against
any or all of the Credit Parties or any other Person that may be obligated to
Agent or any Lender by virtue of any of the Loan Documents; including any such
attempt to enforce any such remedies in the course of any work-out or
restructuring of the Loans during the pendency of one or more Events of
Default; provided that in the case of reimbursement of counsel for Lenders
other than Agent, such reimbursement shall be limited to one counsel for all
such Lenders;
(e) any work-out or restructuring of the Loans during the pendency of
one or more Events of Default;
(f) efforts to verify, protect, evaluate and assess and (following the
occurrence of any Event of Default) to appraise, collect, sell, liquidate or
otherwise dispose of any of the Collateral; including all attorneys' and other
professional and service providers' fees arising from such services, including
those in connection with any appellate proceedings; and all expenses, costs,
charges and other fees incurred by such counsel and others in any way or
respect arising in connection with or relating to any of the events or actions
described in this Section 11.3 shall be payable, on demand, by Borrower to
Agent. Without limiting the generality of the foregoing, such expenses, costs,
charges and fees may include: fees, costs and expenses of accountants,
environmental advisors, appraisers, investment bankers, management and other
consultants and paralegals; court costs and expenses; photocopying and
duplication expenses; court reporter fees, costs and expenses; long distance
telephone charges; air express charges; telegram or telecopy charges;
secretarial overtime charges; and expenses for travel, lodging and food paid or
incurred in connection with the performance of such legal or other advisory
services.
11.4 NO WAIVER. Agent's or any Lender's failure, at any time or times,
to require strict performance by the Credit Parties of any provision of this
Agreement and any of the other Loan Documents shall not waive, affect or
diminish any right of Agent or such Lender thereafter to demand strict
compliance and performance therewith. Any suspension or waiver of an Event of
Default shall not suspend, waive or affect any other Event of Default whether
the same is prior or subsequent thereto and whether the same or of a
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different type. Subject to the provisions of Section 11.2, none of the
undertakings, agreements, warranties, covenants and representations of any
Credit Party contained in this Agreement or any of the other Loan Documents and
no Default or Event of Default by any Credit Party shall be deemed to have been
suspended or waived by Agent or any Lender, unless such waiver or suspension is
by an instrument in writing signed by an officer of or other authorized
employee of Agent and the applicable required Lenders and directed to Borrower
specifying such suspension or waiver.
11.5 REMEDIES. Agent's and Lenders' rights and remedies under this
Agreement shall be cumulative and nonexclusive of any other rights and remedies
which Agent or any Lender may have under any other agreement, including the
other Loan Documents, by operation of law or otherwise. Recourse to the
Collateral shall not be required.
11.6 SEVERABILITY. Wherever possible, each provision of this Agreement
and the other Loan Documents shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining
provisions of this Agreement.
11.7 CONFLICT OF TERMS. Except as otherwise provided in this Agreement
or any of the other Loan Documents by specific reference to the applicable
provisions of this Agreement, if any provision contained in this Agreement is
in conflict with, or inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this Agreement shall govern and control.
11.8 CONFIDENTIALITY. Agent and each Lender agree to use commercially
reasonable efforts (equivalent to the efforts Agent or such Lender applies to
maintain the confidentiality of its own confidential information) to maintain
as confidential all confidential information provided to them by the Credit
Parties and designated as confidential for a period of two (2) years following
receipt thereof, and further agree not to use such confidential information
except in connection with the evaluation and administration of the credit
relationship governed by this Agreement; except that Agent and each Lender may
disclose such information (a) to Persons employed or engaged by Agent or such
Lender in evaluating, approving, structuring or administering the Loans and the
Commitments who agree to be bound by the terms of this Section; (b) to any bona
fide assignee or participant or potential assignee or participant that has
agreed to comply with the covenant contained in this Section 11.8 (and any such
bona fide assignee or participant or potential assignee or participant may
disclose such information to Persons employed or engaged by them as described
in clause (a) above); (c) as required or requested by any Governmental
Authority or reasonably believed by Agent or such Lender to be compelled by any
court decree, subpoena or legal or administrative order or process; (d) as, in
the opinion of Agent's or such Lender's counsel, required by law; (e) in
connection with the exercise of any right or remedy under the Loan Documents or
in connection with any Litigation to which
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Agent or such Lender is a party; or (f) which ceases to be confidential through
no fault of Agent or such Lender. The Agent and the Lenders acknowledge that
the confidential information may from time to time include material non-public
information relating to the Borrower or its Subsidiaries, including information
regarding potential Permitted Acquisitions.
11.9 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF
THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS SHALL BE
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE) AND
ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. BORROWER HEREBY CONSENTS
AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE BOROUGH OF MANHATTAN
IN THE CITY AND STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER, AGENT AND LENDERS PERTAINING
TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS,
PROVIDED, THAT AGENT, LENDERS AND BORROWER ACKNOWLEDGE THAT ANY APPEALS FROM
THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE THE BOROUGH OF
MANHATTAN IN THE CITY AND STATE OF NEW YORK AND, PROVIDED, FURTHER NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT
OR OTHER COURT ORDER IN FAVOR OF AGENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS
IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH
COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH SUCH CREDIT PARTY MAY
HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL
SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION
OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS
MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE
ADDRESS SET FORTH IN ANNEX G OF THIS AGREEMENT AND THAT SERVICE SO MADE SHALL
BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAIL, PROPER POSTAGE PREPAID.
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11.10 NOTICES. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other parties, or whenever any of the parties desires to
give or serve upon any other parties any communication with respect to this
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be deemed to have been
validly served, given or delivered (a) upon the earlier of actual receipt and
three (3) Business Days after deposit in the United States Mail, registered or
certified mail, return receipt requested, with proper postage prepaid, (b) upon
transmission, when sent by telecopy or other similar facsimile transmission
(with such telecopy or facsimile promptly confirmed by delivery of a copy by
personal delivery or United States Mail as otherwise provided in this Section
11.10), (c) one (1) Business Day after deposit with a reputable overnight
courier with all charges prepaid or (d) when delivered, if hand-delivered by
messenger, all of which shall be addressed to the party to be notified and sent
to the address or facsimile number indicated on Annex G or to such other
address (or facsimile number) as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Failure or delay in delivering
copies of any notice, demand, request, consent, approval, declaration or other
communication to any Person (other than Borrower or Agent) designated on Annex
G to receive copies shall in no way adversely affect the effectiveness of such
notice, demand, request, consent, approval, declaration or other communication.
11.11 SECTION TITLES. The Section titles and Table of Contents
contained in this Agreement are and shall be without substantive meaning or
content of any kind whatsoever and are not a part of the agreement between the
parties hereto.
11.12 COUNTERPARTS. This Agreement may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement. To the extent executed in counterparts, this
Agreement shall become effective when the Agent shall have notified the
Borrower that the Borrower's signature pages have been accepted by the Agent in
New York, New York.
11.13 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION
WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED
BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND
FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT
THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE,
TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT OR
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OTHERWISE, AMONG AGENT, LENDERS AND BORROWER ARISING OUT OF, CONNECTED WITH,
RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN
CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS RELATED THERETO.
11.14 PRESS RELEASES. The Borrower agrees that neither it nor its
Affiliates will in the future issue any press releases or other public
disclosure using the name of GE Capital or its affiliates or referring to this
Agreement, the other Loan Documents or the Related Transactions Documents
without at least two (2) Business Days' prior notice to GE Capital and without
the prior written consent of GE Capital unless (and only to the extent that)
Borrower or its Affiliate is required to do so under law and then, in any
event, Borrower or its Affiliate will consult with GE Capital before issuing
such press release or other public disclosure. The Borrower consents to the
publication by Agent or any Lender of a tombstone or similar advertising
material relating to the financing transactions contemplated by this Agreement.
11.15 REINSTATEMENT. This Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
Borrower for liquidation or reorganization, should Borrower become insolvent or
make an assignment for the benefit of any creditor or creditors or should a
receiver or trustee be appointed for all or any significant part of Borrower's
assets, and shall continue to be effective or to be reinstated, as the case may
be, if at any time payment and performance of the Obligations, or any part
thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Obligations,
whether as a "voidable preference," "fraudulent conveyance," or otherwise, all
as though such payment or performance had not been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Obligations shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.
11.16 ADVICE OF COUNSEL. Each of the parties represents to each other
party hereto that it has discussed this Agreement and, specifically, the
provisions of Sections 11.9 and 11.13, with its counsel.
11.17 NO STRICT CONSTRUCTION. The parties hereto 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 hereto and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement.
11.18 NO THIRD-PARTY BENEFICIARY. Borrower's covenants in Article 5,
to cause, or to use its reasonable best efforts to cause, the Managed Practices
to take certain actions, are not intended to: (i) imply that Borrower, or any
of its Subsidiaries, has the power and authority to control a Managed Practice;
(ii) constitute an assumption by Borrower of any obligations of a Managed
Practice to any Person; or (iii) waive or release any claim or cause of action
that Borrower or a Subsidiary may have against a Managed Practice for failing
to comply with any of such Managed Practice's obligations under a Service
Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed as of the
date first written above.
AMERICAN PHYSICIAN PARTNERS, INC.
By:
--------------------------------------
Title:
-----------------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION,
as Agent and Lender
Revolving Loan Commitment
(including a Swing Line Commitment
of $5,000,000):
$40,000,000 By:
--------------------------------------
Title:
-----------------------------------
BANK ONE, TEXAS, N.A.,
as Lender
Revolving Loan Commitment: By:
$16,500,000 --------------------------------------
Title:
-----------------------------------
BANQUE PARIBAS,
as Lender
By:
--------------------------------------
Title:
-----------------------------------
Revolving Loan Commitment: By:
$14,500,000 --------------------------------------
Title:
-----------------------------------
<PAGE> 69
CREDIT LYONNAIS NEW YORK BRANCH,
as Lender
Revolving Loan Commitment: By:
$14,500,000 --------------------------------------
Title:
-----------------------------------
TORONTO DOMINION (TEXAS), INC.,
as Lender
Revolving Loan Commitment: By:
$14,500,000 --------------------------------------
Title:
-----------------------------------
MANUFACTURERS AND TRADERS TRUST COMPANY,
as Lender
Revolving Loan Commitment: By:
$7,500,000 --------------------------------------
Title:
-----------------------------------
COOPERATIEVE CENTRALE RAIFFEISEN -
BOERENLEENBANK B.A.
"Rabobank Nederland," NEW YORK BRANCH,
as Lender
By:
--------------------------------------
Title:
-----------------------------------
Revolving Loan Commitment: By:
$7,500,000 --------------------------------------
Title:
-----------------------------------
<PAGE> 70
ANNEX A (Recitals)
to
CREDIT AGREEMENT
DEFINITIONS
Capitalized terms used in the Loan Documents shall have (unless
otherwise provided elsewhere in the Loan Documents) the following respective
meanings and all section references in the following definitions shall refer to
Sections of the Agreement:
"Acquired Permitted Joint Venture" shall mean any Permitted Joint
Venture acquired by the Borrower or one of its Subsidiaries in an acquisition
permitted pursuant to Section 6.1(a).
"Acquisition" shall mean, collectively, the acquisition at or prior to
the Closing Date by one or more Subsidiaries of the Borrower of all or
substantially all of the assets of the radiology practices or practice groups
or clinics or imaging centers providing ancillary services to such practices or
practice groups, or the acquisition by one or more Subsidiaries of the Borrower
of all of the outstanding capital stock of any radiology practice or practice
group or clinic or imaging center providing ancillary services to such practice
or practice group, which are described on Disclosure Schedule A-1 to the Credit
Agreement, in accordance with the agreements described on such Schedule and the
entry of the Borrower and one or more of its Subsidiaries into one or more
Service Agreements with such practice, practice group, clinic or imaging center
or successor thereto which agreements are in substantially the form of the
agreements described on such Schedule.
"Acquisition Agreement" shall mean, collectively, each Agreement and
Plan of Reorganization and Merger or Exchange Agreement for the Acquisition of
each Founding Radiology Practice and the other Acquisitions on the Closing Date
and each Service Agreement to be executed in connection therewith.
"Acquisition Target" shall have the meaning assigned to it in Section
6.1(a).
"Adjusted EBITDA" shall mean EBITDA of Borrower and its Subsidiaries
plus any amount deducted from earnings with respect to corporate overhead in
determining such consolidated net income.
"Advance" shall mean any Revolving Credit Advance or Swing Line
Advance, as the context may require.
"Affiliate" shall mean, with respect to any Person, (a) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, five percent (5%) or more of the Stock
having ordinary voting power in the election of directors of such Persons, (b)
each Person that controls, is controlled by or is under common
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control with such Person, and (c) each of such Person's officers, directors,
joint venturers and partners. For the purposes of this definition, "control" of
a Person shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of its management or policies, whether through
the ownership of voting securities, by contract or otherwise; provided,
however, that the term "Affiliate" shall specifically exclude Agent and each
Lender.
"Agent" shall mean GE Capital or its successor appointed pursuant to
Section 9.7.
"Agreement" shall mean the Credit Agreement by and among Borrower, GE
Capital, as Agent and Lender and the other Lenders signatory from time to time
to the Agreement.
"Appendices" shall have the meaning assigned to it in the recitals to
the Agreement.
"Applicable L/C Margin" shall mean the per annum fee, from time to
time in effect, payable with respect to outstanding Letter of Credit
Obligations as determined by reference to Section 1.5(a).
"Applicable Margins" means collectively the Applicable L/C Margin, the
Applicable Revolver Index Margin and the Applicable Revolver LIBOR Margin.
"Applicable Revolver Index Margin" shall mean the per annum interest
rate margin from time to time in effect and payable in addition to the Index
Rate applicable to the Revolving Loan, as determined by reference to Section
1.5(a) of the Agreement.
"Applicable Revolver LIBOR Margin" shall mean the per annum interest
rate margin from time to time in effect and payable in addition to the LIBOR
Rate applicable to the Revolving Loan, as determined by reference to Section
1.5(a) of the Agreement.
"Assignment Agreement" shall have the meaning assigned to it in
Section 9.1(a).
"Availability Termination Date" shall mean the earlier of: (i) the
third anniversary of the Closing Date, and (ii) the Commitment Termination
Date.
"Blue Cross/Blue Shield" shall mean any and all contracts or
agreements in force between any of the Borrower, any Subsidiary or any Managed
Practice and any Blue Cross/Blue Shield plan.
"Borrower" shall have the meaning assigned to it in the recitals to
the Agreement.
"Borrower Pledge and Security Agreement" shall mean the Pledge and
Security Agreement of even date herewith executed by Borrower in favor of
Agent, on behalf of itself and Lenders, pledging all Stock of its Subsidiaries
and all Intercompany Notes owing to or held by it, if any, and granting a
security interest in any Service Agreements to which it is a party.
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<PAGE> 72
"Borrowing Availability" shall have the meaning assigned to it in
Section 1.1(a).
"Business Day" shall mean any day that is not a Saturday, a Sunday or
a day on which banks are required or permitted to be closed in the State of New
York and in reference to LIBOR Loans shall mean any such day that is also a
LIBOR Business Day.
"Capital Expenditures" shall mean, with respect to any Person, all
expenditures (by the expenditure of cash or the incurrence of Indebtedness) by
such Person during any measuring period for any fixed assets or improvements or
for replacements, substitutions or additions thereto, that have a useful life
of more than one year and that are required to be capitalized under GAAP.
"Capital Lease" shall mean, with respect to any Person, any lease of
any property (whether real, personal or mixed) by such Person as lessee that,
in accordance with GAAP, would be required to be classified and accounted for
as a capital lease on a balance sheet of such Person.
"Capital Lease Obligation" shall mean, with respect to any Capital
Lease of any Person, the amount of the obligation of the lessee thereunder
that, in accordance with GAAP, would appear on a balance sheet of such lessee
in respect of such Capital Lease.
"CHAMPUS" shall mean, collectively, the Civilian Health and Medical
Program of the Uniformed Service, a program of medical benefits covering former
and active members of the uniformed services and certain of their dependents,
financed and administered by the United States Departments of Defense, Health
and Human Services and Transportation, and all laws, rules, regulations,
manuals, orders, guidelines or requirements pertaining to such program
including (a) all federal statutes (whether set forth in 10 U.S.C. Sections
1071-1106 or elsewhere) affecting such program; and (b) all rules, regulations
(including 32 C.F.R. Section 199), manuals, orders and administrative,
reimbursement and other guidelines of all governmental authorities promulgated
in connection with such program (whether or not having the force of law), in
each case as the same may be amended, supplemented or otherwise modified from
time to time.
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<PAGE> 73
"CHAMPVA" shall mean, collectively, the Civilian Health and Medical
Program of the Department of Veteran Affairs, a program of medical benefits
covering retirees and dependents of former members of the armed services
administered by the United States Department of Veteran Affairs, and all laws,
rules, regulations, manuals, orders, guidelines or requirements pertaining to
such program including (a) all federal statutes (whether set forth in 38 U.S.C.
Section 1713 or elsewhere) affecting such program or, to the extent applicable
to CHAMPVA; and (b) all rules, regulations (including 38 C.F.R. Section 17.54),
manuals, orders and administrative, reimbursement and other guidelines of all
governmental authorities promulgated in connection with such program (whether
or not having the force of law), in each case as the same may be amended,
supplemented or otherwise modified from time to time.
"Change of Control" means any of the following: (a) any person or
group of persons (within the meaning of the Securities Exchange Act of 1934, as
amended), other than John PappaJohn and/or Derace L. Schaffer, M.D., shall have
acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended) of 25% or 30% (if such acquisition shall result from the
issuance of Stock to Physicians in a Permitted Acquisition) or more of the
issued and outstanding shares of Stock of Borrower having the right to vote for
the election of directors of Borrower under ordinary circumstances; (b) at any
time, individuals who at the Closing Date, or if later, the date two years
prior to the date of determination (the Closing Date or such later date, the
"Baseline Date"), constituted 50% or more of the board of directors of Borrower
(together with any new directors whose election by the board of directors of
Borrower or whose nomination for election by the stockholders of Borrower was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors on the Baseline Date or whose elections or nomination
for election was previously so approved) cease for any reason other than death
or disability to constitute a majority of the directors then in office; or (c)
Borrower sells, transfers, conveys, assigns or otherwise disposes of all or
substantially all of its assets.
"Charges" shall mean all federal, state, county, city, municipal,
local, foreign or other governmental taxes (including taxes owed to the PBGC at
the time due and payable), levies, assessments, charges, liens, claims or
encumbrances upon or relating to (a) the Collateral, (b) the Obligations, (c)
the employees, payroll, income or gross receipts of the Borrower, any of its
Subsidiaries or any Managed Practice, (d) any such Person's ownership or use of
any properties or other assets, or (e) any other aspect of any such Person's
business.
"Closing Date" shall mean the date of the initial funding of the
Loans.
"Closing Checklist" shall mean the schedule, including all appendices,
exhibits or schedules thereto, listing certain documents and information to be
delivered in connection with the Agreement, the other Loan Documents and the
transactions contemplated thereunder, substantially in the form attached hereto
as Annex C.
A-4
<PAGE> 74
"Code" shall mean the Uniform Commercial Code as the same may, from
time to time, be enacted and in effect in the State of New York; provided,
however, in the event that, by reason of mandatory provisions of law, any or
all of the attachment, perfection or priority of Agent's or any Lender's
security interest in any Collateral is governed by the Uniform Commercial Code
as enacted and in effect in a jurisdiction other than the State of New York,
the term "Code" shall mean the Uniform Commercial Code as enacted and in effect
in such other jurisdiction solely for purposes of the provisions hereof
relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
"Collateral" shall mean the property covered by the Borrower Pledge
Agreement and the other Collateral Documents and any other property, real or
personal, tangible or intangible, now existing or hereafter acquired, that may
at any time be or become subject to a security interest or Lien in favor of
Agent, on behalf of itself and Lenders, to secure the Obligations.
"Collateral Documents" shall mean the Pledge Agreements, the
Guaranties, and all similar agreements entered into guaranteeing payment of, or
granting a Lien upon property as security for payment of, the Obligations.
"Collection Account" shall mean the following account of Agent:
GECC/CAF Depository
Account #:50-232-854
Bankers Trust Company
1 Bankers Trust Plaza
New York, New York 10006
ABA #: 021-001-033
Attention: Judy Lancaster
Reference: CFA 4622, American Physician Partners, Inc.
"Commitments" shall mean (a) as to any Lender, such Lender's Revolving
Loan Commitment (including without duplication the Swing Line Lender's Swing
Line Commitment) as set forth on the signature page to the Agreement or in the
most recent Assignment Agreement executed by such Lender and (b) as to all
Lenders, all Lenders' Revolving Loan Commitments (including without duplication
the Swing Line Lender's Swing Line Commitment) which aggregate commitment shall
be One Hundred Fifteen Million Dollars ($115,000,000.00) on the Closing Date,
as such amount may be adjusted, if at all, from time to time in accordance with
the Agreement.
"Commitment Termination Date" shall mean the earliest of (a) the sixth
anniversary of the Closing Date, (b) the date of termination of Lenders'
obligations to make Advances and/or incur Letter of Credit Obligations or
permit existing Loans to remain outstanding pursuant to Section 8.2(b), (c) the
earlier of: (i) November 30, 1997 and (ii) the date that the Borrower shall
have failed in or abandoned its efforts to consummate the IPO, if the Closing
Date shall not have occurred by such date, and (d) the
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date of indefeasible prepayment in full by Borrower of the Loans and the
cancellation and return of all Letters of Credit or the cash collateralization
(or stand-by guarantee) of all Letter of Credit Obligations pursuant to Annex B
and the permanent reduction of the Revolving Loan Commitment and the Swing Line
Commitment to zero dollars ($0), in accordance with the provisions of Section
1.3(a).
"Compliance Certificate" shall have the meaning assigned to it in
Annex D.
"Copyright License" shall mean any and all rights now owned or
hereafter acquired by any Credit Party under any written agreement granting any
right to use any Copyright or Copyright registration.
"Copyrights" shall mean all of the following now owned or hereafter
acquired by any Credit Party: (a) all copyrights and general intangibles of
like nature (whether registered or unregistered), now owned or existing or
hereafter adopted or acquired, all registrations and recordings thereof, and
all applications in connection therewith, including all registrations,
recordings and applications in the United States Copyright Office or in any
similar office or agency of the United States, any state or territory thereof,
or any other country or any political subdivision thereof, and (b) all
reissues, extensions or renewals thereof.
"Credit Parties" shall mean Borrower and each of Borrower's Restricted
Subsidiaries.
"Default" shall mean any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"Default Rate" shall have the meaning assigned to it in Section
1.5(d).
"Disclosure Documents" shall mean the Registration Statement on Form
S-1 filed by the Borrower in connection with the IPO and all amendments,
modifications and supplements thereto.
"Disclosure Schedules" shall mean the Schedules prepared by Borrower
and denominated as such in the Agreement.
"Dollars" or "$" shall mean lawful currency of the United States of
America.
"EBITDA" shall mean, with respect to any Person for any fiscal period,
an amount equal to (a) consolidated net income of such Person for such period,
minus (b) the sum of (i) income tax credits, (ii) interest income, (iii) gain
from extraordinary items for such period, and (iv) any aggregate net gain
during such period arising from the sale, exchange or other disposition of
capital assets by such Person (including any fixed assets,
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whether tangible or intangible, all inventory sold in conjunction with the
disposition of fixed assets and all securities), in each case to the extent
included in the calculation of consolidated net income of such Person for such
period in accordance with GAAP, but without duplication, minus (c) any cash
payments made in respect of any item of extraordinary loss accrued during a
prior period and added back to EBITDA in such prior period pursuant to clause
(d)(v) below, plus (d) the sum of (i) any provision for income taxes, (ii)
Interest Expense, (iii) the amount of depreciation and amortization for such
period, (iv) the amount of any deduction to consolidated net income as the
result of any stock option expense, (v) the amount of any item of extraordinary
loss not paid in cash in such period, and (vi) the absolute value of any
aggregate net loss during such period arising from the sale, exchange or other
disposition of capital assets by such Person (including any fixed assets,
whether tangible or intangible, all inventory sold in conjunction with the
disposition of fixed assets and all securities), in each case to the extent
included in the calculation of consolidated net income of such Person for such
period in accordance with GAAP, but without duplication. For purposes of this
definition, the following items shall be excluded in determining consolidated
net income of a Person: (1) the undistributed earnings of any Subsidiary of
such Person to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary is not at the time permitted by the
terms of any contractual obligation or requirement of law applicable to such
Subsidiary; or (2) any restoration to income of any extraordinary contingency
reserve, except to the extent that provision for such reserve was made out of
income accrued during such period. For the purposes of calculating the EBITDA
of the Borrower and its consolidated Subsidiaries (but not when calculating the
EBITDA for the Borrower and its Restricted Subsidiaries and not when
calculating Adjusted EBITDA), deductions from consolidated net income for
minority interests in Levered Permitted Joint Ventures shall not be made except
to the extent such amounts represent actual cash payments to such minority
interests.
"Eligible Assignee" means (i) a commercial bank organized under the
laws of the United States, or any state thereof, having a combined capital and
surplus of at least $100,000,000; (ii) a savings and loan association or
savings bank organized under the laws of the United States or any state
thereof, and having a combined capital and surplus of at least $100,000,000;
(iii) a commercial bank organized under the laws of any other country which is
a member of the OECD, or a political subdivision of any such country, and
having a combined capital and surplus of at least $100,000,000, provided, that,
such bank is acting through a branch, agency or Affiliate located in the United
States or managed and controlled by a branch, agency or affiliate located in
the United States; (iv) any affiliate of any Lender if such Affiliate has total
assets in excess of $100,0000,000; (v) any insurance company organized under
the laws of the United States or any state thereof, and having total assets in
excess of $100,000,000, (vi) any other commercial financial entity having total
assets in excess of $100,000,000; and (vii) any other Person mutually agreed to
in writing by the Borrower and the Agent.
"Environmental Laws" shall mean all applicable federal, state, local
and foreign laws, statutes, ordinances, codes, rules, standards and
regulations, now or hereafter in effect, and in each case as amended or
supplemented from time to time, and
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any applicable judicial or administrative interpretation thereof, including any
applicable judicial or administrative order, consent decree, order or judgment,
imposing liability or standards of conduct for or relating to the regulation
and protection of human health, safety, the environment and natural resources
(including ambient air, surface water, groundwater, wetlands, land surface or
subsurface strata, wildlife, aquatic species and vegetation). Environmental
Laws include the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (42 U.S.C. Sections 9601 et seq.) ("CERCLA"); the
Hazardous Materials Transportation Authorization Act of 1994 (49 U.S.C.
Sections 5101 et seq.); the Federal Insecticide, Fungicide, and Rodenticide Act
(7 U.S.C. Sections 136 et seq.); the Solid Waste Disposal Act (42 U.S.C.
Sections 6901 et seq.); the Toxic Substance Control Act (15 U.S.C. Sections
2601 et seq.); the Clean Air Act (42 U.S.C. Sections 7401 et seq.); the Federal
Water Pollution Control Act (33 U.S.C. Sections 1251 et seq.); the Occupational
Safety and Health Act (29 U.S.C. Sections 651 et seq.); and the Safe Drinking
Water Act (42 U.S.C. Sections 300(f) et seq.), each as from time to time
amended, and any and all regulations promulgated thereunder, and all analogous
state, local and foreign counterparts or equivalents and any transfer of
ownership notification or approval statutes.
"Environmental Liabilities" shall mean, with respect to any Person,
all liabilities, obligations, responsibilities, response, remedial and removal
costs, investigation and feasibility study costs, capital costs, operation and
maintenance costs, losses, damages, punitive damages, property damages, natural
resource damages, consequential damages, treble damages, costs and expenses
(including all fees, disbursements and expenses of counsel, experts and
consultants), fines, penalties, sanctions and interest incurred as a result of
or related to any claim, suit, action, investigation, proceeding or demand by
any Person, whether based in contract, tort, implied or express warranty,
strict liability, criminal or civil statute or common law, including any
arising under or related to any Environmental Laws, Environmental Permits, or
in connection with any Release or threatened Release or presence of a Hazardous
Material whether on, at, in, under, from or about or in the vicinity of any
real or personal property.
"Environmental Permits" shall mean all permits, licenses,
authorizations, certificates, approvals, registrations or other written
documents required by any Governmental Authority under any Environmental Laws.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974
(or any successor legislation thereto), as amended from time to time, and any
regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to any of the Borrower and
its Subsidiaries, any trade or business (whether or not incorporated) which,
together with such Person, are treated as a single employer within the meaning
of Sections 414(b), (c), (m) or (o) of the IRC.
"ERISA Event" shall mean, with respect to any Credit Party or any
ERISA Affiliate, (a) any event described in Section 4043(c) of ERISA with
respect to a Title IV Plan; (b) the withdrawal of any Credit Party or ERISA
Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan
year in which it was a substantial employer, as defined in Section 4001(a)(2)
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of ERISA; (c) the complete or partial withdrawal of any Credit Party or any
ERISA Affiliate from any Multiemployer Plan; (d) the filing of a notice of
intent to terminate a Title IV Plan or the treatment of a plan amendment as a
termination under Section 4041 of ERISA; (e) the institution of proceedings to
terminate a Title IV Plan or Multiemployer Plan by the PBGC; (f) the failure by
any Credit Party or ERISA Affiliate to make when due required contributions to
a Multiemployer Plan or Title IV Plan unless such failure is cured within 30
days; (g) any other event or condition which might reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Title IV Plan or Multiemployer Plan
or for the imposition of liability under Section 4069 or 4212(c) of ERISA; (h)
the termination of a Multiemployer Plan under Section 4041A of ERISA or the
reorganization or insolvency of a Multiemployer Plan under Section 4241 of
ERISA; or (i) the loss of a Qualified Plan's qualification or tax exempt
status.
"ESOP" shall mean a Plan which is intended to satisfy the requirements
of Section 4975(e)(7) of the IRC.
"Event of Default" shall have the meaning assigned to it in Section
8.1.
"Execution Date" shall mean the date as of which this Agreement is
dated.
"Existing Permitted Joint Venture" shall mean any Permitted Joint
Venture acquired as part of the Acquisition and listed on Schedule 6.1(b).
"Federal Funds Rate" shall mean, for any day, a floating rate equal to
the weighted average of the rates on overnight federal funds transactions among
members of the Federal Reserve System, as determined by Agent.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System, or any successor thereto.
"Fees" shall mean any and all fees payable to Agent, any L/C Issuer or
any Lender pursuant to the Agreement or any of the other Loan Documents.
"Financial Statements" shall mean the consolidated income statements,
statements of cash flows and balance sheets of Borrower delivered in accordance
with Section 3.4 of the Agreement and Annex D to the Agreement.
"Fiscal Month" shall mean any of the monthly accounting periods of
Borrower.
"Fiscal Quarter" shall mean any of the quarterly accounting periods of
Borrower, ending on March 31, June 30, September 30 and December 31 of each
year.
"Fiscal Year" shall mean any of the annual accounting periods of
Borrower ending on December 31 of each year.
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"Fixed Charges" shall mean, with respect to any Person for any fiscal
period, the aggregate of all Interest Expense paid or accrued during such
period, plus scheduled payments of principal with respect to Indebtedness
during such period; provided, however, that there shall be excluded in
calculating Fixed Charges for both the Borrower and its Restricted Subsidiaries
and the Borrower and its Consolidated Subsidiaries for any period through the
Availability Termination Date, scheduled payments of principal of any
Indebtedness.
"Fixed Charge Coverage Ratio" shall mean, with respect to any Person
for any fiscal period, the ratio of (a) (i) EBITDA, minus (ii) cash payments of
income taxes (other than up to $10,000,000 payable in respect of Fiscal Year
1997 for income taxes arising from the conversion of the Founding Radiology
Practices from cash-basis taxpayers to accrual-basis taxpayers) minus (iii)
Capital Expenditures to (b) Fixed Charges. For any covenant calculation
required to be made prior to the Availability Termination Date, Capital
Expenditures for any period, for the purposes of this definition, will be
defined as the amount shown on the consolidated income statement of such
Persons for such corresponding period as depreciation expense.
"Fixtures" shall mean any "fixtures" as such term is defined in the
Code, now owned or hereafter acquired by any Credit Party.
"Founder's Closing Date Payment" shall mean an amount not to exceed
the net cash proceeds received by the Borrower in the IPO, after deducting all
expenses (including underwriters' discounts and commissions) incurred in
connection therewith.
"Founding Radiology Practices" shall mean Advanced Imaging of Orange
County, P.C., Central Imaging Associates, P.C., Carroll Imaging Associates,
Diagnostic Imaging Associates, P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A.,
Drs. Copeland, Hyman & Shackman, P.A., Drs. Decarlo, Lyon, Hearn & Pazourek,
P.A., Harbor Radiologists, P.A., Perilla, Sindler & Associates, P.A., The IDE
Group, P.C., M&S X-Ray Associates, P.A., Mid Rockland Imaging Associates, P.C.,
Nyack Magnetic Resonance Imaging, P.C., Pelham Imaging Associates, P.C.,
Pacific Imaging Consultants, A Medical Group, Inc., Radiology and Nuclear
Medicine, a Professional Association, Valley Radiologists Medical Group, Inc.,
Women's Imaging Consultants, P.C., Lexington MR, Ltd., San Antonio MRI
Partnership No. 2 Ltd., Madison Square Joint Venture, South Texas MR, Inc. and
South Texas No. 2 MRI Limited Partnership.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect on the Closing Date, consistently
applied. Unless otherwise specifically provided herein, any accounting term
used in the Agreement shall have the meaning customarily given such term in
accordance with GAAP, and all financial computations hereunder shall be
computed in accordance with GAAP consistently applied.
"GE Capital Fee Letter" shall have the meaning assigned to it in
Section 1.6(a).
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"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Guaranteed Indebtedness" shall mean, as to any Person, any obligation
of such Person guaranteeing any indebtedness, lease, dividend, or other
obligation ("primary obligations") of any other Person (the "primary obligor")
in any manner, including any obligation or arrangement of such Person (a) to
purchase or repurchase any such primary obligation, (b) to advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency or any balance sheet condition of the
primary obligor, (c) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the ability
of the primary obligor to make payment of such primary obligation, or (d) to
indemnify the owner of such primary obligation against loss in respect thereof.
The amount of any Guaranteed Indebtedness at any time shall be deemed to be an
amount equal to the lesser at such time of (x) the stated or determinable
amount of the primary obligation in respect of which such Guaranteed
Indebtedness is made and (y) the maximum amount for which such Person may be
liable pursuant to the terms of the instrument embodying such Guaranteed
Indebtedness; or, if not stated or determinable, the maximum reasonably
anticipated liability (assuming full performance) in respect thereof.
"Guaranties" shall mean, collectively, each Subsidiary Guaranty and
any other guaranty executed by any Guarantor in favor of Agent and Lenders in
respect of the Obligations.
"Guarantors" shall mean each Subsidiary of Borrower, and each other
Person, if any, which executes a guarantee or other similar agreement in favor
of Agent in connection with the transactions contemplated by the Agreement and
the other Loan Documents.
"HCFA" shall mean the Health Care Financing Administration, an agency
of HHS, and any successor thereto.
"Hazardous Material" shall mean any substance, material or waste which
is regulated by or forms the basis of liability now or hereafter under, any
Environmental Laws.
"Healthcare Law" shall mean, collectively, any and all federal, state
or local laws, rules, regulations, manuals, orders, guidelines and requirements
pertaining to the delivery of services by the Managed Practices or to the
practice of medicine thereby, including without limitation all laws, rules,
regulations, manuals, orders, guidelines and requirements pertaining to
CHAMPUS, CHAMPVA, Medicaid or Medicare.
"Indebtedness" of any Person shall mean without duplication (a) all
obligations of such Person for borrowed money or for the deferred purchase
price of property or services, but excluding trade accounts payable incurred
and paid in the
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ordinary course of business that are not deferred or overdue by more than six
(6) months unless being contested in good faith, (b) all reimbursement and
other obligations with respect to letters of credit, bankers' acceptances and
surety bonds, whether or not contingent on matured, (c) all obligations
evidenced by notes, bonds, debentures or similar instruments, (d) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (e)
all Capital Lease Obligations, (f) all obligations of such Person under any
foreign exchange contract, currency swap agreement, interest rate swap, cap or
collar agreement or other similar agreement or arrangement designed to alter
the risks of that Person arising from fluctuations in currency values or
interest rates, in each case whether contingent or matured, (g) all equity
securities of such Person subject to repurchase or redemption other than at the
sole option of such Person, (h) all obligations of such Person to purchase
securities (or other property) which arise out of or in connection with the
sale of the same or substantially similar securities (or property), (i) any of
the foregoing referred to above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon or in property or other assets (including accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness, and (j) Guaranteed Indebtedness.
"Indemnified Liabilities" shall have the meaning assigned to it in
Section 1.10.
"Index Rate" shall mean, for any day, a floating rate equal to the
higher of (i) the rate publicly quoted from time to time by The Wall Street
Journal as the "base rate on corporate loans at large U.S. money center
commercial banks" (or, if The Wall Street Journal ceases quoting a base rate of
the type described, the highest per annum rate of interest published by the
Federal Reserve Board in Federal Reserve statistical release H.15 (519)
entitled "Selected Interest Rates" as the Bank prime loan rate or its
equivalent), and (ii) the Federal Funds Rate plus fifty (50) basis points per
annum. Each change in any interest rate provided for in the Agreement based
upon the Index Rate shall take effect at the time of such change in the Index
Rate.
"Index Rate Loan" shall mean a Revolving Credit Advance or portion
thereof bearing interest by reference to the Index Rate.
"Intellectual Property" shall mean any and all Licenses, Patents,
Copyrights, Trademarks and trade secrets.
"Intercompany Notes" shall have the meaning assigned to it in Section
6.3.
"Interest Expense" shall mean, with respect to any Person for any
fiscal period, interest expense (whether cash or non-cash) of such Person
determined in accordance with GAAP for such period, including, in any event,
interest expense with respect to any Indebtedness of such Person.
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"Interest Payment Date" means (a) as to any Index Rate Loan, the first
Business Day of each Fiscal Quarter to occur while such Loan is outstanding,
(b) as to any LIBOR Loan, the last day of the applicable LIBOR Period; provided
that, in addition to the foregoing, each of (x) the date upon which all of the
Commitments have been terminated and the Loans have been paid in full and (y)
the Commitment Termination Date shall be deemed to be an "Interest Payment
Date" with respect to any interest which is then accrued under the Agreement.
"IPO" shall have the meaning assigned to it in Section 2.1.
"IRC" shall mean the Internal Revenue Code of 1986, as amended, and
any successor thereto.
"IRS" shall mean the Internal Revenue Service, or any successor
thereto.
"L/C Issuer" shall have the meaning assigned to it in Annex B.
"L/C Request" shall have the meaning assigned to it in Annex B
"L/C Sublimit" shall have the meaning assigned to it in Annex B.
"Lenders" shall mean GE Capital, the other Lenders named on the
signature page of the Agreement, and, if any such Lender shall decide to assign
all or any portion of the Obligations, such term shall include such Lender's
assignee.
"Letter of Credit Fee" has the meaning assigned to it in Annex B.
"Letter of Credit Obligations" shall mean all outstanding obligations
incurred by Agent and Lenders at the request of Borrower, whether direct or
indirect, contingent or otherwise, due or not due, in connection with the
issuance of a reimbursement agreement or guaranty by Agent with respect to any
Letter of Credit. The amount of such Letter of Credit Obligations shall equal
the maximum amount which may be payable by Agent or Lenders thereupon or
pursuant thereto.
"Letters of Credit" shall mean commercial or standby letters of credit
issued for the account of Borrower by any L/C Issuer, and bankers' acceptances
issued by Borrower, for which Agent and Lenders have incurred Letter of Credit
Obligations.
"Levered Permitted Joint Venture" shall mean any Permitted Joint
Venture designated by the Borrower as such at the time of the acquisition or
creation thereof in accordance with Section 6.1(b).
"LIBOR Business Day" shall mean a Business Day on which banks in the
city of London are generally open for interbank or foreign exchange
transactions.
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"LIBOR Loan" shall mean an aggregation of Advances, having the same
Interest Period that bear interest by reference to the LIBOR Rate.
"LIBOR Period" shall mean, with respect to any LIBOR Loan, each period
commencing on a LIBOR Business Day selected by Borrower pursuant to the
Agreement and ending one, two or three months thereafter, as selected by
Borrower's irrevocable notice to Agent as set forth in Section 1.5(e); provided
that the foregoing provision relating to LIBOR Periods is subject to the
following:
(a) if any LIBOR Period would otherwise end on a day that is not a
LIBOR Business Day, such LIBOR Period shall be extended to the next
succeeding LIBOR Business Day unless the result of such extension would be
to carry such LIBOR Period into another calendar month in which event such
LIBOR Period shall end on the immediately preceding LIBOR Business Day;
(b) any LIBOR Period that would otherwise extend beyond the
Commitment Termination Date shall end two (2) LIBOR Business Days prior to
such date;
(c) any LIBOR Period pertaining to a LIBOR Loan that begins on the
last LIBOR Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in the calendar month at the end of
such LIBOR Period) shall end on the last LIBOR Business Day of a calendar
month; and
(d) Borrower shall select LIBOR Periods so that there shall be no
more than seven (7) separate LIBOR Loans in existence at any one time.
"LIBOR Rate" shall mean for each LIBOR Period, a rate of interest
determined by Agent equal to:
(a) the offered rate for deposits in United States Dollars for the
applicable LIBOR Period which appears on Dow Jones Markets Page 3750 as of
11:00 a.m., London time, on the second full LIBOR Business Day next
preceding the first day of each LIBOR Period (unless such date is not a
Business Day, in which event the next succeeding Business Day will be
used); divided by
(b) a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day which is two (2) LIBOR Business Days
prior to the beginning of such LIBOR Period (including basic,
supplemental, marginal and emergency reserves under any regulations of the
Board of Governors of the Federal Reserve system or other governmental
authority having jurisdiction with respect thereto, as now and from time
to time in effect) for Eurocurrency funding (currently referred to as
"Eurocurrency liabilities" in Regulation D of such Board) which are
required to be maintained by a member bank of the Federal Reserve System
(such rate to be adjusted to the nearest one sixteenth of one percent
(1/16th of 1%) or, if there is not a nearest one sixteenth of one percent
(1/16th of 1%), to the next highest one sixteenth of one percent (1/16th
of 1%).
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If such interest rates shall cease to be available from Dow Jones
Markets, the LIBOR Rate shall be determined from such financial reporting
service or other information as shall be mutually acceptable to Agent and
Borrower.
"License" shall mean any Copyright License, Patent License, Trademark
License or other license of rights or interests now held or hereafter acquired
by any Credit Party.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security
interest under the Code or comparable law of any jurisdiction).
"Litigation" shall have the meaning assigned to it in Section 3.13.
"Loan" shall mean either or both of the Revolving Loan and the Swing
Line Loan.
"Loan Account" shall have the meaning assigned to it in Section 1.9.
"Loan Documents" shall mean the Agreement, the Notes, the Collateral
Documents, any agreement among the Borrower or the Borrower and the Credit
Parties and one or more Lenders that governs an obligation described in clause
(f) of the definition of Indebtedness which obligation is permitted pursuant to
Section 6.3(a)(iv), and all other agreements, instruments, documents and
certificates identified in the Closing Checklist executed and delivered to, or
in favor of, Agent and/or Lenders and including all other pledges, powers of
attorney, consents, assignments, contracts, notices, and all other written
matter whether heretofore, now or hereafter executed by or on behalf of any
Credit Party, or any employee of any Credit Party, and delivered to Agent or
any Lender in connection with the Agreement or the transactions contemplated
hereby. Any reference in the Agreement or any other Loan Document to a Loan
Document shall include all appendices, exhibits or schedules thereto, and all
amendments, restatements, supplements or other modifications thereto, and shall
refer to such Agreement as the same may be in effect at any and all times such
reference becomes operative.
"Managed Practice" shall mean any radiologist, professional
corporation, professional association, partnership or similar Person that, (i)
pursuant to a Service Agreement, provides radiology or other related
professional medical services at a medical office, clinic or other facility
operated by the Borrower or any of Borrower's Subsidiaries, or at a hospital or
hospital department with which the Borrower or any Subsidiary (or any Permitted
Joint Venture) has a service contract, and (ii) satisfies one or more of the
following criteria: (A) such Person is a Founding Radiology Practice; or (B)
such Person entered into
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such transaction pursuant to or in connection with a Practice Acquisition.
"Managed Practice Advance" shall mean, with respect to any Managed
Practice, on any day, the cumulative excess on such day of (i) amounts paid to
or for the benefit of such Managed Practice (other than amounts paid as part of
the initial acquisition consideration with respect to the assets of such
Managed Practice and amounts paid with respect to practice expenses which are
deducted from the net revenues of the Managed Practice prior to calculating
amounts payable in respect of practice compensation or management fees) over
(ii) accrued net revenues of such Managed Practice.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the business, assets, operations, prospects or financial or other condition of
the Borrower and its Restricted Subsidiaries taken as a whole or the industry
in which such Persons operate, (b) the business, assets, operations, prospects
or financial or other condition of the Borrower and its Subsidiaries taken as a
whole, or the industry in which they operate, (c) Borrower's ability to pay any
of the Loans or any of the other Obligations in accordance with the terms of
the Agreement, (d) the Collateral or Agent's Liens, on behalf of itself and
Lenders, on the Collateral or the priority of such Liens, or (e) Agent's or any
Lender's rights and remedies under the Agreement and the other Loan Documents.
"Material Managed Practice" shall mean any Managed Practice that
generates 10% or more of the revenues or the Adjusted EBITDA of the Borrower
and its Subsidiaries on a consolidated basis.
"Material Unrestricted Subsidiary" shall mean any Subsidiary that is
not a Restricted Subsidiary and that generates 5% or more of the revenue or
that holds 5% or more of the assets of the Borrower and its Subsidiaries on a
consolidated basis.
"Maximum Amount" shall mean, at any particular time, an amount equal
to the Revolving Loan Commitment of all Lenders.
"Medicaid" shall mean, collectively, the health care assistance
program established by Title XIX of the Social Security Act (42 U.S.C. Sections
1396 et seq.) and any statutes succeeding thereto, and all laws, rules,
regulations, manuals, orders, guidelines or requirements pertaining to such
program including (a) all federal statutes (whether set forth in Title XIX of
the Social Security Act or elsewhere) affecting such program; (b) all state
statutes and plans for medical assistance enacted in connection with such
program and federal rules and regulations promulgated in connection with such
program; and (c) all applicable provisions of all rules, regulations, manuals,
orders and administrative, reimbursement, guidelines and requirements of all
government authorities promulgated in connection with such program (whether or
not having the force of law), in each case as the same may be amended,
supplemented or otherwise modified from time to time.
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"Medicaid Certification" shall mean certification of a facility by
HCFA or a state agency or entity under contract with HCFA that such healthcare
facility fully complies with all the conditions of Medicaid.
"Medicaid Provider Agreement" shall mean an agreement entered into
between a state agency or other entity administering Medicaid in such state and
a health care facility or physician under which the health care facility or
physician agrees to provide services or merchandise for Medicaid patients.
"Medicare" shall mean, collectively, the health insurance program for
the aged and disabled established by Title XVIII of the Social Security Act (42
U.S.C. Sections 1395 et seq.) and any statutes succeeding thereto, and all
laws, rules, regulations, manuals, orders or guidelines pertaining to such
program including (a) all federal statutes (whether set forth in Title XVIII of
the Social Security Act or elsewhere) affecting such program; and (b) all
applicable provisions of all rules, regulations, manuals, orders and
administrative, reimbursement, guidelines and requirements of all governmental
authorities promulgated in connected with such program (whether or not having
the force of law), in each case as the same may be amended, supplemented or
otherwise modified from time to time.
"Medicare Certification" shall mean certification of a facility by
HCFA or a state agency or entity under contract with HCFA that such healthcare
facility fully complies with all conditions for such facility's participation
in Medicare.
"Medicare Provider Agreement" shall mean an agreement entered into
between a state agency or other entity administering Medicare in such state and
a health care facility or physician under which the health care facility or
physician agrees to provide services or merchandise for Medicare patients.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, and to which any Credit Party or ERISA Affiliate
is making, is obligated to make, has made or been obligated to make,
contributions on behalf of participants who are or were employed by any of
them.
"Net Borrowing Availability" shall mean as of any date of
determination, the lesser of (i) the Maximum Amount and (ii) the Revolving
Credit Availability, in each case less the sum of the Revolving Loan, the
Letter of Credit Obligations and the Swing Line Loan then outstanding.
"Notes" shall mean the Revolving Notes and the Swing Line Note.
"Notice of Conversion/Continuation" shall have the meaning assigned to
it in Section 1.5(e).
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"Notice of Revolving Credit Advance" shall have the meaning assigned
to it in Section 1.1(a).
"Obligations" shall mean all loans, advances, debts, liabilities and
obligations, for the performance of covenants, tasks or duties or for payment
of monetary amounts (whether or not such performance is then required or
contingent, or such amounts are liquidated or determinable) owing by any Credit
Party to Agent or any Lender, and all covenants and duties regarding such
amounts, of any kind or nature, present or future, whether or not evidenced by
any note, agreement or other instrument, arising under the Agreement or any of
the other Loan Documents. This term includes all principal, interest (including
all interest which accrues after the commencement of any case or proceeding in
bankruptcy after the insolvency of, or for the reorganization of any Credit
Party, whether or not allowed in such proceeding), Fees, Charges, expenses,
attorneys' fees and any other sum chargeable to any Credit Party under the
Agreement or any of the other Loan Documents.
"Patent License" shall mean rights under any written agreement now
owned or hereafter acquired by any Person granting any right with respect to
any invention on which a Patent is in existence.
"Patents" shall mean all of the following in which any Person now
holds or hereafter acquires any interest: (a) all letters patent of the United
States or any other country, all registrations and recordings thereof, and all
applications for letters patent of the United States or any other country,
including registrations, recordings and applications in the United States
Patent and Trademark Office or in any similar office or agency of the United
States, any State or Territory thereof, or any other country, and (b) all
reissues, continuations, continuations-in-part or extensions thereof.
"Payment Default" shall have the meaning assigned to such term in
Section 1.5(d).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.
"Permitted Acquisition" shall have the meaning assigned to it in
Section 6.1.
"Permitted Encumbrances" shall mean the following encumbrances: (a)
Liens for taxes or assessments or other governmental Charges not yet due and
payable; (b) pledges or deposits of money securing obligations under workmen's
compensation, unemployment insurance, social security or public liability laws
or similar legislation; (c) pledges or deposits of money securing bids,
tenders, contracts (other than contracts for the payment of money) or leases to
which any Credit Party is a party as lessee made in the ordinary course of
business; (d) deposits of money securing statutory obligations of any Credit
Party; (e) inchoate and unperfected workers', mechanics', landlords', or
similar liens arising in the ordinary course of business, so long as such Liens
attach only to Equipment, Fixtures and/or Real Estate; (f) deposits securing,
or in lieu
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of, surety, appeal or customs bonds in proceedings to which any Credit Party is
a party; (g) any attachment or judgment lien not constituting an Event of
Default under Section 8.1(j), so long as such Lien attaches only to Real
Estate; (h) zoning restrictions, easements, licenses, or other restrictions on
the use of any Real Estate or other minor irregularities in title (including
leasehold title) thereto, so long as the same do not materially impair the use,
value, or marketability of such Real Estate; (i) presently existing or
hereinafter created Liens in favor of Agent, on behalf of Lenders; and (j)
Liens expressly permitted under clauses (a)(ii) and (iii) of Section 6.7 of the
Agreement.
"Permitted Joint Venture" shall mean a Person: (i) the Stock of which
is held by the Borrower or its Subsidiaries and a hospital or other health care
organization not owned by the Borrower or one of its Subsidiaries, (ii) over
which the Borrower or one of its Subsidiaries has management control, either as
general partner, managing partner, by contract or as holder of the controlling
interest, provided that this clause (ii) shall not apply to MRI of Kansas, L.P.
or MRI of Kansas, Inc., (iii) the sole activity of which is to own, lease or
operate a radiological diagnostic, treatment or imaging center, device, or
department and/or facilities providing services ancillary to such center,
device or department, (iv) is subject to no provision in its organizational
documents or any contract to which it is a party that restricts the payment of
dividends from such entity to the Borrower or any Subsidiary thereof that owns
the Stock of such Permitted Joint Venture, provided that this restriction shall
not prohibit provisions contained in debt documents of Levered Permitted Joint
Ventures that restrict the payment of dividends to payments made with funds
remaining after the payment of all debt service on the debt, and (v) which
satisfies the requirements of Section 6.1(b), or (vi) in which the Borrower or
one of its Subsidiaries holds Stock, and which at the time of the creation or
the initial acquisition of the Stock thereof and at the time of each subsequent
investment, loan or advance thereto, in each case by the Borrower and/or one of
its Subsidiaries, complied with all of the requirements of clauses (i) through
(v) of this definition, but which subsequently fails to meet one or more of the
requirements of clauses (i) through (iv) of this definition, provided that (A)
the aggregate amount of the EBITDA (adjusted to reflect the pro forma effect of
certain events in the manner provided in clause (B) of paragraph (iv) of the
second sentence of Section 6.1(a)) of the Borrower and its consolidated
Subsidiaries for the four Fiscal Quarters most recently ended for which
financial statements are required to be delivered pursuant to Annex D, that is
attributable to such Person and all other Persons to which this clause (vi)
applies shall not exceed ten percent (10%) of the total EBITDA of the Borrower
and its Consolidated Subsidiaries for such period, or (B) the Requisite Lenders
shall not have notified Borrower, in the exercise of their sole discretion,
that such Person no longer constitutes a Permitted Joint Venture.
"Permitted Joint Venture Holding Company" shall mean a wholly-owned
Subsidiary of the Borrower or any Restricted Subsidiary that has no assets
other than (i) minute books, its corporate name and licenses, and other assets
of insignificant value arising incidentally to its existence and (ii) its Stock
and other permitted investments in a single Permitted Joint Venture and has no
Indebtedness or liabilities except (x) contingent liabilities in respect of
Indebtedness and liabilities of the Permitted Joint Venture in which it holds
Stock and (y)
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Indebtedness and liabilities to the Borrower and its Restricted Subsidiaries.
"Permitted Recourse Debt" shall have the meaning assigned to it in
Section 6.3(a).
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, public benefit corporation, other
entity or government (whether federal, state, county, city, municipal, local,
foreign, or otherwise, including any instrumentality, division, agency, body or
department thereof).
"Plan" shall mean, at any time, an employee benefit plan, as defined
in Section 3(3) of ERISA, which any Credit Party maintains, contributes to or
has an obligation to contribute to on behalf of participants who are or were
employed by any Credit Party.
"Pledge Agreements" shall mean the Borrower Pledge Agreement, the
Subsidiary Pledge Agreement and any other pledge agreement entered into after
the Closing Date by any Subsidiary (as required by the Agreement or any other
Loan Document).
"Practice Acquisition" shall mean a Permitted Acquisition that results
in the acquisition by the Borrower or any Restricted Subsidiary, of all or
substantially all of the non-medical assets of a physician or physician group
providing radiology or other professional services.
"Prior Lender" shall mean the lenders listed on Schedule A-19 hereto.
"Prior Lender Obligations" shall mean all obligations of any Credit
Party or any Founding Radiology Practice to be repaid on the Closing Date.
"Proceeds" shall mean "proceeds," as such term is defined in the Code
and, in any event, shall include (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Credit Party from time to time
with respect to any of the Collateral, (b) any and all payments (in any form
whatsoever) made or due and payable to any Credit Party from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Authority
(or any Person acting under color of governmental authority), (c) any claim of
Borrower or any of its Subsidiaries against third parties (i) for past, present
or future infringement of any Patent or Patent License, or (ii) for past,
present or future infringement or dilution of any Copyright, Copyright License,
Trademark or Trademark License, or for injury to the goodwill associated with
any Trademark or Trademark License, (d) any recoveries by any Credit Party
against third parties with respect to any litigation or dispute concerning any
of the Collateral, and (e) any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral, upon disposition or
otherwise.
"Pro Forma" means the unaudited consolidated and consolidating balance
sheet of Borrower and its Subsidiaries as of _________, 1997 after giving pro
forma effect to the Related Transactions.
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"Projections" means Borrower's forecasted consolidated: (a) balance
sheets; (b) profit and loss statements; (c) cash flow statements; and (d)
capitalization statements, all consistent with the historical Financial
Statements of Borrower, together with appropriate supporting details and a
statement of underlying assumptions.
"Pro Rata Share" shall mean with respect to all matters relating to
any Lender the percentage obtained by dividing (i) the Revolving Loan
Commitment of that Lender by (ii) the aggregate Revolving Loan Commitments of
all Lenders as any percentage may be adjusted by assignments permitted pursuant
to Section 9.1.
"Qualified Plan" shall mean a Plan which is intended to be
tax-qualified under Section 401(a) of the IRC.
"Real Estate" shall have the meaning assigned to it in Section 3.6.
"Refinancing" shall mean the repayment in full by Borrower of the
Prior Lender Obligations on the Closing Date except as set forth on Schedule
6.3.
"Refunded Swing Line Loan" shall have the meaning assigned to it in
Section 1.1(c)(iii).
"Related Transactions" means each borrowing under the Revolving Loan
Commitments on the Closing Date, the Acquisition, the Refinancing, the IPO, the
payment of all fees, costs and expenses associated with all of the foregoing
and the execution and delivery of all of the Related Transactions Documents.
"Related Transactions Documents" shall mean the Loan Documents, the
Disclosure Documents, any agreement executed with any underwriter for the
purchase or sale of securities in connection with the IPO, and the Acquisition
Agreements.
"Release" shall mean any release, threatened release, spill, emission,
leaking, pumping, pouring, emitting, emptying, escape, injection, deposit,
disposal, discharge, dispersal, dumping, leaching or migration of Hazardous
Material in the indoor or outdoor environment, including the movement of
Hazardous Material through or in the air, soil, surface water, ground water or
property.
"Repurchase Program" shall mean purchases by the Borrower of shares of
its common stock in the public market through one or more broker-dealers
pursuant to a stock repurchase program, executed in purchasing cycles not to
exceed three weeks each.
"Requisite Lenders" shall mean (a) Lenders having more than fifty-one
percent (51%) of the Commitments of all Lenders, or (b) if the Commitments have
been terminated, more than fifty-one percent (51%) of the aggregate outstanding
amount of the Loans (with the Swing Line Loan being attributed to the Lender
making such loan) and Letter of Credit Obligations.
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"Restricted Payment" shall mean (a) the declaration or payment of any
dividend or the incurrence of any liability to make any other payment or
distribution of cash or other property or assets (other than in stock of the
same class as the Stock with respect to which such dividend or distribution is
being made) in respect of a Person's Stock, (b) any payment on account of the
purchase, redemption, defeasance, sinking fund or other retirement of a
Person's Stock or any other payment or distribution made in respect thereof,
either directly or indirectly, (c) any payment or prepayment of principal of,
premium, if any, or interest, fees or other charges on or with respect to, and
any redemption, purchase, retirement, defeasance, sinking fund or similar
payment and any claim for rescission with respect to, any Subordinated Debt;
(d) any payment made to redeem, purchase, repurchase or retire, or to obtain
the surrender of, any outstanding warrants, options or other rights to acquire
Stock of such Person now or hereafter outstanding; (e) any payment of a claim
for the rescission of the purchase or sale of, or for material damages arising
from the purchase or sale of, any shares of such Person's Stock or of a claim
for reimbursement, indemnification or contribution arising out of or related to
any such claim for damages or rescission, except to the extent covered by
insurance; and (f) any payment, loan, contribution, or other transfer of funds
or other property to any Stockholder of such Person in its capacity as a
Stockholder.
"Restricted Subsidiary" shall mean any Subsidiary of the Borrower
other than an Unrestricted Subsidiary.
"Retiree Welfare Plan" shall mean, at any time, a Plan that is a
"welfare plan" as defined in Section 3(2) of ERISA, that provides for
continuing coverage or benefits for any participant or any beneficiary of a
participant after such participant's termination of employment, other than
continuation coverage provided pursuant to Section 4980B of the IRC and at the
sole expense of the participant or the beneficiary of the participant.
"Revolving Credit Advance" shall have the meaning assigned to it in
Section 1.1(a).
"Revolving Credit Availability" shall mean an amount equal to three
(3) times EBITDA of the Borrower and its Subsidiaries as calculated for the
most recently ended twelve (12) month period for which financial statements are
required to be delivered pursuant to paragraph (a)(i) of Annex D, provided that
EBITDA for purposes of determining the Revolving Credit Availability will be
computed to include, on a pro forma basis, the EBITDA of the Borrower and its
Subsidiaries attributable to any entity the stock or assets of which were
acquired by the Borrower or any Subsidiary of the Borrower, or which came under
the management of the Borrower or any Subsidiary of the Borrower, subsequent to
the first day of such twelve (12) month period or are to be acquired with the
proceeds of a Revolving Credit Advance, as if such entity had been owned and/or
managed by the Borrower or such Subsidiary during such period which computation
shall be made for such period as provided in paragraph (d)(i) of Annex E, and,
provided further that EBITDA for purposes of determining the Revolving Credit
Availability will be computed to exclude the EBITDA of the Borrower and its
Subsidiaries attributable to any entity 100% of the stock or substantially all
of the assets of which were disposed of by the Borrower or any
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Subsidiary of the Borrower or attributable to any Managed Practice the Service
Agreement with respect to which was terminated and not replaced with a Service
Agreement with the same entity generating substantially the same EBITDA,
subsequent to the first day of such twelve (12) month period.
"Revolving Loan" shall mean, at any time, the sum of (i) the aggregate
amount of Revolving Credit Advances outstanding to Borrower plus (ii) the
aggregate Letter of Credit Obligations incurred on behalf of Borrower.
"Revolving Loan Commitment" shall mean (a) as to any Lender, the
commitment of such Lender to make Revolving Credit Advances (including without
duplication Swing Line Advances) and/or incur Letter of Credit Obligations as
set forth in the signature page to the Agreement or in the most recent
Assignment Agreement executed by such Lender and (b) as to all Lenders, the
aggregate commitment of all Lenders to make Revolving Credit Advances
(including without duplication Swing Line Advances) and/or incur Letter of
Credit Obligations, which aggregate commitment shall be One Hundred Fifteen
Million Dollars ($115,000,000.00) on the Closing Date, as such amount may be
adjusted, if at all, from time to time in accordance with the Agreement.
"Revolving Note" shall have the meaning assigned to it in Section
1.1(b).
"Senior Debt" shall mean the Obligations and, (i) in the case of the
Borrower and its Restricted Subsidiaries, all other Indebtedness of the
Borrower and its Restricted Subsidiaries other than the Subordinated Debt, and,
(ii) in the case of the Borrower and its consolidated Subsidiaries, all other
Indebtedness of the Borrower and its consolidated Subsidiaries other than the
Subordinated Debt.
"Senior Debt Leverage Ratio" shall mean, with respect to any test
period, (a) in the case of the Borrower and its Restricted Subsidiaries, the
ratio of: (i) the amount of Senior Debt of the Borrower and its Restricted
Subsidiaries outstanding on the last day of such period, to (ii) EBITDA of the
Borrower and its Restricted Subsidiaries for four (4) Fiscal Quarters then
ended, and (b) in the case of the Borrower and its consolidated Subsidiaries,
the ratio of: (i) the amount of Senior Debt of the Borrower and its
consolidated Subsidiaries outstanding on the last day of such period, to (ii)
EBITDA of the Borrower and its consolidated Subsidiaries for four (4) Fiscal
Quarters then ended.
"Service Agreement" shall mean an agreement between the Borrower or
one or more of Borrower's Subsidiaries and one or more Managed Practices (or a
radiologist, professional corporation, professional association, partnership,
or similar Person that would constitute a "Managed Practice," but for its
failure to satisfy one of the two criteria described in clause (ii) of the
definition of "Managed Practice") pursuant to which the Borrower or such
Subsidiaries agree to provide or arrange for comprehensive management,
administrative and other non-medical support services to such Managed
Practice(s) or other Person(s) in exchange for the payment by the Managed
Practice or such other Person to the Borrower or such Subsidiary of a service
fee.
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"Solvent" shall mean, with respect to any Person on a particular date,
that on such date (a) the fair value of the property of such Person is greater
than the total amount of liabilities, including contingent liabilities, of such
Person; (b) the present fair salable value of the assets of such Person is not
less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured; (c) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature; and (d) such Person is not engaged in a business or transaction, and is
not about to engage in a business or transaction, for which such Person's
property would constitute an unreasonably small capital. The amount of
contingent liabilities (such as litigation, guarantees and pension plan
liabilities) at any time shall be computed as the amount which, in light of all
the facts and circumstances existing at the time, represents the amount which
can be reasonably be expected to become an actual or matured liability.
"Stock" shall mean all shares, options, warrants, general or limited
partnership interests, membership interests or other equivalents (regardless of
how designated) of or in a corporation, partnership or equivalent entity
whether voting or nonvoting, including common stock, preferred stock or any
other "equity security" (as such term is defined in Rule 3a11-1 of the General
Rules and Regulations promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended).
"Subordinated Debt" shall mean any Indebtedness of any Credit Party
subordinated to the Obligations in a manner and form satisfactory to Agent and
Requisite Lenders in their good faith discretion, as to right and time of
payment and as to any other rights and remedies thereunder.
"Subsidiary" shall mean, with respect to any Person, (a) any
corporation of which an aggregate of more than fifty percent (50%) of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors of such corporation (irrespective of whether, at the time, Stock
of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, owned legally or beneficially by such Person and/or one
or more Subsidiaries of such Person, or with respect to which any such Person
has the right to vote or designate the vote of fifty percent (50%) or more of
such Stock whether by proxy, agreement, operation of law or otherwise, and (b)
any partnership or limited liability company in which such Person and/or one or
more Subsidiaries of such Person shall have an interest (whether in the form of
voting or participation in profits or capital contribution) of more than fifty
percent (50%).
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"Subsidiary Guaranty" shall mean the Subsidiary Guaranty of even date
herewith executed by each Subsidiary of Borrower, other than a Permitted Joint
Venture, in favor of Agent, on behalf of itself and Lenders.
"Subsidiary Pledge and Security Agreement" shall mean the Pledge and
Security Agreement of even date herewith executed by each Subsidiary of
Borrower, other than a Permitted Joint Venture, in favor of Agent, on behalf of
itself and Lenders, pledging all Stock of its Subsidiaries, if any, and all
Intercompany Notes owing to or held by it and granting a security interest in
all the Service Agreements to which it is a party.
"Supermajority Lenders" shall mean (a) Lenders having more than
sixty-six and two-thirds percent (66 2/3%) of the Commitments of all Lenders,
or (b) if the Commitments have been terminated, more than sixty-six and
two-thirds percent (66 2/3%) of the aggregate outstanding amount of the Loans
(with the Swing Line Loan being attributed to the Lender making such loan) and
Letter of Credit Obligations.
"Swing Line Advance" has the meaning assigned to it in Section
1.1(c)(i).
"Swing Line Availability" has the meaning assigned to it in Section
1.1(c)(i).
"Swing Line Commitment" shall mean, as to the Swing Line Lender, the
commitment of the Swing Line Lender to make Swing Line Loans as set forth on
the signature page to the Agreement, which commitment constitutes a subfacility
of the Revolving Loan Commitment of the Swing Line Lender.
"Swing Line Lender" shall mean GE Capital.
"Swing Line Loan" shall mean at any time, the aggregate amount of
Swing Line Advances outstanding to Borrower.
"Swing Line Loan Participation Certificate" shall mean a certificate
delivered pursuant to Section 1.1(c)(iv).
"Swing Line Note" has the meaning assigned to it in Section
1.1(c)(ii).
"Taxes" shall mean taxes, levies, imposts, deductions, Charges or
withholdings, and all liabilities with respect thereto, excluding taxes imposed
on or measured by the net income or revenue of Agent or a Lender by the
jurisdictions under the laws of which Agent and Lenders are organized or
maintain their principal office, or any political subdivision thereof.
"Termination Date" shall mean the date on which the Loans have been
indefeasibly repaid in full and all other Obligations under the Agreement and
the other Loan Documents have been completely discharged and Letter of Credit
Obligations have been cash collateralized, canceled or backed by stand-by
letters of credit in accordance with Annex B, and Borrower shall not have any
further right to borrow any monies under the Agreement.
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"Third Party Payor" shall mean any governmental entity, insurance
company, health maintenance organization, professional provider organization or
similar entity that is obligated to make payments on behalf of any Account
Debtor of any Person.
"Title IV Plan" shall mean an employee pension benefit plan, as
defined in Section 3 (2) of ERISA (other than a Multiemployer Plan), which is
covered by Title IV of ERISA, and which any Credit Party or ERISA Affiliate
maintains, contributes to or has an obligation to contribute to on behalf of
participants who are or were employed by any of them.
"Total Debt Leverage Ratio" shall mean, with respect to any test
period, (a) in the case of the Borrower and its Restricted Subsidiaries, the
ratio of: (i) the amount of Indebtedness of Borrower and its Restricted
Subsidiaries outstanding on the last day of such period to (ii) EBITDA of
Borrower and its Restricted Subsidiaries for the four (4) Fiscal Quarters then
ended, and (b) in the case of the Borrower and its consolidated Subsidiaries,
the ratio of: (i) the amount of Indebtedness of Borrower and its consolidated
Subsidiaries outstanding on the last day of such period to (ii) EBITDA of
Borrower and its consolidated Subsidiaries for the four (4) Fiscal Quarters
then ended.
"Trademark License" shall mean rights under any written agreement now
owned or hereafter acquired by any Credit Party granting any right to use any
Trademark.
"Trademarks" shall mean all of the following now owned or hereafter
acquired by any Person: (a) all trademarks, trade names, corporate names,
business names, trade styles, service marks, logos, other source or business
identifiers, prints and labels on which any of the foregoing have appeared or
appear, designs and general intangibles of like nature (whether registered or
unregistered), now owned or existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all applications in connection
therewith, including registrations, recordings and applications in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, any state or territory thereof, or any other country or any
political subdivision thereof; (b) all reissues, extensions or renewals
thereof; and (c) all goodwill associated with or symbolized by any of the
foregoing.
"Unfunded Pension Liability" shall mean, at any time, the aggregate
amount, if any, of the sum of (a) the amount by which the present value of all
accrued benefits under each Title IV Plan exceeds the fair market value of all
assets of such Title IV Plan allocable to such benefits in accordance with
Title IV of ERISA, all determined as of the most recent valuation date for each
such Title IV Plan using the actuarial assumptions for funding purposes in
effect under such Title IV Plan, and (b) for a period of five (5) years
following a transaction which might reasonably be expected to be covered by
Section 4069 of ERISA, the liabilities (whether or not accrued) that could be
avoided by any Credit Party or any ERISA Affiliate as a result of such
transaction.
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"Unrestricted Subsidiary" shall mean any Permitted Joint Venture and
any Permitted Joint Venture Holding Company.
All other undefined terms contained in any of the Loan Documents
shall, unless the context indicates otherwise, have the meanings provided for
by the Code as in effect in the State of New York to the extent the same are
used or defined therein. Unless otherwise specified, references in the
Agreement or any of the Appendices to a Section, subsection or clause refer to
such Section, subsection or clause as contained in the Agreement. The words
"herein," "hereof" and "hereunder" and other words of similar import refer to
the Agreement as a whole, including all Annexes, Exhibits and Schedules, as the
same may from time to time be amended, restated, modified or supplemented, and
not to any particular section, subsection or clause contained in the Agreement
or any such Annex, Exhibit or Schedule.
Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, feminine and neuter genders. The words "including", "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to Persons include their respective successors and assigns (to the
extent and only to the extent permitted by the Loan Documents) or, in the case
of governmental Persons, Persons, if any, succeeding to the relevant functions
of such Persons; and all references to statutes and related regulations shall
include any amendments of the same and any successor statutes and regulations.
Whenever any provision in any Loan Document refers to the knowledge (or an
analogous phrase) of any Credit Party, such words are intended to signify that
such Credit Party has actual knowledge or awareness of a particular fact or
circumstance.
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ANNEX B (Section 1.2)
to
CREDIT AGREEMENT
LETTERS OF CREDIT
(a) ISSUANCE. Subject to the terms and conditions of the Agreement,
Agent and Lenders agree to incur, from time to time prior to the Commitment
Termination Date, upon the request of Borrower and for Borrower's account,
Letter of Credit Obligations by causing Letters of Credit to be issued (by a
bank or other legally authorized Person selected by or acceptable to Agent in
its sole discretion (each, an "L/C Issuer")) for Borrower's account and
guaranteed by Agent; provided, however, that if the L/C Issuer is a Lender,
then such Letters of Credit shall not be guaranteed by Agent but rather each
Lender shall, subject to the terms and conditions hereinafter set forth,
purchase (or be deemed to have purchased) risk participations in all such
Letters of Credit issued with the written consent of Agent, as more fully
described in paragraph (b)(ii) below. The aggregate amount of all such Letter
of Credit Obligations shall not at any time exceed the least of (i) Ten Million
Dollars ($10,000,000.00) (the "L/C Sublimit"), (ii) the Maximum Amount less the
aggregate outstanding principal balance of the Revolving Credit Advances and
the Swing Line Loan, and (iii) the Revolving Credit Availability less the
aggregate outstanding principal balance of the Revolving Credit Advances and
the Swing Line Loan. No such Letter of Credit shall have an expiry date which
is more than one year following the date of issuance thereof, and neither Agent
nor Lenders shall be under any obligation to incur Letter of Credit Obligations
in respect of, or purchase risk participations in, any Letter of Credit having
an expiry date which is later than the Commitment Termination Date.
(b) (i) ADVANCES AUTOMATIC; PARTICIPATIONS. In the event that Agent or
any Lender shall make any payment on or pursuant to any Letter of Credit
Obligation, such payment shall then be deemed automatically to constitute a
Revolving Credit Advance under Section 1.1(a) of the Agreement regardless of
whether a Default or Event of Default shall have occurred and be continuing and
notwithstanding Borrower's failure to satisfy the conditions precedent set
forth in Section 2, and each Lender shall be obligated to pay its Pro Rata
Share thereof in accordance with the Agreement. The failure of any Lender to
make available to Agent for Agent's own account its Pro Rata Share of any such
Revolving Credit Advance or payment by Agent under or in respect of a Letter of
Credit shall not relieve any other Lender of its obligation hereunder to make
available to Agent its Pro Rata Share thereof, but no Lender shall be
responsible for the failure of any other Lender to make available such other
Lender's Pro Rata Share of any such payment.
(ii) If it shall be illegal or unlawful for Borrower to incur
Revolving Credit Advances as contemplated by paragraph (b)(i) above
because of an Event of Default described in Section 8.1(h) or (i) or
otherwise or if it shall be illegal or unlawful for any Lender to be
deemed to have assumed a ratable share of the reimbursement obligations
owed to an L/C Issuer, or if the L/C Issuer is a Lender, then (i)
immediately and without further action whatsoever, each Lender shall be
deemed to have irrevocably
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and unconditionally purchased from Agent (or such L/C Issuer, as the case
may be) an undivided interest and participation equal to such Lender's Pro
Rata Share (based on the Revolving Loan Commitments) of the Letter of
Credit Obligations in respect of all Letters of Credit then outstanding
and (ii) thereafter, immediately upon issuance of any Letter of Credit,
each Lender shall be deemed to have irrevocably and unconditionally
purchased from Agent (or such L/C Issuer, as the case may be) an undivided
interest and participation in such Lender's Pro Rata Share (based on the
Revolving Loan Commitments) of the Letter of Credit Obligations with
respect to such Letter of Credit on the date of such issuance. Each Lender
shall fund its participation in all payments or disbursements made under
the Letters of Credit in the same manner as provided in the Agreement with
respect to Revolving Credit Advances.
(c) CASH COLLATERAL. If Borrower is required to provide cash
collateral for any Letter of Credit Obligations pursuant to the Agreement prior
to the Commitment Termination Date, Borrower will pay to Agent for the benefit
of Lenders cash or cash equivalents acceptable to Agent ("Cash Equivalents") in
an amount equal to 105% of the maximum amount then available to be drawn under
each applicable Letter of Credit outstanding. Such funds or Cash Equivalents
shall be held by Agent in a cash collateral account (the "Cash Collateral
Account") maintained at a bank or financial institution acceptable to Agent.
The Cash Collateral Account shall be in the name of Borrower and shall be
pledged to, and subject to the control of, Agent, for the benefit of Agent and
Lenders, in a manner satisfactory to Agent. Borrower hereby pledges and grants
to Agent, on behalf of Lenders, a security interest in all such funds and Cash
Equivalents held in the Cash Collateral Account from time to time and all
proceeds thereof, as security for the payment of all amounts due in respect of
the Letter of Credit Obligations and other Obligations, whether or not then
due. The Agreement, including this Annex B, shall constitute a security
agreement under applicable law.
If any Letter of Credit Obligations, whether or not then due and
payable, shall for any reason be outstanding on the Commitment Termination
Date, Borrower shall either (i) provide cash collateral therefor in the manner
described above, or (ii) cause all such Letters of Credit and guaranties
thereof to be canceled and returned, or (iii) deliver a stand-by letter (or
letters) of credit in guarantee of such Letter of Credit Obligations, which
stand-by letter (or letters) of credit shall be of like tenor and duration as,
and in an amount equal to 105% of the aggregate maximum amount then available
to be drawn under, the Letters of Credit to which such outstanding Letter of
Credit Obligations relate and shall be issued by a Person, and shall be subject
to such terms and conditions, as are be satisfactory to Agent in its sole
discretion.
From time to time after funds are deposited in the Cash Collateral
Account by Borrower, whether before or after the Commitment Termination Date,
Agent may apply such funds or Cash Equivalents then held in the Cash Collateral
Account to the payment of any amounts, in such order as Agent may elect, as
shall be or shall become due and payable by Borrower to Lenders with respect to
such Letter of Credit Obligations of Borrower and, upon the satisfaction in
full of all Letter of Credit
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Obligations of Borrower, to any other Obligations then due and payable.
Neither Borrower nor any Person claiming on behalf of or through
Borrower shall have any right to withdraw any of the funds or Cash Equivalents
held in the Cash Collateral Account, except that upon the termination of all
Letter of Credit Obligations and the payment of all amounts payable by Borrower
to Lenders in respect thereof, any funds remaining in the Cash Collateral
Account shall be applied to other Obligations when due and owing and upon
payment in full of such Obligations, any remaining amount shall be paid to
Borrower or as otherwise required by law; provided that, prior to the
Commitment Termination Date and absent the occurrence and continuation of an
Event of Default, any amounts remaining in the Cash Collateral account upon the
termination of all Letter of Credit Obligations and the payment of all amounts
payable by Borrower to Lenders in respect thereof shall be returned to the
Borrower upon the Borrower's request therefor.
(d) FEES AND EXPENSES. Borrower agrees to pay to Agent for the benefit
of Lenders, as compensation to such Lenders for Letter of Credit Obligations
incurred hereunder, (x) all costs and expenses incurred by Agent or any Lender
on account of such Letter of Credit Obligations, and (y) for each month during
which any Letter of Credit Obligation shall remain outstanding, a fee (the
"Letter of Credit Fee") in an amount equal to the Applicable L/C Margin from
time to time in effect multiplied by the daily average the amount undrawn under
the Letter of Credit for such month. The Letter of Credit Fee shall be paid to
Agent for the benefit of the Lenders in arrears, on the first day of each
month. In addition, Borrower shall pay to any L/C Issuer, on demand, such fees
(including all per annum fees), charges and expenses of such L/C Issuer in
respect of the issuance, negotiation, acceptance, amendment, transfer and
payment of such Letter of Credit or otherwise payable pursuant to the
application and related documentation under which such Letter of Credit is
issued.
(e) REQUEST FOR INCURRENCE OF LETTER OF CREDIT OBLIGATIONS. Borrower
shall give Agent at least five (5) Business Days prior written notice (the "L/C
Request") requesting the incurrence of any Letter of Credit Obligation,
specifying the date such Letter of Credit Obligation is to be incurred,
identifying the beneficiary to which such Letter of Credit Obligation relates
and describing the nature of the transactions proposed to be supported thereby.
The notice shall be accompanied by the form of the Letter of Credit (which
shall be acceptable to the L/C Issuer) to be guarantied. Notwithstanding
anything contained herein to the contrary, Letter of Credit applications by
Borrower and approvals by Agent may be made and transmitted pursuant to
electronic codes and security measures mutually agreed upon and established by
and among Borrower, Agent and the L/C Issuer.
(f) OBLIGATION ABSOLUTE. The obligation of Borrower to reimburse Agent
and Lenders for payments made with respect to any Letter of Credit Obligation
shall be absolute, unconditional and irrevocable, without necessity of
presentment, demand, protest or other formalities, and the obligations of each
Lender to make payments to Agent with respect to Letters of Credit shall be
unconditional and irrevocable. Such obligations of Borrower
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and Lenders shall be paid strictly in accordance with the terms hereof under
all circumstances including the following circumstances:
(i) any lack of validity or enforceability of any Letter of Credit or
the Agreement or the other Loan Documents or any other agreement;
(ii) the existence of any claim, set-off, defense or other right
which Borrower or any of its Affiliates or any Lender may at any time have
against a beneficiary or any transferee of any Letter of Credit (or any
Persons or entities for whom any such transferee may be acting), Agent,
any Lender, or any other Person, whether in connection with the Agreement,
the Letter of Credit, the transactions contemplated herein or therein or
any unrelated transaction (including any underlying transaction between
Borrower or any of its Affiliates and the beneficiary for which the Letter
of Credit was procured);
(iii) any draft, demand, certificate or any other document presented
under any Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) payment by Agent (except as otherwise expressly provided in
paragraph (g)(ii)(C) below) or any L/C Issuer under any Letter of Credit
or guaranty thereof against presentation of a demand, draft or certificate
or other document which does not comply with the terms of such Letter of
Credit or such guaranty;
(v) any other circumstance or happening whatsoever, which is similar
to any of the foregoing; or
(vi) the fact that a Default or an Event of Default shall have
occurred and be continuing.
(g) Indemnification; Nature of Lenders' Duties. (i) In addition to
amounts payable as elsewhere provided in the Agreement, Borrower hereby agrees
to pay and to protect, indemnify, and save harmless Agent and each Lender from
and against any and all claims, demands, liabilities, damages, losses, costs,
charges and expenses (including attorneys' fees and allocated costs of internal
counsel) which Agent or any Lender may incur or be subject to as a consequence,
direct or indirect, of (A) the issuance of any Letter of Credit or guaranty
thereof, or (B) the failure of Agent or any Lender seeking indemnification or
of any L/C Issuer to honor a demand for payment under any Letter of Credit or
guaranty thereof as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto government or
Governmental Authority, in each case other than to the extent resulting from
the gross negligence or willful misconduct of Agent or such Lender (as finally
determined by a court of competent jurisdiction).
(ii) As between Agent and any Lender and Borrower, Borrower assumes
all risks of the acts and omissions of, or misuse of any Letter of Credit
by beneficiaries of any Letter of Credit. In furtherance and not in
limitation of the foregoing, to the fullest extent permitted by law
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neither Agent nor any Lender shall be responsible: (A) for the form,
validity, sufficiency, accuracy, genuineness or legal effect of any
document issued by any party in connection with the application for and
issuance of any Letter of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or
forged; (B) for the validity or sufficiency of any instrument transferring
or assigning or purporting to transfer or assign any Letter of Credit or
the rights or benefits thereunder or proceeds thereof, in whole or in
part, which may prove to be invalid or ineffective for any reason other
than, only in the case of a purported transfer of the entire Letter of
Credit and not a right to draw or receive payment thereunder, the fact
that the instrument purports to transfer a Letter of Credit which states
on its face that it is non-transferable; (C) for failure of the
beneficiary of any Letter of Credit to comply fully with conditions
required in order to demand payment under such Letter of Credit; provided
that, in the case of any payment by Agent or L/C Issuer under any Letter
of Credit or guaranty thereof, Agent or such L/C Issuer, as the case may
be, shall be liable to the extent such payment was made as a result of its
gross negligence or willful misconduct (as finally determined by a court
of competent jurisdiction) in determining that the demand for payment
under such Letter of Credit or guaranty thereof complies on its face with
any applicable requirements for a demand for payment under such Letter of
Credit or guaranty thereof; (D) for errors, omissions, interruptions or
delays in transmission or delivery of any messages, by mail, cable,
telegraph, telex or otherwise, whether or not they be in cipher; (E) for
errors in interpretation of technical terms; (F) for any loss or delay in
the transmission or otherwise of any document required in order to make a
payment under any Letter of Credit or guaranty thereof or of the proceeds
thereof; (G) for the credit of the proceeds of any drawing under any
Letter of Credit or guaranty thereof; and (H) for any consequences arising
from causes beyond the control of Agent or any Lender. None of the above
shall affect, impair, or prevent the vesting of any of Agent's or any
Lender's rights or powers hereunder or under the Agreement.
(iii) Nothing contained herein shall be deemed to limit or to expand
any waivers, covenants or indemnities made by Borrower in favor of any L/C
Issuer in any letter of credit application, reimbursement agreement or
similar document, instrument or agreement between Borrower and such L/C
Issuer.
(iv) Nothing contained herein shall waive, release or limit the
Borrower's rights, claims and remedies as against any beneficiary of a
Letter of Credit.
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ANNEX C (Section 2.1(a))
to
CREDIT AGREEMENT
SCHEDULE OF ADDITIONAL CLOSING DOCUMENTS
In addition to, and not in limitation of, the conditions described in Section
2.1 of the Agreement, pursuant to Section 2.1(a), the following items must be
received by Agent in form and substance satisfactory to Agent on or prior to
the Closing Date (each capitalized term used but not otherwise defined herein
shall have the meaning ascribed thereto in Annex A to the Agreement):
A. APPENDICES. All Appendices to the Agreement, in form and substance
satisfactory to Agent.
B. REVOLVING NOTES AND SWING LINE NOTE. Duly executed originals of the
Revolving Notes and Swing Line Note for each applicable Lender, dated the
Closing Date.
C. INSURANCE. Satisfactory evidence that the insurance policies
required by Section 5.4 are in full force and effect, together with appropriate
evidence showing loss payable and/or additional insured clauses or
endorsements, as requested by Agent, in favor of Agent, on behalf of Lenders.
D. SECURITY INTERESTS AND CODE FILINGS. Evidence satisfactory to Agent
that Agent (for the benefit of itself and Lenders) has a valid and perfected
first priority security interest in the Collateral, including (i) such
documents duly executed by each Credit Party (including financing statements
under the Code and other applicable documents under the laws of any
jurisdiction with respect to the perfection of Liens) as Agent may request in
order to perfect its security interests in the Collateral and (ii) copies of
Code search reports listing all effective financing statements that name any
Borrower or any Subsidiary as debtor, together with copies of such financing
statements, none of which shall cover the Collateral, except for those relating
to the Prior Lender Obligations (all of which shall be terminated on the
Closing Date).
E. PAYOFF LETTER; TERMINATION STATEMENTS. Copies of a duly executed
payoff letter, in form and substance satisfactory to Agent, by and between all
parties to the Prior Lender loan documents evidencing repayment in full of all
Prior Lender Obligations, together with (a) UCC-3 or other appropriate
termination statements, in form and substance satisfactory to Agent, manually
signed by the Prior Lender releasing all liens of Prior Lender upon any of the
personal property of each Credit Party or, in lieu thereof, a description of
all financing statements for which termination statements are required,
together with the commitment of the Prior Lender to execute and deliver to
Agent all necessary termination statements, promptly after receiving the
required payment specified in such Prior Lender's executed payoff letter, and
(b)
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termination of all blocked account agreements, bank agency agreements or other
similar agreements or arrangements or arrangements in favor of Prior Lender or
relating to the Prior Lender Obligations.
F. SUBSIDIARY GUARANTIES. Guaranties executed by and each direct and
indirect Subsidiary of Borrower, other than a Permitted Joint Venture, in favor
of Agent, for the benefit of Lenders.
G. INITIAL NOTICE OF REVOLVING CREDIT ADVANCE. Duly executed originals
of a Notice of Revolving Credit Advance, dated the Closing Date, with respect
to the initial Revolving Credit Advance to be requested by Borrower on the
Closing Date.
H. LETTER OF DIRECTION. Duly executed originals of a letter of
direction from Borrower addressed to Agent, on behalf of itself and Lenders,
with respect to the disbursement on the Closing Date of the proceeds of the
initial Revolving Credit Advance.
I. CHARTER AND GOOD STANDING. For Borrower and each of its
Subsidiaries, such Person's (a) charter and all amendments thereto, (b) good
standing certificates (including verification of tax status) in its state of
incorporation and (c) good standing certificates (including verification of tax
status) and certificates of qualification to conduct business in each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification, each dated a recent date prior to the
Closing Date and certified by the applicable Secretary of State or other
authorized Governmental Authority.
J. BYLAWS AND RESOLUTIONS. For Borrower and each of its Subsidiaries,
(a) such Person's bylaws, together with all amendments thereto and (b)
resolutions of such Person's Board of Directors (or other governing body),
approving and authorizing the execution, delivery and performance of the Loan
Documents to which such Person is a party and the transactions to be
consummated in connection therewith, each certified as of the Closing Date by
such Person's corporate secretary or an assistant secretary as being in full
force and effect without any modification or amendment.
K. INCUMBENCY CERTIFICATES. For Borrower and each of its Subsidiaries,
signature and incumbency certificates of the officers of each such Person
executing any of the Loan Documents, certified as of the Closing Date by such
Person's corporate secretary or an assistant secretary as being true, accurate,
correct and complete.
L. Opinions of Counsel. Duly executed originals of opinions of
McDermott, Will & Emery, Brobeck, Phleger & Harrison LLP, and/or Haynes and
Boone, L.L.P. counsel for Borrower and its Subsidiaries, together with any
local counsel opinions requested by Agent, each in form and substance
satisfactory to the Lenders, dated the Closing Date, and each accompanied by a
letter addressed to such counsel from such Credit Parties, authorizing and
directing such counsel to address its opinion to Agent, on behalf of Lenders,
and to include in such opinion or in a letter accompanying such opinion an
express statement to the effect that Agent and Lenders are authorized to rely
on such opinion.
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M. PLEDGE AGREEMENTS. Duly executed originals of each of the Pledge
Agreements accompanied by (as applicable) (a) share certificates representing
all of the outstanding Stock being pledged pursuant to such Pledge Agreement
and stock powers for such share certificates executed in blank and (b) the
original Intercompany Notes and other instruments evidencing Indebtedness being
pledged pursuant to such Pledge Agreement, duly endorsed in blank.
N. ACCOUNTANTS' LETTER. A letter authorizing the independent certified
public accountants of Borrower and its Subsidiaries to communicate with Agent
and Lenders in accordance with Section 4.2.
O. FEE LETTER. Duly executed originals of the GE Capital Fee Letter.
P. OFFICER'S CERTIFICATE. Agent shall have received duly executed
originals of a certificate of the Chief Executive Officer and Chief Financial
Officer of Borrower, dated the Closing Date, stating that, since __________,
19__ (a) no event or condition has occurred or is existing which could
reasonably be expected to have a Material Adverse Effect; (b) there has been no
material adverse change in the industry in which Borrower operates; (c) no
Litigation has been commenced which, if successful, would have a Material
Adverse Effect or could challenge any of the transactions contemplated by the
Agreement and the other Loan Documents; (d) there have been no Restricted
Payments made by Borrower or any of its Subsidiaries; and (e) there has been no
material increase in liabilities, liquidated or contingent, and no material
decrease in assets of Borrower or any of its Subsidiaries.
Q. AUDITED FINANCIALS; FINANCIAL CONDITION. Agent shall have received
Borrower's final Consolidated Financial Statements for its Fiscal Year ended
December 31, 1996, audited by Arthur Andersen. Borrower shall have provided
Agent with its current operating statements, a consolidated balance sheet and
statement of cash flows, the Pro Forma and Projections, in each case in form
and substance satisfactory to Agent, and Agent shall be satisfied, in its sole
discretion, with all of the foregoing. Agent shall have further received a
certificate of the Chief Executive Officer and/or the Chief Financial Officer
of Borrower, based on such Pro Forma and Projections, to the effect that (a)
Borrower will be Solvent upon the consummation of the Related Transactions and
the transactions contemplated herein; (b) the Pro Forma fairly presents the
financial condition of Borrower as of the date thereof after giving effect to
the transactions contemplated by the Loan Documents and the Related
Transactions; (c) the Projections are based upon estimates and assumptions
stated therein, all of which Borrower believes to be reasonable and fair in
light of current conditions and current facts known to Borrower and, as of the
Closing Date, reflect Borrower's good faith and reasonable estimates of its
future financial performance and of the other information projected therein for
the period set forth therein; and (d) containing such other statements with
respect to the solvency of Borrower and matters related thereto as Agent shall
request.
R. OTHER DOCUMENTS. Such other certificates, documents and agreements
respecting any Credit Party as Agent may, in its sole discretion, request.
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ANNEX D (Section 4.1(a))
to
CREDIT AGREEMENT
FINANCIAL STATEMENTS AND PROJECTIONS -- REPORTING
Borrower shall deliver or cause to be delivered to Agent or to Agent
and Lenders, as indicated, the following:
(a) (i) MONTHLY FINANCIALS. To Agent, within thirty (30) days after
the end of each Fiscal Month commencing with the first full Fiscal Month
elapsed following the Closing Date (but in the case of such month including the
results since the Closing Date), (A) financial information regarding Borrower
and its Subsidiaries, certified by the Chief Financial Officer of Borrower,
consisting of: (1) unaudited consolidated balance sheets as of the close of
such Fiscal Month and the related consolidated statements of income for that
portion of the Fiscal Year ending as of the close of such Fiscal Month; and (2)
unaudited consolidated statements of income for such Fiscal Month, and (B)
regarding each Subsidiary, unaudited statements of income for such Managed
Practice for such Fiscal Month. Such financial information shall be accompanied
by the certification of the Chief Financial Officer of Borrower (a "Monthly
Compliance Certificate") that any information presented is true, correct and
complete in all material respects and that there was no Default or Event of
Default in existence as of such time or, if a Default or Event of Default shall
have occurred and be continuing, describing the nature thereof and all efforts
undertaken to cure such Default or Event of Default;
(ii) QUARTERLY FINANCIALS. To Agent, within forty-five (45) days after
the end of each Fiscal Quarter, financial information regarding Borrower and
its Subsidiaries, certified by the Chief Financial Officer of Borrower,
consisting of (1) unaudited consolidated balance sheets as of the close of such
Fiscal Quarter and the related consolidated statements of income and cash flows
for that portion of the Fiscal Year ending as of the close of such Fiscal
Month; and (2) unaudited consolidated statements of income and cash flows for
such Fiscal Quarter, all prepared in accordance with GAAP (subject to normal
year-end adjustments). To the extent that the foregoing information is set
forth in any periodic filing with the Securities and Exchange Commission,
delivery of a copy of such filing shall meet the requirement of the preceding
sentence. Such financial information shall be accompanied by (A) a statement in
reasonable detail (each, a "Quarterly Compliance Certificate") showing the
calculations used in determining compliance with each financial covenant set
forth on Annex E which is tested on a quarterly basis, the calculations used in
determining the applicable margins pursuant to Section 1.5 (a), and the
calculations to show compliance with Sections 6.2(a)(iii)(A), 6.2(a)(iv), 6.3
(a)(vii), 6.3(a)(ix), 6.4(b) and 6.14(d) and (B) the certification of the Chief
Financial Officer of Borrower that (i) such financial information presents
fairly in accordance with GAAP (subject to normal year-end adjustments) the
financial position and results of operations of Borrower and
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its Subsidiaries, on a consolidated basis, in each case as at the end of such
quarter and for the period then ended and (ii) any other information presented
is true, correct and complete in all material respects and that there was no
Default or Event of Default in existence as of such time or, if a Default or
Event of Default shall have occurred and be continuing, describing the nature
thereof and all efforts undertaken to cure such Default or Event of Default;
(b) BUDGET. To Agent, as soon as available, but not later than thirty
(30) days after the end of each Fiscal Year, an annual operating plan for
Borrower, approved by the Board of Directors of Borrower, for the following
year, which will include a statement of all of the material assumptions on
which such plan is based, will include quarterly balance sheets and a quarterly
budget for the following year and will integrate sales, operating expenses,
operating profit, EBITDA and cash flow projections all prepared on the same
basis and in similar detail as that on which operating results are reported
(and in the case of cash flow projections, representing management's good faith
estimates of future financial performance based on historical performance), and
including plans for Capital Expenditures and acquisitions;
(c) ANNUAL FINANCIALS. To Agent, within ninety (90) days after the end
of each Fiscal Year, audited Financial Statements for Borrower and its
Subsidiaries on a consolidated basis, consisting of balance sheets and
statements of income and retained earnings and cash flows, setting forth (in
the case of Financial Statements delivered for Fiscal Year 1998 and thereafter,
it being understood that Fiscal Year 1998 Financial Statements will require
comparisons only for the last quarter of 1997) in comparative form in each case
the figures for the previous Fiscal Year and the figures contained in the
Projections for such Fiscal Year, which Financial Statements shall be prepared
in accordance with GAAP, certified without qualification, by an independent
certified public accounting firm of national standing or otherwise acceptable
to Agent (other than the Projections which are not required to be certified or
audited). Such Financial Statements shall be accompanied by (i) a statement
prepared in reasonable detail showing the calculations used in determining
compliance with each of the financial covenants set forth on Annex E and the
other items described in clause (A) of the third sentence of Section (a)(ii) of
this Annex D, (ii) a report from such accounting firm to the effect that, in
connection with their audit examination, nothing has come to their attention to
cause them to believe that a Default or Event of Default has occurred (or
specifying those Defaults and Events of Default that they became aware of), it
being understood that such audit examination extended only to accounting
matters and that no special investigation was made with respect to the
existence of Defaults or Events of Default, and (iii) the certification of the
Chief Executive Officer or Chief Financial Officer of Borrower that all such
Financial Statements present fairly in accordance with GAAP the financial
position, results of operations and statements of cash flows of Borrower and
its Subsidiaries on a consolidated basis, as at the end of such year and for
the period then ended, and that there was no Default or Event of Default in
existence as of such time or, if a Default or Event of Default shall have
occurred and be continuing, describing the nature thereof and all efforts
undertaken to cure such Default or Event of Default;
D-2
<PAGE> 107
(d) MANAGEMENT LETTERS. To Agent, within five (5) Business Days after
receipt thereof by Borrower or any of its Subsidiaries, copies of all
management letters, exception reports or similar letters or reports received by
such Credit Party from its independent certified public accountants;
(e) DEFAULT AND OTHER NOTICES. To Agent, as soon as practicable, and
in any event within five (5) Business Days after an executive officer of
Borrower has actual knowledge of the existence of any Default, Event of
Default, any change with respect to a Permitted Joint Venture that would cause
it to fail to meet the requirements of clauses (i) through (iv) of the
definition thereof, any event respecting a Material Unrestricted Subsidiary
described in Section 8.1(h) or (i), any event respecting a Managed Practice
described in Section 8.1(m), (n), (o) or (p), or other event which has had, or
could reasonably be expected to have, a Material Adverse Effect, telephonic or
telecopied notice specifying the nature of such Default or Event of Default or
other event, including the anticipated effect thereof, which notice, if given
telephonically, shall be promptly confirmed in writing on the next Business
Day;
(f) SEC FILINGS AND PRESS RELEASES. To Agent, promptly upon their
becoming available, copies of: (i) all Financial Statements, reports, notices
and proxy statements made publicly available by Borrower or any of its
Subsidiaries to its security holders; (ii) all regular and periodic reports and
all registration statements and prospectuses, if any, filed by such Credit
Party with any securities exchange or with the Securities and Exchange
Commission or any governmental or private regulatory authority; and (iii) all
press releases and other statements made available by such Credit Party to the
public concerning material adverse changes or developments in the business of
any such Person;
(g) SUBORDINATED DEBT AND EQUITY NOTICES. To Agent, as soon as
practicable, copies of all material written notices given or received by any
Credit Party with respect to any Subordinated Debt or Stock of such Person,
and, within two (2) Business Days after any Credit Party obtains knowledge of
any matured or unmatured event of default with respect to any Subordinated
Debt, notice of such event of default;
(h) SUPPLEMENTAL SCHEDULES. To Agent, supplemental disclosures, if
any, required by Section 5.6 of the Agreement;
(i) LITIGATION. To Agent in writing, promptly upon learning thereof,
notice of any Litigation commenced or threatened against any Credit Party or
Managed Practice that (i) seeks damages in excess of $500,000, (ii) seeks
injunctive relief, (iii) is asserted or instituted against any Plan, its
fiduciaries or its assets or against any Credit Party or ERISA Affiliate in
connection with any Plan, (iv) alleges criminal misconduct by any Credit Party,
or (v) alleges the violation of any law regarding, or seeks remedies in
connection with, any Environmental Liabilities;
(j) INSURANCE NOTICES. To Agent, disclosure of losses or casualties
required by Section 5.4 of the Agreement;
(k) OTHER DOCUMENTS. To Agent and Lenders, such other financial and
other information respecting the Borrower's or any of its Subsidiaries'
business or financial condition as Agent or
any Lender shall, from time to time, request, provided that such right to
request other information shall not include a right to require additional
periodic reports unless an Event of Default shall have occurred and be
continuing at the time of such request.
D-3
<PAGE> 108
E-PAGE 3
ANNEX E (Section 6.10)
to
CREDIT AGREEMENT
FINANCIAL COVENANTS
Borrower shall not breach or fail to comply with any of the following
financial covenants, each of which shall be calculated in accordance with GAAP:
(a) MINIMUM FIXED CHARGE COVERAGE RATIO. Each of (i) the Borrower and
its Restricted Subsidiaries and (ii) the Borrower and its Subsidiaries, shall
have on a consolidated basis at the end of each Fiscal Quarter set forth below,
a Fixed Charge Coverage Ratio for the number of Fiscal Quarters ended since the
Closing Date, or, if the number of Fiscal Quarters ended since the Closing Date
exceeds 4 quarters, then for the four (4) Fiscal Quarters then ended, of not
less than the following for each of the following periods:
Period Ratio
------ -----
Fiscal Quarter ending September 30, 1997
through the Fiscal Quarter ending June 30, 2000; 2.65 to 1.00
Fiscal Quarter ending September 30, 2000; and 1.35 to 1.00
each Fiscal Quarter ended thereafter 1.10 to 1.00
(b) MAXIMUM LEVERAGE RATIO. Each of (i) the Borrower and its
Restricted Subsidiaries and (ii) the Borrower and its Subsidiaries, on a
consolidated basis shall have, at the end of each Fiscal Quarter a Total Debt
Leverage Ratio not in excess of 4.0 to 1.0.
(c) MAXIMUM SENIOR DEBT LEVERAGE RATIO. Each of (i) the Borrower and
its Restricted Subsidiaries and (ii) the Borrower and its Subsidiaries, on a
consolidated basis shall have at the end of each Fiscal Quarter a Senior Debt
Leverage Ratio not in excess of 3.0 to 1.0.
(d) PRO FORMA ADJUSTMENTS. In calculating quarterly compliance with
the covenants specified in paragraphs (a), (b) and (c) above, the following
adjustments shall be made to reflect the effect of acquisitions, dispositions
and terminations of Service Agreements (which are not contemporaneously
replaced by Service Agreements with the same Managed Practices and which new
agreements provide substantially the same EBITDA to the Borrower and its
Subsidiaries as the terminated Service Agreements) occurring after the Closing
Date and during the relevant test period:
(i) For the purposes of paragraphs (a), (b) and (c) the EBITDA
attributable to such acquisition, based on the actual EBITDA of such
acquired entity for such period, shall be included as if such entity had
been acquired on the first day of such period but shall be adjusted to
reflect the APPI Physician compensation model, and shall be adjusted to
eliminate, as of the first day of such period, any Indebtedness repaid,
retired, disposed of or refinanced in
E-1
<PAGE> 109
such acquisition and to include any Indebtedness incurred in connection
with such acquisition (including any portion thereof used to fund the
aforementioned refinancing);
(ii) For the purposes of paragraph (a), Fixed Charges shall include,
as of the first day of such period and for the entire period, any Fixed
Charges associated with any acquired entity, including, any interest
attributable to any Indebtedness incurred in connection with such
acquisition, but excluding any interest or other Fixed Charges
attributable to any Indebtedness repaid, retired, disposed of or
refinanced in such acquisition (including any portion thereof used to fund
the aforementioned refinancing);
(iii) For the purposes of paragraph (a), for any test period which
occurs prior to the date when four (4) Fiscal Quarters have ended since
the Closing Date, and that requires adjustments pursuant to clauses (i)
and (ii) above, the Fixed Charge Coverage Ratio shall be calculated by
annualizing the results for the Company and its Subsidiaries before making
the adjustments referred to in such clauses and then making the adjustment
described in such clauses based on the actual results of the newly
acquired entities for the four (4) quarters ended as of the end of the
relevant test period; and
(iv) For the purposes of paragraphs (b) and (c), Indebtedness and
Senior Debt of the Borrower and its Subsidiaries shall be adjusted (A)
upward to reflect any Indebtedness or Senior Debt incurred or assumed in
connection with such acquisition or disposition and (B) downward to
reflect any Indebtedness or Senior Debt repaid, retired or disposed of in
connection with such acquisition, disposition or Service Agreement
termination to the extent that the Borrower and/or its Subsidiaries have
been released from all liability therefor.
(v) For the purposes of paragraphs (a), (b) and (c), the EBITDA
attributable to any entity all or substantially all of whose Stock or
assets were disposed of or to any terminated Service Agreement shall be
excluded as if such entity had been disposed of, or such Service Agreement
terminated, on the first day of such period and shall be adjusted to
eliminate, as of the first day of such period, any Indebtedness repaid,
retired or disposed of in connection with such disposition or termination
to the extent that the Borrower and/or the remaining Subsidiaries have
been released from all liability therefor.
(vi) For the purposes of paragraph (a), Fixed Charges shall exclude,
as of the first day of such period and for the entire period, any Fixed
Charges associated with any entity disposed of or with any terminated
Service Agreement, including, any interest or other Fixed Charges
attributable to any Indebtedness repaid, retired or disposed of in such
disposition or termination, to the extent that the Borrower and/or the
remaining Subsidiaries have been released from all liability therefor.
(e) CERTAIN OTHER ADJUSTMENTS. In calculating the covenants for the
Borrower and its Restricted Subsidiaries above: (i) EBITDA shall be calculated
so as to exclude all items
E-2
<PAGE> 110
included in EBITDA with respect to any Permitted Joint Venture or any
Unrestricted Subsidiary; (ii) Fixed Charges shall be calculated to exclude any
such amounts attributable to any Permitted Joint Venture or any Unrestricted
Subsidiary; and (iii) Senior Debt and Indebtedness of the Borrower and its
Restricted Subsidiaries shall not include any Indebtedness of any Unrestricted
Subsidiary or that constitutes Permitted Recourse Debt.
E-3
<PAGE> 111
ANNEX F (Section 1.1(d))
to
CREDIT AGREEMENT
LENDERS' WIRE TRANSFER INFORMATION
General Electric Capital Corporation:
- ------------------------------------
GECC/CAF Depository
Account #: 50-232-854
Bankers Trust Company
1 Bankers Trust Plaza
New York, New York 10006
ABA #: 021-001-033
Attention: Judy Lancaster
Reference: CFA 4622, American Physician Partners,Inc.
Bank One, Texas, N.A.:
- ----------------------
Bank One, Texas, N.A.
Dallas, Texas
Credit Account #: 0109904045
ABA #: 111000614
Attention: Lesa Nile
Reference: Loan
Banque Paribas:
- ---------------
Bankers Trust Company New York
For Account #: 04202195 Banque Paribas New York
For Further Credit to A/C #: 2144-001545 Banque Paribas Houston Agency
ABA #: 021001033
Reference: APPI
F-1
<PAGE> 112
Credit Lyonnais:
- ----------------
Credit Lyonnais New York
Account #: 01-88179-3701
ABA #: 0260-0807-3
Attention: Loan Servicing
Reference: American Physician Partners, Inc.
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.,
- -----------------------------------------------------
"Rabobank Nederland" New York Branch:
- -------------------------------------
Bank of New York
A/C Rabobank New York
A/C #: 802 6002533
ABA #: 021000018
Reference: American Physician
Toronto Dominion (Texas), Inc.:
- -------------------------------
Bank of America NTSA
FAVOR: TD Houston Agency
Account #: 6550-6-52270
ABA #: 026009593
Reference: American Physician Partners, Inc.
Manufacturers & Trust Company:
- ------------------------------
M & T Bank
One M & T Plaza
Buffalo, New York 14240
Beneficiary Name: Open Items General Ledger Account
For the Benefit of: cost center 353
Account #: 02684000
Contact Person: Judy Cummings
Contact Phone Number: (716) 258-8260
Reference: APPI
F-1
<PAGE> 113
ANNEX G (Section 11.10)
to
CREDIT AGREEMENT
NOTICE ADDRESSES
(A) If to Agent or GE Capital, at
General Electric Capital Corporation
3379 Peachtree Road, Suite 560
Atlanta, Georgia 30326
Attention: John P. Crosby, Account Manager
Telecopier No.: (404) 266-3538
Telephone No.: (404) 814-2609
with copies to:
Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309-4530
Attention: Colvin T. Leonard, III, Esq.
Telecopier No.: (404) 815-6555
Telephone No.: (404) 815-6172
and
General Electric Capital Corporation
201 High Ridge Road
Stanford, Connecticut 06927-5100
Attention: Corporate Counsel
Telecopier No.: (203) 316-7889
Telephone No.: (203) 316-7552
(B) If to Borrower, at
American Physician Partners, Inc.
2301 NationsBank Plaza
901 Main Street
Dallas, Texas 75202
Attention: Sami Abbasi
Telecopier No.: (214) 761-3150
Telephone No.: (214) 761-3131
<PAGE> 114
With copies to:
------------------------------
------------------------------
Attention:
-------------------
Telecopier No.:
---------------
Telephone No.: ---------------
(C) If to any Lender, to such Lender at its address specified below:
Bank One, Texas, N.A.
1717 Main Street
Third Floor, Health Care Group
Dallas, Texas 75201
Attn: C.L. Turner, III
Telecopier No.: (214) 290-2492
Telephone No.: (214) 290-3347
Banque Paribas
1200 Smith Street, Suite 3100
Houston, Texas 77002
Attn: Leah Evans-Hughes
Operations Officer
Telecopier No.: (713) 659-5234
Telephone No.: (713) 659-4811
Credit Lyonnais
1301 Avenue of the Americas
New York, New York 10019
Attn: Martin D. Golden
Telecopier No.: (212) 261-3440
Telephone No.: (212) 261-7791
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland"
New York Branch
245 Park Avenue
New York, New York 10167
Attention: Corporate Services Department
Telecopier No.: (212) 916-7880
Telephone No.: (212) 916-7863
<PAGE> 115
With copies to:
Rabobank Nederland
1355 Noel Road
One Galleria Tower
Suite 100
Dallas, Texas 75240
Attention: Anita Vogel
Toronto Dominion (Texas), Inc.
909 Fannin Street, Suite 1700
Houston, Texas 77010
Attn: Neva Nesbitt
Telecopier No.: (713) 951-9921
Telephone No.: (713) 653-8261
With copies to:
Robert Maloney / Stuart Odell
31 West 52nd Street
New York, New York 10019
Telecopier No.: (212) 974-0396
Telephone No.: (212) 468-0750 / (212) 468-0769
Manufacturers and Traders Trust Company
225 Easy Avenue
Rochester, New York 14692
Telecopier No.: (716) 325-5105
Telephone No.: (716) 258-8459
<PAGE> 116
SCHEDULE 1.1
Responsible Individual
Judy Lancaster
3379 Peachtree Road, Suite 560
Atlanta, Georgia 30326
Telecopier No.: (404) 266-3538
Telephone No.: (404) 814-3100
<PAGE> 117
SCHEDULE 1.4
SOURCES AND USES OF FUNDS
<TABLE>
<CAPTION>
SOURCES USES
------- ----
<S> <C> <C> <C>
Net IPO Proceeds $66,300,000 Founders' Group $54,583,000
Credit Agreement $21,865,562 Distribution
----------- Repay Existing $26,582,562
Indebtedness 5,000,000
Total Sources $88,165,562 Cash on Opening Balance $ 5,000,000
Sheet Transaction Fees $ 2,000,000
-----------
Total Uses $88,165,562
</TABLE>
SEE PAY PROCEEDS LETTER FOR DETAILED FUNDS FLOW.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
October 10, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated January 3, 1997, on our audit of the combined financial statements of The
Ide Group, P.C. and Ide Diagnostic Imaging Associates (and to all references to
our Firm) included in or made a part of this registration statement.
/s/ DEJOY, KNAUF & BLOOD, LLP
Rochester, New York
October 10, 1997
